In the fifth panel of the Responsible Pathway Live event, Schroders, Stewart Investors, abrdn and LGIM, explored the role of investments in the transition from brown to green energy, identifying the contributor of the reduction and the opportunities or risk associated with it.
Here are the five key takeaways.
1. Halve emissions by 2030
Looking at the scale of the climate change challenge, Lorna Logan, portfolio manager at Stewart Investors, noted that in order to achieve net zero by 2050, carbon emissions have to be halved by 2030.
“This means we need to reduce emissions by 7% each year,” she said.
“If we look at what happened in the first half of 2020, when half the world was shut down, emissions were reduced by 6.4%. This demonstrates the scale of the challenge.”
“The world is about to go through an enormous period of structural change,” added Alex Monk, portfolio manager at Schroders.
“We liken it to the industrial revolution and we think we are going to see a fundamental transformation in the way we do things as a society.”
2. Define net zero
While in simple terms net zero means net-zero carbon, Dan Grandage, head of sustainable investing at abrdn, said there are a multitude of interpretations around its definition.
“Carbon neutral is not the same as net zero, they are different things,” he said.
“Typically carbon neutral means you have paid for some form of offsetting but have not actually looked at the underlying efficiency or carbon within your own supply chain and business. Net zero looks at the full value chain and tries to balance the two.”
“Net zero involves as much mitigation as possible before you start to do the offsetting,” added Charlie Miller, climate strategist at LGIM.
“You need to do as much mitigation as possible to actually offset the carbon because there is only so much the land forestry agriculture can actually absorb. So we see net zero as mitigation first and the removal of carbon second.”
3. Engage with emitters
To get to a point in which emissions are halved by 2030, Miller said the most carbon-intensive companies need to be doing much of the transition.
“This is where the engagement versus divestment debate comes in,” he said.
“If you own these companies and you have voting rights within their AGM, you’re able to put some pressure on and engage with those companies and get a seat at the table to take them on that journey.”
Equally as important as engaging with the fossil fuels companies, or the “bad guys” is engaging with the big users of them, such as auto companies and steel manufacturers, to get them to transition, added Monk.
“We have been telling the oil majors not to invest in projects for the past five years, but when oil is suddenly pulled out of a system we are still very reliant on the demand side, we end up with energy prices through the roof because there is no spare capacity,” he said.
“So it’s about balancing the supply and demand side and not always bashing the oil majors because they are very important to the solution.”
4. Diversify portfolios
Given the recent spell of underperformance from climate change and ESG funds in general, the panel were asked how should investors align their performance expectations when it comes to climate change investing.
Both Logan and Monk said the experience of the past year underlines the importance of diversification within the asset class.
“When looking at thematic strategies investors need to make sure the strategy has enough diversification within it so that the fund manager has the flexibility to move around,” said Monk.
“Picking the companies that are leading the charge, but that are trading on cheap multiples, and blending that into your portfolio to manage some of your style biases is an attractive proposition.”
“Where we see the greatest investment opportunities is actually in the less well-known companies that tend to be further on down the supply chain,” added Logan.
“That might be a company that provides semi-conductors for renewable energies or electric vehicles, or one that produces adhesive and coatings for solar panels. We tend to like these ‘picks and shovels’-type companies to the more obvious names.”
5. Look for good data
In terms of moving forward, the panel agreed acquiring good data about companies was a huge challenge.
“It’s probably my biggest headache,” said Grandage.
“It’s not that companies are doing anything bad, it’s just there is no requirement for them to disclose. We are constantly trying to find ways to get better data, more data suppliers and find ways of estimating or proxying data when we can’t find it.”
“You have to understand what you’re trying to measure and then work out whether the data you have got is going to help you get to that goal,” added Miller.
“There is a data quality issue, as well as a data coverage one. However through time it has improved.”
While agreeing the data has improved, Logan added investors need to be careful not to rely on it too heavily. “It’s just about taking it with a pinch of salt,” she said.
“We use a couple of providers just to cross-check, but even then the data still has a way to go.”
All 5 panel discussions are available to watch on demand here: https://www.bonhillevents.com/EN/ResponsiblePathwayLive-July2022/OnDemand
