A slew of new funds help you invest in ‘climate solutions’ companies. But these companies typically have a significant carbon footprint themselves. So how can your investments have a positive climate impact, both today and in the future?

Fires in California, floods in Germany and China, prolonged drought across swathes of the world: we are forcefully reminded that climate change has major consequences.

One important response has been a focus on carbon reduction. Mainly, this has come from companies committing to reduce their own emissions and those in their supply chains. But what about companies that help others achieve net zero? Here, we move into the realm of ‘climate solutions’.

The most obvious example is a company helping the shift to renewable energy from carbon-intensive fossil fuels, e.g. a wind turbine or solar panel manufacturer. Other examples include companies developing energy-efficient processes for manufacturers, growing meat in ways that do not involve animals, or fabricating components for electric vehicles.

Can you invest in climate solutions?

A number of funds, including from M&G, JP Morgan and Aberdeen Standard Investments, offer UK retail investors exposure to climate solutions. A few ETFs have recently launched too, for example from iClima Earth and Rize ETF. Investing in these products, you can be reassured that you’re funding the (indirect) fight against climate change, as well as other sustainable themes.

It’s important to note, however, that climate solutions funds are not necessarily a low-carbon investment. Many climate solutions companies have relatively high carbon footprints, especially those in inherently higher carbon sectors such as energy, industrials and materials.

Asset managers often point to ‘avoided emissions’ as a way of quantifying the positive indirect effect these companies have on the climate, to balance the ledger. However, there are many uncertainties in avoided emissions: methodologies differ per asset manager and, unlike the world of carbon credits, there is no third party certification that emissions are actually avoided.

Let’s take the example of Tesla

Tesla is a climate solutions company in that it produces electric vehicles to replace fossil-fuel powered vehicles. However, the carbon footprint of its supply chains is fairly hefty, given the diverse, globally distributed resources required to build electric vehicles, some of which are extracted at a high energy cost. And it’s assumed that electricity is less carbon intensive than petrol. But in many countries, the electricity grid is supported by coal and natural gas. Hardly planet friendly!

Is offsetting the answer?

It’s logical, therefore, to be concerned about the current environmental impact of climate solutions firms.

A savvy investor might want to pursue a combined strategy, where you invest in climate solutions and personally offset the footprint of those companies. This has the virtue of supporting medium- to longer term carbon reduction (via the investment) while achieving immediate carbon reduction at the time of investing (via offsetting).

The cost of offsetting climate solutions

Sugi has reviewed a range of climate solutions funds and ETFs and if we take into account all of each company’s emissions (direct and indirect), a £1,000 investment would typically cost between £10 and £15 a year to offset (between 1% and 1.5%), depending on the type of offset.

This is material in the context of overall returns, and it raises a general issue around offsetting investments. Although we’ve seen some recent ETFs being released with inbuilt offsetting (‘carbon-neutral investing’), for example from HanETF, this option is only really feasible for products which already have a low carbon footprint.

Inbuilt offsetting is less feasible for higher carbon investments - it’s too much of an increase in overheads for asset managers to absorb, and if it’s passed on to the consumer automatically, it’s too high an increase in management fees.

Take control as a DIY investor

Since we don’t have standardisation around avoided emissions methodologies (which would allow asset managers robustly to incorporate avoided emissions into the footprints of their investment products), another option is to offer investors the ability to offset their funds personally.

This makes the offset optional. Investors can decide based on research whether they’re willing to absorb the extra cost, and it gives investors agency to choose which offset projects to support.

For example, you might want to support offset projects related to climate solutions, such as renewable energy projects, or take a different (perhaps diversified) approach and support forest conservation or newly emerging ‘blue carbon’ (coastal and marine) projects. Verified conservation and restoration projects, in particular, are a good way to deal with the conditionality of climate solutions.

Of course, this hinges on the offsetting option being presented to investors. Many are already confused about the ESG and green credentials of investments, and for fund managers to confess that, in one sense, climate solutions funds are not quite so green, would be to undercut their marketing message. That’s why it’s vital for all investors to have independent green data on investments – part of our core mission at Sugi.

So where does that leave us?

Climate solutions are key to addressing the fight against climate change. The surge in products coming to market is fantastic for raising the profile of this important sector and offering greater consumer choice. Combining them with strategies such as offsetting gives retail investors even more ability to optimise the environmental impact of their investments and take positive climate action now - when it counts.