With growing interest in how to tackle global warming, ethical investors now have a new option -  climate change funds.

One of the most notable entrants in this sector is the Virgin Climate Change fund, where the fund managers, Pierre Lagrange  and Ben Funnell of the second largest hedge fund GLG, cherry pick the companies they believe will deliver the best returns, while maintaining the best environmental credentials.

The fund invests primarily in stocks listed on the MSCI Europe index, using GLG’s Europen Equity fund as a basis. The managers also have the power to invest globally where opportunities arise, with no sector excluded.

The fund aims to invest 75-100 per cent in lighter footprint companies, with a so-called ‘green filter’ applied to screen out the heavier polluters, meaning that the managers only invest in a company if it is in the environmentally lighter half of its industry.

Up to 15 per cent can be invested in ’solution adapters,’ which means the managers try to invest in companies which are taking a lead in their industries, actively adopting best practice and always looking at ways to reduce their environmental footprint.

Up to 10 per cent can be allocated to ’solution providers’ - namely companies developing products and solutions to environmental problems. As the latter come with an element of risk, solution providers make up the smallest proportion of the fund.

The initial charge is 0 per cent, but the annual management charge is a hefty 1.75 per cent and the TER (representing the total costs) is an eye watering 1.81 per cent. Minimum initial investment is £500, with a minimum regular saving of £50 a month. In addition, a performance fee of 20 per cent over the Bank of England base rate also applies over any six month period that the fund performs above both the base rate and the previous six months’ performance.

As it only launched on 21 January 2008, there is little by way of investment performance to assess this fund. But given the high charges, the fund would have to produce at least 2 per cent pa just to break even.

However, for climate change enthusiasts and other ethical investors, this fund may be attractive for a small portion of their portfolio. Certainly GLG has a strong track record, but in today’s volatile markets, this is no guarantee of future performance.

Defaqto investment principal, Fraser DOnaldson, comments: “People looking at this fund should not expect any companies to be necessarily excluded on traditional ethical grounds. In some respects, this then makes selection of this fund a purely investment decision on the basis of whether you think companies that are leaders in dealing with climate change issues are better placed to succeed than those which are less attuned to the problem? There may be some mileage in this argument, but ultimately it is up to the investor to decide!”
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http://uk.virginmoney.com/unit-trust/funds.html