Defining the Global Environment Universe

In our view, there are compelling reasons for asset owners to make a specialist allocation

Mar 4, 2019

27 Minutes

In our view, there are compelling reasons for asset owners to make a specialist allocation

In our view, there are compelling reasons for asset owners to make a specialist allocation to a portfolio of companies which will enable the process of sustainable decarbonisation and benefit from the energy transition. In doing so, they will gain exposure to a structural growth area which is otherwise under-represented in their portfolios and which will act as a hedge against systemic carbon exposure.

To facilitate such an allocation, we have developed a proprietary screening methodology to generate a universe consisting of over 700 companies with a total market cap of US$6.5 trillion, distributed between the US, China and the rest of the world.

The first step in the screening process is to define what constitutes environmental revenues, which we take as not just the direct beneficiaries of the energy transition, but the entire related supply chain that needs to be built up. In essence, companies involved in developing an 80%+ renewable electricity grid with significant energy storage capability, electrifying heating, electrifying ground transportation and making homes, buildings and offices more energy efficient.

Once we’ve found companies that will enable the process of sustainable decarbonisation, the second step is to figure out which companies’ products are genuinely avoiding carbon. To help assist with this, it is important to not just assess direct and indirect emissions (known as ‘Scope 1’ and ‘Scope 2’ carbon) but also the indirect emissions from the companies’ supply chains and products and services once they are sold (‘Scope 3’ carbon), which accounts for a significant proportion of any company’s emissions.

We believe it’s critical to use the carbon data and the environmental revenues screen in tandem, and not excessively punish the under-reporters because of the biases that creates. In future, we expect the carbon avoided to grow significantly both for every company in the portfolio and for the portfolio as a whole as each company sells more and more products that contribute to the energy transition.

Click here to read more on how we define the global environment universe.