Investing in climate solutions presents impact investors with some of the most exciting opportunities, from transforming what we eat to the electricity running through our homes.
The most attractive of those opportunities may be based in the Global South, in the low- and middle- income countries that account for three-quarters of global greenhouse gas emissions.
Where can US based investors, retail and institutional, turn to take advantage of investments in the Global South? The team at Carbon Collective has put together a helpful database of listed climate companies across the globe, especially those in low- and middle income countries, or LMICs. Here’s a primer on where to start.
Global majority
The world cannot seriously move past the climate crisis without mobilizing significant capital for climate solutions in the Global South. Low- and middle-income countries, or LMICs, represent 75% of global greenhouse gas emissions and are most vulnerable to climate shocks, yet they receive only 15% of global climate capital. Of the roughly $2 trillion invested annually in climate solutions, just $300 billion went to LMICs.
Most of that capital for the global majority emanates from already-stretched public budgets. Of the more than $450 trillion available in global private wealth, just a measly $43 billion is invested in climate solutions in LMICs.
Today’s capital flows for climate solutions are not only insufficient, they’re not reaching the communities and countries that need them most.
The good news is climate investment opportunities in the Global South exist across the supply chain of finance, from risk-averse bank and credit union lending, to risk-tolerant venture capital. Risk-adjusted returns tend to follow the financial asset class just as they do in the Global North.
Public markets are one of the easiest and most accessible ways to invest in climate solutions; the transparency of listed equities and bonds also renders these products more accountable to investors.
Opportunity asymmetry
Carbon Collective’s database focuses on listed companies in the major economic clusters: the Association of Southeast Asian Nations, or ASEAN; the Community of Latin American and Caribbean States, or CELAC; the African Union; and the South Asian Association for Regional Cooperation, or SAARC.
For investors looking for immediate dividends, one option could be a bundle of stocks that skews towards renewable energy utilities and industrials. Investors interested in opportunities for longer-term appreciation may focus on technologies like electric vehicles and batteries.
In all, there are nearly 1,000 publicly-listed companies across the Global South that derive more than 50% of their revenue from climate-solution activities. Many are offering attractive returns. United Bus Service in Mauritius is providing predictable dividends. Barito Renewables Energy, a geothermal company listed as BREN.JK on the Indonesia Stock Exchange, surged more than eight-fold after its 2023 IPO. Kenya Power and Lighting Company, trading as KPLC on the Nairobi Securities Exchange, is also providing investor dividends.
If one is a US-based investor, how can they purchase shares of such global climate champions?
The top US exchange-traded funds and mutual funds with LMIC climate solutions exposure, by weight and by number of climate companies, can be found here.
The top 10 such ETFs by weight only are (by ticker): CNXT, LIT, KGRN, NIKL, ILIT, LIMI, KARS, ICLN, RNRG, and BATT.
The top 10 such mutual funds by weight only are (by ticker): GOPAX, GOPSX, BCANX, TCWAX, CNREX, VEOAX, ZGEIX, MIMFX, ACBEX, and ASEMX.
Betting on innovation
Here’s the catch: These ETFs and mutual funds provide exposure to only 189 of nearly 1,000 companies in Carbon Collective’s database. That result is from looking at more than 30,000 US-listed ETFs and mutual funds.
That means US investors, especially retail investors, are effectively shut off from over 80% of listed climate opportunities in LMICs because those opportunities are entirely excluded from US ETFs and mutual funds.
Among that list of 189, more than 99% of current AUM exposure is concentrated in companies based in large countries, like China, Brazil and India. Most LMICs are left out of the picture completely.
There are structural barriers faced by US-listed funds when allocating to LMICs, or what the capital market industry labels as “emerging and frontier markets.” These barriers include limited liquidity, market accessibility restrictions, custody and settlement complexity, regulatory and disclosure inconsistencies, and benchmark exclusion.
These are all surmountable.
Carbon Collective’s Zach Stein takes a bullish view of Global South climate solution stocks, arguing, “Some of the best international returns historically have come from countries that see rapidly growing middle classes.”
Some investors interpret that as a bet on fossil fuels as that has been the historical trajectory; for example, we saw an increase in fossil fuel use with China’s burgeoning middle class in the 1990s.
“But that bet could be very wrong,” Stein says. “Any investor betting on landlines doing well in Africa lost their money. Investors should bet on climate solutions instead. Bet on innovation. Bet on the leapfrog.”
I would agree.
Marilyn Waite is a contributing editor to ImpactAlpha.
Waite runs Capital for Sustainability, or C4S, an initiative focused on mobilizing private capital for low- and middle-income countries. She previously led the Climate Finance Fund, now fully deployed.
The Climate Finance Fund supports ImpactAlpha’s global climate coverage.
