The planet is heating up. The Arctic is melting. July is on course to be the hottest month ever measured on Earth, according to climate scientists. Extreme weather is becoming the norm. Climate change looks like an insoluble problem right now, but investors should be asking themselves this question: how can I make money from it?

This is not as cynical as it sounds. If we are going to slow or reverse climate change, businesses have to help and savers can do their bit by investing in the new green economy. Renewable energy, battery-charging technology, carbon capture, electric vehicles and even plant-based burger patties can help make the world well again, and with luck might make investors richer too.

Despite growing concern over climate change and other problems such as plastic pollution, ethical investing still hasn’t hit the mainstream. For example, in the UK, ethical funds make up less than 2 per cent of total investments. But Kay Van-Petersen, global macro strategist at Denmark’s Saxo Bank, says attitudes are changing and sustainable investing is now one of the hottest long-term investment trends, particularly among younger investors, so-called Millennials and Generation Z.

Ms Van Petersen says there is a growing body of research showing that investing does not have to be a trade-off between doing something good and sacrificing returns. To take one example, last year UK investment platform Hargreaves Lansdown found that the 11 ethical funds with a 10-year track record delivered a total return of 125.2 per cent, only slightly lagging the average 134.4 per cent return from UK All Companies funds.

Comparisons are tricky and performance can be cyclical. Ethical funds tend to focus on small and medium-sized companies, which find it easier to be cleaner and greener than sprawling multinationals, but will underperform when the big-caps swing into favour. This typically happens during recessions, as large diversified global businesses are better able to withstand an economic downturn than smaller companies. Smaller companies can also struggle when energy prices are rising, whereas oil and gas companies do well.

What is ‘ethical investing’?

Another challenge facing investors is that there is no single agreed definition of what constitutes an ethical investment. Some fund managers take a positive approach and actively target, say, renewable energy stocks, while others invest more generally but screen out environmental offenders such as oil and mining companies.

Investing with a clean conscience is not new as such, and has a proud history. The first ethical investment fund, the US-based Pax World Fund, started almost 50 years ago in 1971, while the UK followed in 1984 with the Friends Provident Stewardship Fund.

Ethically concerned Sharia-compliant investment funds also have a long history, first appearing in Malaysia in the 1960s. The sector is growing as it targets Muslims who want to invest in line with their religious beliefs. Today the sector goes by many different names, including ethical investing, sustainable investing, socially responsible investing (SRI) and more recently, ethical and social governance (ESG) investing.

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