• As climate warnings become more dire, investors have become more interested in climate change-related investments, which did well in 2019 but haven’t had a good track record longer term.
  • In the past year, some climate change ETFs have outperformed and analysts expect the climate change theme to become a much bigger part of the stock market, taking its place as a large part of ESG investing and individual sectors.
  • The focus on climate is moving away from the traditional energy and alternative energy plays, with the financial sector increasing its focus on investments and risks related to climate.

Investing for climate change had been a niche on Wall Street, often generating sub-par returns, but in the coming decade it is expected to become a much broader and more critical investment strategy, driven by a new generation of investors.

The millennial investor is the most interested in impact investing, with nearly 90% setting it as a first investment criteria, in an investor survey, according to Bank of America Securities. That contrasts with just under half of baby boomers, who invest with a similar top priority on ESG or environmental, social and governance criteria.

“I think in this coming decade, it’s going to be one of the most important elements that investors will start looking at. It’s very key. We saw a massive increase in interest in the last year or so,” said Haim Israel, head of thematic investing at BofA Securities. “It’s not our kids’ and grandkids’ problem any more. People are beginning to understand it’s our problem. It’s in this decade.”

BofA estimates in the next 20 years there will be more than $20 trillion of asset growth in ESG funds — equal to the current size of the S&P 500. While that does not measure climate change investment alone, Israel said climate change has become a much higher priorty for BofA clients, who are surveyed periodically on macrothemes. Climate change jumped to the top theme in November, from number five a year earlier.

Performance catching up

But investing in climate change-related shares has been far from a winning strategy for everyone. In a study last May, J.P. Morgan analysts found that global pure play climate change funds underperformed by 5% per annum for the past 10 years.

In the past year, however, clean energy ETFs, iShares Global Clean Energy ETF and First Trust Nasdaq Clean Edge Green Energy ETF QCLN, both surged 41%. ICLN was down 47.5% over the decade, but QCLN was up 54% in the same period. VanEck Vectors Low Carbon Energy ETF and Invesco Solar ETF were up in the past year, up 39% and 63%, respectively, but are laggards over the last decade.

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