Responsible Investor

Meanwhile, stricter rules and regulations are coming into force concerning the environment, carbon emissions and recycling, which creates new business opportunities and product marketplaces.
Such companies could be located anywhere in the world, given the global nature of the problems, but all will have the majority of their business operations focused on improving the environment, thereby making a difference to the planet without necessarily being beholden to socially responsible investment (SRI) principles.
Furthermore, diversification in traditional global portfolios can be achieved by investing in these identified green sectors, as many of them benefit positively from factors that tend to negatively impact most other global industries. For example, a substantial rise in oil prices will help spur on alternative energy providers but undermine traditional industries like steel and autos that are heavy fossil fuel users.
However, what all these sectors have in common is that they are entering a structural expansion phase that will see them eventually become established global industries. They include the following 12 to 15 sectors: new materials, products and processes – fuel cells – recycling and materials recovery – waste management, decontamination, purification – power management storage and distribution – industrial gases – biomass, wave, wind and solar energy provision – materials and component suppliers – emission credit creation and trading. Similarly, within each and every one of these emerging sectors, there are multiple sub-sectors or

solutions to the same problem, so a broad selection of the relevant companies’ shares should be held within a portfolio.
At the same time, as only some of the key players are quoted companies many are either private or a small subsidiary or operating division of a much larger listed company; for example, Johnson Matthey is a critical component supplier to the entire global fuel cell industry.
As a result these industries and their constituent companies will differ in their stages of maturity, which adds another layer of diversification. Some are directly comparable to the semi-conductor and PC industries in the 1970s and 1980s respectively, when they were initially small but then rapidly expanded over the next 20 years to become pervasive. Others are far more established and merely finding other uses for their existing products. Reflecting this, the relevant sectors would vary by the applicable investment time horizon which would normally be the inverse of the maturity of the underlying industry i.e. newer, smaller sectors would have the longer time horizon.
This means their constituent firms could differ widely in their market capitalisation and size, so investors could benefit not only from the huge growth potential of small start-up firms but also the established profitability of medium and larger enterprises already operating profitably.
Chris Taylor is fund manager of the Neptune Green Planet Fund at Neptune Investment Management.

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