Oct 1, 2020
The world is investing just US$500 billion of the US$2-3 trillion required annually to decarbonise the global economy and keep global temperature rises below 2oC pre-industrial levels. We need listed companies to spend much more on tackling climate change, because governments and private equity funds can’t make up the shortfall by themselves. Investors’ valuable role is to engage with listed businesses, as shareholders, to encourage them to accelerate spending on transitioning the global economy to a lower-carbon model.
But it’s important investors are clear about their impact and do not overstate it. Within our Global Environment portfolio, we analyse and report carbon impact for each company, which means we can measure progress. This includes analysing companies’ emissions profiles, ‘carbon avoided’ and initiatives to align business strategies with the Paris climate goals. We report on the companies that are doing well, and call out those that are not moving as quickly as we believe they should.
It’s a measure of the extent to which a company’s products or services have a lower carbon footprint than the alternative. It’s not a very well-known concept now, but it is becoming adopted more widely. We are working with companies to encourage them to record and report it. We think it is the best measure of how a company’s products and services contribute to decarbonisation.
For example, to calculate the ‘carbon avoided’ of an electric car, you would compare its total lifecycle emissions – from making it, driving it over its useful life, and eventually disposing of it – with the total lifecycle emissions of a traditional car. That gives a measure of the importance of electric vehicles to achieving the world’s climate goals, and therefore an indication of the strength of the potential decarbonisation tailwind behind companies in the electric vehicle value chain.
There are three main pathways to a low-carbon future, and we invest in select companies in all of them:
At first it seemed the pandemic might delay decarbonisation. Now, it appears we’ll see an acceleration.
There are three main drivers of decarbonisation: regulation, technology and consumer behaviour. In some places, there has been a big acceleration of the regulatory driver, especially in the European Union, which is focusing its recovery plan on the low-carbon transition. We’re seeing no let-up in the technology driver, for example in terms of the falling cost of renewable energy and in the number of sustainable product launches, including electric vehicles and energy-efficiency solutions. As for consumer behaviour, the jury’s out. But there is encouraging evidence that people are thinking much more about their carbon footprints. All in all, we think that companies exposed to decarbonisation are very well positioned for above-market growth as we come out of this crisis.
This is a really important question, because I believe it’s a misunderstanding that there need be a trade-off between them. I think you have a higher probability of outperforming if you understand a company in the context of all of its stakeholders – which is what a fundamental investment approach that incorporates sustainable investing helps you to do.
Sustainability data provides additional insights into a company’s business model and culture, including whether it has a competitive market position, which in turn helps you analyse revenue growth and returns. Simply put, to be in a better position to provide long-term potential returns to investors, I think a fund manager absolutely must understand a company’s sustainability performance.
It’s a good question, because sustainability data is generally less available in emerging markets. As an active manger, the way to overcome that is to visit companies. We spend a lot of time with management teams in both emerging and developed countries, to try and understand companies from both a financial and a sustainability perspective.
That’s worth doing, because a significant amount of the growth potential linked to decarbonisation resides in emerging markets, especially in China. The country supplies more of the world’s solar panels and lithium-ion batteries than anyone else, and it is a leader in several of the technologies that are key to decarbonisation. Consequently, Chinese companies proliferate throughout the supply chains of all the sectors that will enable a lower-carbon future, from renewable energy to electrification to energy efficiency.
Interestingly, the share prices of companies in our decarbonisation universe that are exposed to the domestic Chinese market have not benefited in the way that those exposed to the stimulus in Europe and elsewhere have. So we think there are currently some value opportunities among Chinese companies within our sector.
Our investors have various needs and motivations. One group is looking for exposure to an area of long-term structural growth, which we think decarbonisation provides. A second group is realising that the climate risk in their portfolios is much greater than they thought and impacting companies across sectors. So they want to allocate to businesses with the potential to outperform in a decarbonisation scenario that could be negative for many other parts of their portfolios.
In terms of blending Global Environment Fund into a broader portfolio, I think many investors find it helpful that the Fund is neutral from a style perspective – i.e., it doesn’t have a growth or quality bias. And because it’s very concentrated, there is little overlap with broad indices or other active strategies. The 25 stocks in our portfolio at present1 are underrepresented in traditional active equity approaches.
1As at 31 August 2020.