Sustainability with substance, not sustainability by numbers

We don’t live in a 1.5 degree world

22 Oct 2021

We don’t live in a 1.5 degree world

22 October 2021, Hong Kong/ Singapore Ninety One has published its annual Global Environment Fund Impact Report, which provides a detailed analysis of what we call the “sustainability attribution” for every holding within the Global Environment portfolio – an assessment of each company’s contribution to a greener cleaner future, evidence of their positive environmental impact and the appraisal of other Environmental, Social and Governance (ESG) considerations.

Green shoots of political action on climate change are starting to take place across multiple regions, evidenced by 73% of global emissions now covered by national net zero pledges1. Further, two important initiatives - the European Sustainable Finance Disclosure Regulation (SFDR) and the Net Zero Asset Owners and Asset Managers Alliances - have changed the landscape for the better for investors. However, despite some political and policy progress, only six countries have actually turned their pledges into binding law1 and investment in decarbonisation remains far short of that required, with the annual amount of decarbonisation needed to reach net zero continuing to escalate.

Deirdre Cooper, Co-Portfolio Manager, Ninety One Global Environment Fund: “We wholeheartedly support initiatives that drive greater sustainability transparency; however, we have concerns about an overreliance on ‘sustainability by numbers’ and the tendency of third-party data sources to oversimplify the issues. In our view, no single data point can describe whether a company is driving the transition to net zero, or if it is truly sustainable. Portfolio level metrics will not always be indicative of the underlying sustainability performance of our investments, which is why we are committed to providing detailed position-level reporting, revealing not only data but the stories behind it. We believe it is this detailed position-level reporting contributes to the concept of ‘sustainability with substance’.”

Carbon reporting

There have been improvements in portfolio companies’ reporting of carbon risk (Scope 1,2 & 3 carbon emissions) and impact (carbon avoided2), but as expected the rate of improvement has slowed. Almost 80% of companies now report Scope 1 & 2 emissions, with 40% of companies now providing full carbon risk reporting and disclosures. In fact, three Chinese holdings (Xinyi Solar, Wuxi Lead Intelligent and Sanhua Intelligent Controls) and NextEra Energy3, the world’s largest renewable energy provider have reported for the first time.

These reporting improvements are welcomed but it shouldn’t take away from the need for fundamental analysis of carbon data, which continues to be a vital overlay.

Carbon risk and impact

Over the past year, more than two thirds of portfolio companies reduced Scope 1 & 2 emissions intensity, and two-thirds increased their absolute “carbon avoided”. In addition, one-third of companies reduced their Scope 3 emissions intensity. Proactive engagement with companies remains vital to help them understand their Scope 3 emissions, and subsequently target reductions. At present1, 14 portfolio companies have explicit carbon reduction targets, and 35% of portfolio holdings have targets approved by the Science Based Targets initiative (SBTi).

Graeme Baker, Co-Portfolio Manager, Ninety One Global Environment Fund: “While we strive to allocate capital to companies we believe are developing products and services that will help the world get as close as possible to 1.5 degrees, we don’t believe we yet live in a 1.5 degrees world. All companies rely on the communities they operate in to achieve their climate goals. However, we remain hopeful that we will start to see more regulatory action which will enable us to make that statement in future. It would not only be great news for the planet, but also, we believe for our companies’ growth and return prospects.”

1 Source: Ninety One, as at 30 June 2021.
2 The carbon emissions avoided by using a product that has less carbon emissions than the status quo.
3 This is not a buy, sell or hold recommendation for any particular stock. Individual security performance does not represent the Fund performance. There is no guarantee that the Fund is currently investing and/or will invest in the securities in the future. The portfolio may change significantly over a short period of time.

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