The commitment complements our support for the Paris Agreement and global efforts to limit warming to 1.5°C. We are also aligned with the 17 specific goals in the United Nations 2030 Agenda for Sustainable Development. We believe in sustainability with substance. It is about a better world, and, in the case of climate, avoiding a calamity.
In our resolve to join the Net Zero Asset Managers Initiative, we have also committed ourselves to a special task.
We believe the world needs an inclusive transition plan that works for all its 7.9 billion people. Therefore, a drive to net zero that excludes, intentionally or otherwise, any place or enterprise could result in no net zero at all. So, to us, the mission to reduce carbon must include the entire world.
The carbon-intensive emerging market economies need time, encouragement and resources to adjust. We at Ninety One understand this well, given that we come from an emerging market. These economies, after all, are not responsible for the bulk of emissions to date.
Our task is to make the case not merely for a transition, but for a fair transition.
In our drive for low-emitting portfolios, we intend to do more than reduce “portfolio carbon” by simply constructing portfolios that exclude high-emitting countries and companies. If we mechanistically apply an exclusionary process to achieve net zero targets, a consequence is likely to be the creation of portfolios concentrated in developed markets and asset-light industries without the transition focus on the rest. We might see places and sectors abandoned to their own devices.
Instead, we seek to differentiate between the reduction of “portfolio carbon” and the reduction of carbon emissions in the real world. Currently, companies are incentivised to divest carbon-heavy assets to report declining carbon intensity. These carbon-heavy businesses continue to operate, but often outside the public eye. If excluded, they will increasingly operate outside the scrutiny of regulated public markets to the detriment of society. In the same vein, countries are incentivised to “offshore” carbon emissions to other countries without changing domestic consumption patterns.
As currently measured, the carbon footprint of our portfolios depends far more on the sector and regional allocation than on the progress of the underlying companies.
A narrow focus on lowering “reported carbon intensity” is likely to suck capital out of the developing world. This could deny large parts of the world the capital needed to build a cleaner, greener economy. It would also deny developed-market savers access to the dynamism of emerging markets and the potential return opportunity. In the past 15 years, exposure to fast-growing emerging markets has provided return and diversification benefits to developed market savers.
At Ninety One, we believe in active engagement and encouragement towards a transition. As a paper from Imperial College noted, “Not all firms can go green, but they can all get engaged in transition.” Instead of risking a disorderly exit from carbon-intensive economies, sectors or companies with a high carbon footprint, we will – where we can exert influence – actively allocate to companies and countries that can be encouraged to deliver on transition plans.