Exposure to climate leaders across all sectors should enable investors to avoid being impacted by rising regulation and litigation around emissions, according to Schroders’ ESG specialists Simon Webber and Isabella Hervey-Bathurst.
The common trait of these climate leaders is an ambition to lead their industry on the path of reducing greenhouse gas emissions, while there is also a potential cost advantage. “The cost of polluting is on the rise, in the form of a higher price for carbon permits or carbon taxes. The cost of offsetting pollution is also becoming more expensive,” explained Webber, lead portfolio manager at Schroders.
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These companies can also increasingly benefit from what he describes as “network effects” – where companies looking to reduce their overall emissions will seek suppliers doing the same.
“[This will lead] to a virtuous circle in which being a climate leader will help a company to win new business,” added Webber.
Minimising regulatory risk
Furthermore, climate leaders should be lower risk investments as government and societal action increases, he said and this is an increasingly important consideration amid recent legislation and legal action.
Recent examples include a ban on single-use plastic in the EU, the phasing out of new internal combustion engine cars in numerous countries around the world, and US states suing oil companies over climate change.
“[This is] a flavour of the regulatory and legal risks faced by companies who continue to cause pollution and harmful emissions,” said Hervey-Bathurst, global sector specialist at Schroders.
As a result, companies that do not reposition their businesses and put in place measures to get to net zero risk being left behind with outdated products and technology.
“We see climate litigation as a growing risk for companies,” she said, adding the vulnerable companies will be those that are meaningful contributors to climate change, or are failing to manage the risks posed by climate change to their business, or are presenting a green façade to consumers that is not supported by the facts.
By contrast, companies which have already taken steps to decarbonise their businesses will be much better placed as the pace of regulation increases and the cost of compliance rises, explained Webber.
“We think there is significant potential for returns to be made by separating the climate leaders from the laggards,” he said.
