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Why this green investment fund is betting big on natural gas

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Natural gas prices (NG=F) soared to their highest levels since 2014 this week as hot weather boosted demand, and Hurricane Ida threatened supply. With sweltering temperatures and powerful storms increasingly seen as symptoms of climate change, one green-focused investment fund is betting on the commodity’s potential to replace heavy-emitting coal power in the near-term.

Purpose Investments launched its Global Climate Opportunities Fund (CLMT.TO) in late April, shortly after the run-up in clean energy stocks of late-2020 lost momentum. The iShares Global Clean Energy ETF (ICLN), a US$6 billion basket of clean energy stocks, has fallen more than 30 per cent from its all-time peak in early January.

Jeremy Lin, who manages Toronto-based Purpose’s climate-focused fund, blames the pull-back on a combination of weak quarterly results and missed growth expectations. On top of that, he says the sector suffered from the far-reaching supply chain issues caused by the COVID-19 pandemic.

“It was kind of like a double whammy for many of these high-growth names,” Lin said in an interview.

His long-term optimism about the rise of clean energy is grounded in government policies offering financial support, including the passage of a massive bipartisan infrastructure bill by the U.S. Senate last month, which includes major funding for clean energy and “climate resilience.” He says a summer marked by severe storms, floods, and heatwaves has been tough to ignore as well. However, he’s wary of making investment decisions that look too far into the future.

“It’s just not realistic to have an investment portfolio that has no carbon emissions,” he said. “We can’t just jump there overnight. We have to look at existing technology. We have to look at the existing fuel mix, and see what’s going to get us there with the lowest emissions.”

The thinking counters those who prize sweeping, futuristic solutions to climate change over incremental improvements. Amazon (AMZN) CEO Jeff Bezos recently exemplified the former to the extreme when he suggested moving heavy-emitting industries into space, shortly after returning from orbit himself.

The Purpose fund’s top holding (6.31 per cent) is Advantage Energy (AAV.TO), a Calgary-based oil and gas company with a 90 per cent stake in a carbon capture and storage (CCS) firm claiming to have a proprietary solvent that makes the technology profitable. Other investments include Brookfield Asset Management (BAM-A.TO), California-based home energy solutions firm Enphase Energy (ENPH), and Plug Power (PLUG), which manufactures hydrogen fuel cells.

However, it’s natural gas that Lin dubs “the most important piece” when it comes to reducing emissions today. He expects it to fill a gap between retiring legacy energy infrastructure, like coal-fired power plants, and cleaner, renewable replacements coming online.

“Coal on average releases twice the emissions of gas. The coal-to-natural gas conversion is going to be huge. We’re expecting natural gas to still have pretty good secular growth over the next two decades as overall energy demand increases,” he said.

“At the same time, a lot of these natural gas companies are trading at a steep discount. A lot of these names are just printing money.”

Lin points to the deepening energy crisis in Britain as evidence of strong natural gas demand in a country embracing renewables. Last week, officials there were forced to fire up an old coal plant to meet electricity demand amid soaring gas prices and underperforming wind farms.

“You would think that with a rising emissions cost through the EU Emissions Trading System that you would be incentivized to use less coal. But that’s not what’s been happening. Demand is outpacing supply,” he said.

“It’s kind of a perverse loop. You’re extending the life of coal facilities because you’re not addressing the underlying problem; the energy supply mix globally is not able to serve the demand today.”

Lin does not expect natural gas will be a long-term focus for the fund, which has dipped 3.4 per cent since its April 27 launch.

“Once we get rid of coal, natural gas is next on the list to phase out,” he said.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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