May 27, 2007

How to profit from global warmingA new index lets you make money from rising temperatures, but it’s not the only way that you can climb on the green bandwagon

Ali Hussain

INVESTORS are being offered the chance to profit from climate change with the launch of an index that lets you bet on rising global temperatures.

The UBS Global Warming index will initially track temperature variations in 15 American cities, making so-called “weather futures” available to ordinary investors for the first time. They have long been used by the likes of agricultural firms to hedge against bad weather.

Investors will be able to bet on the index using certificates, which are essentially like tracker funds, and warrants, a type of option on the index available via UBS’s private bank.

The launch seeks to take advantage of the growing mania for “green” investment, which has seen alternative energy stocks such as wave and wind power generators leap by 300% over the past three years, according to ABN Amro, an investment bank.

These returns have led some commentators to liken green energy companies to the technology bubble, especially as Silicon Valley entrepreneurs who set up tech firms back in the 1990s are now moving into renewable energy stocks.

However, City analysts say that over the long term the potential is huge. Ian Richards of ABN Amro said: “There has been a surge in eco-awareness over the past 12 months and the appetite for change has never been greater. The direction of government policy is clear and should result in investment opportunities.”

The government’s white paper on energy, published last week, made a number of recommendations – including the tripling of electricity from renewable sources by 2015 and increasing the use of nuclear power.

The European Investment Bank also sought to get in on the act last week with the launch of the Pan-European Climate Awareness Bond, which will be available from Tuesday from high-street banks and advisers.

The bond, issued in tranches of !100 (£68) each, offers a minimum return of 105% of your investment at maturity in June 2012, while helping to fund climate projects.

Here we offer some other ways to profit from climate change.

Uranium As part of the energy white paper, the government gave the go-ahead for a new generation of nuclear power plants, so fund managers have been increasing their holdings in uranium, nuclear’sraw material.

Ian Henderson, manager of the £1.1 billion JP Morgan Natural Resources fund, has just increased his holdings in uranium companies to 7%, including SXR Uranium One and Ur Asia.

Henderson said: “Just a few years ago we wouldn’t have touched uranium but now we can see a clear market demand and short supply.

“Nuclear energy is an increasingly important source with 430 power plants now depending on uranium to generate energy, and with 80 plants under construction or planned for completion within the next 10 years.”

Smart meter firms The government last week proposed that all homes should be fitted with “smart” meters, which will monitor housesholds’ use of energy and so make it easier to cut consumption.

Charlie Thomas of the Jupiter Ecology fund tips Itron in the US, which is one of the largest manufacturers of meter readers.

Other good bets are Spice, which is a smaller UK firm that installs meters, as well as BGlobal, which makes them.

Renewable energy stocks Peter Michaelis, who runs the Norwich Union Sustainable Future fund, recommends the UK-based firm Romag, which fits glass round solar cells. “Many new office buildings are keen on having some form of solar energy,” he said. The firm supplied the mayor of London’s office, for example.

Outside Britain, he likes solar energy stocks such as the Renewable Energy Corporation, a Norwegian company that produces the silicon used in solar panels. Michaelis predicts growth of 50% a year for the firm in the next couple of years.

Carbon credit firms Britain is leading the European carbon-credits trading scheme, set up in 2005 to limit emissions. The credits are bought by firms that are unable to remain within their CO those that have a surplus.

Michaelis recommends Eco-securities, Trading Emissions and Camco, all of which source carbon credits for sale into the European trading scheme.

Ethanol companies Ethanol, the most common bio-fuel worldwide, is typically produced from wheat, corn and sugar cane. Soaring demand for biofuels has led to increased demand for the raw ingredients, pushing up prices.

Investors can bet on their prices through exchange traded commodities, which are index funds that are traded like shares.

Energy funds Justin Modray of Bestinvest, an adviser, said alternative-energy investing is potentially lucrative but can be a high-risk area, with many of these firms very dependent on a high oil price. You can reduce risks by buying a fund but these, too, can be volatile.

Modray said: “Investors are likely to have high exposure to the oil price through their existing portfolios, so adding an alternative energy fund may be a step too far at present. If you do invest you might hit the jackpot shorter-term, but plan to invest for at least 10 to 15 years in case you don’t.”

Modray recommends the Merrill Lynch New Energy Technology investment trust, headed by Robin Batchelor, though he warns its volatility can be high.

Impax Environmental Markets investment trust provides a little more diversity by also investing in water treatment, pollution control and waste management technologies. The Jupiter Green investment trust invests across a range of areas including clean energy, water management and green transport.

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