Will COVID-19 derail the transition to a low-carbon economy?

The Ninety One Global Environment Fund was recently approved for sale in South Africa and is available exclusively on the Ninety One Investment Platform. The Fund invests globally, primarily in companies contributing to or benefiting from positive environmental change.

May 27, 2020

5 minutes

The Ninety One Global Environment Fund was recently approved for sale in South Africa and is available exclusively on the Ninety One Investment Platform. The Fund invests globally, primarily in companies contributing to or benefiting from positive environmental change.

At first glance, it may seem that the coronavirus pandemic has derailed the global environmental agenda – certainly in the short term. While economies are closed, the massive investment required to decarbonise the way we produce and consume has been delayed. However, as the world emerges from the crisis, we see increasing evidence that the transition may accelerate.

Fiscal stimulus will accelerate climate-related policy

The level of stimulus put in place by governments around the world is unprecedented. It has been implemented multiple times faster than it was in the Global Financial Crisis and its size, as a percentage of GDP, is also unprecedented. In the eurozone, monetary stimulus is 30%+ of GDP and fiscal stimulus is 17%; in the US, the numbers are similar with a slight bias towards monetary policy.

As those programmes are rolled out, we expect that in many regions decarbonisation will be front and centre in terms of the focus of that fiscal stimulus. In Europe, for example, the Green Deal – due to be implemented this year – is the key policy underpinning the acceleration in the energy transition. Despite delays caused by the pandemic and lockdown, in a Europe struggling for growth, fiscal policy dedicated to decarbonisation remains a key lever for driving economic activity.

In the US, while decarbonisation is clearly not top of the agenda for the Trump administration, the country is on track to produce more electricity from renewable energy than from coal this year for the first time on record, according to projections made by the US Energy Information Administration. This transformation is partly driven by the Coronavirus pandemic, and comes despite the Trump administration’s three-year push to revive the ailing coal industry by weakening pollution rules on coal-burning power plants.

To date, China has introduced some small measures to support the sector, but we believe that once the cost of renewable generation becomes cheaper than coal, Chinese clean-energy policy will accelerate significantly.

The pandemic has not put the brakes on technological change

When it comes to technological drivers of decarbonisation, the pandemic has not changed the pace of technological change, nor the downward direction of the cost curve for clean technologies, which has declined dramatically. In the last decade, solar costs have declined more than 80 percent, and the cost of building large wind farms has dropped in excess of 40 percent. If anything, the lockdown has intensified the move away from fossil fuels, with the demand for electricity and fuel falling sharply. And, because coal plants often cost more to operate than renewables, many utilities in countries with a more equitable mix in their power grid than South Africa, are cutting back on coal power first in response.

Consumer behaviour is changing

And finally, consumer behaviour seems to be moving in a more conscious direction, with a growing belief that this crisis may be followed by a pause in conspicuous consumption in favour of more sustainable consumer choices. Even before the pandemic, a survey published by Accenture identified a 429% increase in consumer preferences for sustainably-sourced products, and a 107% increase in consumer desires for eco-conscious products.

Similar trends are taking place in the investment industry. Last year, Ninety One surveyed 2 000 investors to find out what investments they would like in their pension funds*. Over 80% said they would like to invest in environmentally sustainable funds, even though only a small fraction of that number have those products in their pensions today.

Investors are looking for real action from companies. They want to see what their strategies are for addressing environmental, social and governance (ESG) issues; and how executive compensation, for example, is aligned with incentivising sustainability targets. This, in turn, is putting asset owners under more pressure to ensure that their allocations properly integrate ESG considerations.

Ninety One Global Environment Fund requires decarbonisation to be the main driver of revenue growth

Ninety One’s Global Environment Fund only holds companies whose products and services help the world avoid carbon emissions, and we require decarbonisation to be the main driver of revenue growth.

Decarbonisation is arguably the single biggest investment that the world has had to make in peacetime. The numbers dwarf any other investment opportunity today and it is imperative that listed equities play a part in funding the transition to a low carbon economy. Asset managers have a responsibility to engage with company management teams to ensure this happens in a meaningful and measurable capacity.

In fact, according to the UN’s Intergovernmental Panel on Climate Change, in order to stay within a 1.5°Celsius increase in global temperatures by 2100 US$2.4 trillion needs to be invested per annum in the low carbon economy: currently just a quarter of that is being invested globally.

Ninety One’s decarbonisation universe consists of over 700 securities totalling $6.5 trillion in market cap. Interestingly, this universe is poorly represented in major equity indices. For example, only one-third of these companies are included in the MSCI All Country World Index (ACWI), and account for only 10% of its weight.

Businesses in the portfolio must earn at least 50% of their revenue from areas impacted by decarbonisation and offer products and services that are quantifiably more carbon-efficient than the alternative. The fund aims to address climate risk and decarbonisation in three ways: first, by providing access to the investment opportunity represented by companies participating in the sustainable transition towards decarbonisation; second, redressing the balance of structural underexposure to the enablers and beneficiaries of decarbonisation; and finally, providing a means by which to measure and hedge against systemic carbon risk in portfolios.

Download the PDF

*Planetary Pulse survey: Ninety One interviewed a nationally representative sample of more than 2,000 men and women from across the UK about their attitudes to ethical investing through their pensions. The survey was conducted during the last week of September 2019.

Authored by

Deirdre Cooper

Co-portfolio Manager

Important information

All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information or opinion without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security.

All information is as at 26.05.20 unless otherwise stated. Where applicable, the distribution yield reflects the amount that may be expected to be distributed over the 12 months, as a percentage of the mid-market unit price of the Fund. The yield is not guaranteed, will vary over time and take no account of any preliminary charge. This communication is not for general public distribution and is for general information only. If you are a private investor and receive it as part of a general circulation, please contact us on +44 (0)20 7597 1800. The value of this investment, and any income generated from it, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which it invests. The Fund’s investment objective will not necessarily be achieved and there is no guarantee that these investments will make profits; losses may be made. This Fund may not be appropriate for investors who plan to withdraw their money within the short to medium term. Performance shown is that of the Fund and individual investor’s performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. It is not an invitation to make an investment nor does it constitute an offer for sale. Before making an investment, please read the Prospectus and Key Investor Information Document, which sets out the fund specific risks and is available from Ninety One SA (Pty) Ltd (“Ninety One SA”). The portfolio may change significantly over a short period of time. The Fund is traded at the ruling price and can engage in borrowing, up to 10% of the portfolio net asset value to bridge insufficient liquidity, and scrip lending and may be closed in order to be managed in accordance with the mandate. The Fund is a sub-fund of the Investec Global Strategy Fund, which is a UCITS organised as a Société d’Investissement à Capital Variable under the law of Luxembourg. For further information on the Fund including application forms and a schedule of fees and commissions, please contact Ninety One SA. Fund prices and English language copies of the Prospectus, Report & Accounts and Articles of Incorporation and local language copies of the Key Investor Information Documents may be obtained from our website and free of charge from the following country specific contacts: Luxembourg – Investec Global Strategy Fund, 49 avenue J.F. Kennedy, L-1855 Luxembourg. In South Africa, Ninety One SA is an authorised financial services provider. Those sub-funds offered for public sale in South Africa are approved under the South African Collective Investment Schemes Control Act.

Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. Additional information on the funds may be obtained, free of charge, at www.NinetyOne.com. Ninety One SA (Pty) Ltd (“Ninety One SA”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA). Ninety One Investment Platform is an authorised financial services provider.