Theme of Decarbonization Aids in Hedging Broader Market's Climate-Related Risks
In the face of escalating climate change, the global financial landscape is undergoing a significant transformation. Governments and private sectors alike are embracing the challenge of decarbonization, and investors are seizing the opportunity to make a difference while reaping potential profits.
One of the most significant developments is the UK's consideration of banning combustion engines in as little as 10 years, following the European Union's boost in green investment as part of its pandemic stimulus. The world, however, remains far off track in terms of the transition required to meet the climate goals agreed in Paris in 2016.
Yet, the cost curve shows that wind and solar is the cheaper form of electricity, and the market tends to underestimate the opportunity within the energy transition. China, a major contributor to global emissions, has announced a target for a zero-carbon economy by 2060, and the US, under the leadership of President Biden, is expected to follow suit with its pandemic stimulus.
Investing in companies that facilitate carbon avoidance and benefit from decarbonization involves a strategic approach. Here are five key strategies:
1. **Focus on Sector-Specific Decarbonization**: Identify high-impact sectors such as power generation, transport, cement, steel, and agriculture, which are critical for decarbonization efforts and have significant potential for emissions reduction. Encourage companies in these sectors to adopt science-based transition pathways aligned with recognized climate scenarios.
2. **Invest in Low-Emissions Technologies**: Focus on companies developing or integrating renewable energy technologies (e.g., solar, wind, green hydrogen) and energy-efficient solutions (e.g., electrification of heating and cooling systems). Also, consider companies leveraging AI and digital technologies to optimize energy use, monitor emissions, and enhance sustainability in operations.
3. **Engage with Companies on Climate Governance**: Prioritize companies that have set net zero targets and are developing comprehensive transition plans. Encourage companies to report in line with TCFD recommendations, providing clear data on scope 1, scope 2, and material scope 3 emissions.
4. **Encourage Sustainable Business Practices**: Advocate for government policies and regulations that support decarbonization efforts. Consider companies that incorporate robust carbon pricing mechanisms and high-quality carbon offsets into their business models.
5. **Engage Actively**: Use engagement strategies to influence portfolio companies, encouraging them to adopt sustainable practices and set ambitious emissions reduction targets. Use voting rights and propose shareholder resolutions to ensure companies maintain strong climate governance and align their operations with net zero goals.
By focusing on these strategies, investors can support companies that are actively working towards decarbonization while also benefiting from the economic opportunities arising from the transition to a low-carbon economy. Companies with products and services that facilitate carbon avoidance can serve a market of $500bn to $600bn, with the potential for huge structural growth. Seven hundred companies of around $6tn by market cap form Ninety One's "carbon-avoided" universe, with the resulting strategy having around 25 stocks with an average market cap of $30bn.
The European Green Deal, worth €750bn, was launched in May, with 38% of the stimulus focused on climate. The US, under President Biden, is likely to follow suit, making this an exciting time for investors seeking to make a positive impact on the planet while also securing their financial future.
Technology plays a crucial role in facilitating decarbonization, particularly in low-emissions technologies such as solar, wind, and green hydrogen, as well as energy-efficient solutions like AI and digital technologies that optimize energy use, monitor emissions, and enhance sustainability in operations.
By investing in companies that adopt these technologies and adopt science-based transition pathways in high-impact sectors like power generation, transport, cement, steel, and agriculture, investors can support companies working towards decarbonization while benefiting from the economic opportunities of the transition to a low-carbon economy.
