Climate change has rapidly risen up the global political agenda in recent years and is now recognised as one of the most critical issues facing modern society.

Concerns about environmental degradation, global warming and water shortages have galvanised governments into committing to action.

The Kyoto Protocol, which came into force in 2005, has been a key driver in building momentum and forcing the issue of climate change into the mainstream.

This was supported by Sir Nicholas Stern’s 2006 report in Great Britain, which warned that unless 1% of global gross domestic product is invested in finding greener energies, the ravages of climate change could result in the global economy shrinking by up to 20%.

‘We have therefore reached the point where it has become politically acceptable to put a price on the effects of climate change. The days of being able to turn a blind eye to the economic impact of climate change are no more,’ says Charlie Thomas, manager of the Jupiter Climate Change Solutions and Jupiter Ecology funds.

Thomas says there are three key drivers of growth in the sector: legislation and government support; corporate governance; and longer-term consumer purchasing trends.

At the government level, the European Union has been at the forefront of legislative developments, introducing stringent targets that require member states to cut their CO2 emissions by 20% and ensure the same amount of their energy comes from renewable sources by 2020.

Simon Webber, joint manager of the Schroder Global Climate Change fund, says progress on the global stage has also been encouraging, with the United Nations’ 2008 Bali Action Plan calling for quantifiable emission reductions.

Even more significant was the US, the only developed nation not signed up to the Kyoto Protocol, agreeing to engage in the development of a new roadmap for fighting climate change when Kyoto runs out in 2012.

‘Many months of negotiations over the details now lay ahead, but we have much more certainty that there will be a new climate change agreement by 2009 that will be much broader than Kyoto, and will crucially involve the US, China and India,’ Webber says.

Green initiatives

There is mounting evidence that increasing awareness of environmental issues is changing consumer attitudes to sustainability. Thomas says organic food sales are rising by 20% a year in the US, while UK sales of organic produce topped £2 billion in 2007.

Businesses are responding to this with many of the largest companies committing to green initiatives, which is having a drip-down effect on smaller firms.

Thomas has identified six key themes in his investable universe: clean energy; green transport; waste management; sustainable living; environmental services; and water management.

Clean energy has seen exponential growth in recent years, he says, and is a significant theme within the portfolio. Investment in clean energy rose by 60% in 2007 to $148.4 billion and is only expected to rise given emission reduction targets and high oil prices.

‘China and the US are two of the biggest driving forces here and consequently, the fact that wind power has grown by a staggering 28% a year over the last five years and improved economies of scale means wind power is nearly as cheap as conventional electricity,’ Thomas says.

He has exposure to the sector through holdings in Nordex, Vestas Wind Systems and Gamesa.

Webber also believes sustainable transport is a key growth area after comparatively weak recent performance.

He points to both the US and EU introducing greater fuel efficiency and lower carbon targets as underlying drivers.

This is likely to benefit diesel parts suppliers and companies involved in the development of electric vehicles. Both Marks & Spencer and Sainsbury have already placed large orders for electric commercial vehicles to reduce their carbon footprints.

‘Transforming the auto industry from the combustion engine to electric vehicles will completely change the landscape,’ Webber says.

‘Many companies will fall by the wayside and some will be huge winners. One thing is for sure, there will be equally interesting investment opportunities in this area as there are in the currently hot alternative energy sector.’

The breadth and depth of stocks in the environmental universe means investors do not have to compromise performance to back companies looking to tackle climate change.

Thomas adds: ‘Although the recent downturn in market sentiment has created some headwinds for investors, with environmental issues now in the mainstream, the long-term outlook for green investment looks very compelling indeed.’