ESG Investing

15 Climate Funds in HK

Investors have five categories of funds in which they can put their money to help fight climate change.

Kate Lin 25 November, 2021 | 12:08

COP26 has ended, and countries have sent strong signals about their willingness to collaborate to reduce their carbon emissions. One of the highlights of the summit came when the U.S. and China agreed to boost climate co-operation over the next decade. Equity markets received the joint statement as a positive surprise from the summit, despite ongoing undercurrents of a complicated political relationship between the two global giants. Although there’s a decided lack of detail in the announcement, the declaration shows that global leaders are cognizant of the issues around climate change. They seem to be, at least on the surface, committed to making a difference, and seem to be willing to collaborate efforts internationally.

With this underway, how can investors revisit their portfolios and express their climate vision through their fund investments?

More Choices

Globally, 2021 so far has been a banner year of launches of climate-aware funds. Between January and September, asset managers bring the total number of climate funds to 636, adding 186 new products. Assets have increased by 50% so far in 2021 to reach US$ 275 billion.

Jon Hale, head of sustainability research for the Americas at Morningstar, expects the COP26 will likely ignite more investor interest in addressing climate change in their portfolios, both to mitigate climate risk and to invest in climate solutions. He believes that understanding the range of strategies is an important first step in positioning portfolios to align with net-zero goals.

Asset managers are rapidly developing new products and retooling existing ones to help investors decarbonise their portfolios and invest in green solutions. Choices are therefore growing for investors to mitigate climate risk exposure and to invest in the innovative climate service providers.

Hale and the team at Morningstar use a five-step label to distinguish different goals and portfolio construction methods of climate-focused portfolios. The focus here is on climate-aware funds--those that specifically focus on climate risks and opportunities. These funds comprise a subset of the even larger sustainable funds universe, which is also experiencing persistent growth in Asia.

Based on a search on Morningstar Direct, a total of 14 actively-managed funds and 1 index-tracking ETF are available for Hong Kong-domiciled investors.

Category 1: Low-Carbon Funds

Low-carbon funds construct a portfolio of companies with reduced carbon intensity. At the same time, some funds aim to construct their portfolios to also have a lower carbon footprint relative to a benchmark index. In this group, investors can find portfolios that completely exclude investments in fossil-fuels. Low-carbon funds are typically well-diversified, so can be used to gain broad equity exposure while mitigating exposure to climate risk.

Category 2: Climate Conscious

Climate-conscious funds capture firms geared to the transition to a low-carbon economy. Like low-carbon funds, climate-conscious funds are typically well-diversified and can be used to gain broad equity exposure.

Category 3: Climate-solutions funds

These products specifically target companies benefiting from products and services that contribute to the low-carbon transition. Comparatively to low-carbon and conscious funds, these thematic funds are less diversified than their climate-aware or climate-conscious counterparts and are often overweight in smaller companies in the industrials and technology sectors. Morningstar analysts advise that, because of that, climate-solutions funds should represent smaller allocations to the equity portion of most investors’ portfolios.

Category 4: Clean-energy/tech funds

These funds are more focused than climate-solutions funds, investing in firms that specifically contribute to or facilitate the clean energy transition. Clean Energy/Tech funds are characterized as sector specific, with most of these companies in the utilities, industrials, and tech sectors. Essentially quasi-sector funds, clean-energy/tech funds should represent smaller allocations to the equity portion of most investors’ portfolios.

Category 5: Green-bond funds

These funds invest in debt instruments that finance projects facilitating the transition to a green economy. Most green-bond funds maintain credit quality and interest-rate sensitivity similar to those of intermediate-bond funds. The eligible categories include, but are not limited to, renewable energy, energy efficiency, pollution prevention and control, clean transportation, sustainable water and wastewater, climate change adaptation, eco-efficient and/or circular economy adapted products, and green buildings. Investors can also gain exposure to green bonds via sustainable bond funds.

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