We are committed to the transition to an economy with net-zero carbon emissions. The reduction of Arctic sea ice, the death of coral reefs, droughts in the Amazon rainforest, and forest fires, are examples of the climate emergency. Levels of carbon dioxide (CO2) in the atmosphere are higher today than they have been for thousands of years. For planet Earth to have a sustainable future, the global economy urgently needs to transition to net zero.
Active managers can play a significant role in the transition to net zero. Before investing in a company’s bonds, we conduct extremely thorough credit analysis which incorporates complete environmental, social and governance (ESG) analysis alongside business assessment, financials and relative value work.
It is critical to work with management teams to highlight the significance of improving ESG disclosure, especially in fixed income, where information is often not as complete as it is for equity investors. It is simply not possible to set meaningful emission reduction targets and construct plans to achieve them without going through the measurement process first. A clear opportunity for engagement is to encourage the company in question to report under the Task Force on Climate-Related Financial Disclosures (TCFD)1 as well as set Science Based Targets2.
One of our core beliefs is that we must own the carbon problem, not offload it. Pure exclusion policies applied to sectors with elevated emissions may flatter the carbon footprint of a portfolio but they avoid the heart of the issue. In order to meet the Paris Climate Accords‘ target of limiting global warming to well below 2 degrees (preferably 1.5 degrees) the heavy emitters must evolve significantly. Excluding these sectors in their entirety does not make the issue disappear. Instead, we direct capital to and engage with companies that are both capable of and willing to change.
Similarly, pushing companies to dispose of their “issues” may help to flatter how they screen against ESG criteria but doesn’t address those issues. One example that highlights this well was BP’s 2019 disposal of its Alaskan oil and gas exposure to Hilcorp Energy, a private US company. Within months, emissions from the asset rose by almost 9%. This might have been avoided if BP had retained ownership because, as a listed business, the impacts of its operations are likely to come under more scrutiny.
We do not rule out investing in companies with currently poor carbon footprints. We can invest if in our assessment the company is capable of change, its leadership team is committed, and tangible progress can be made. Engagement, rather than blanket exclusion, is key to combating to the climate emergency. A large credit analyst team is a phenomenally valuable resource when engaging with corporate issuers to effect real change.
Here are brief snapshots of two bond issuers (not necessarily holdings), to illustrate some of our thinking.
Today, our world is still very much reliant on the burning of fossil fuels, which account for approximately 80% of global energy production. We cannot just turn this source of power off without an alternative. We believe that large-scale energy businesses can be part of the solution for a more sustainable future. Within the energy industry, in our view, Eni is towards the front of the pack.
Eni is one of the largest integrated energy businesses in the world. Within Eni’s upstream business, the contribution from natural gas (lower carbon intensity than oil and coal) is higher than most peers. Its presence in renewables is also considerable relative to similar companies. Eni has limited exposure to the environmentally contentious North American hydraulic fracturing industry.
Eni has a well-articulated strategy to decarbonise. These strategies include (i) meaningful increase in renewable power generation capacity; (ii) increased use of carbon capture technology; (iii) forest preservation as carbon offset; and (iv) continued shift towards natural gas and away from oil. The company expects to achieve net zero (Scope 1, 2 and 3) by 2050 with well-defined interim targets as well as a capital expenditure plan supporting its efforts in this regard. Currently, the company supplies just under 1% of the world’s oil and gas consumption. By 2050, the company aims to shift towards having renewables assets alone capable of generating about 1% of the world’s current total electricity demand.
Key takeaway: Eni’s current position is relatively advanced compared with much of its sector in terms of its ability and willingness to transition towards net zero combined with well-defined plans to achieve its goals. We continue to work closely with its management.
JPMorgan Chase & Co
JPMorgan is one of the world’s largest banks and its huge lending power is to the benefit of many corporate borrowers. The bank receives much attention for the absolute dollar amount of lending into carbon intensive industries, but as a proportion of its loan book it is far lower than for many peers. In our view, its scale means it can greatly assist in the transition to net zero – if it takes the right approach.
Over the past few years, JP Morgan Chase & Co has greatly improved its disclosures around Scope 1, 2 and 3 emissions and has set targets to reduce Scope 3 emission intensity. Its 2030 carbon intensity targets for its portfolios include a 15% reduction in oil and gas (gCO2/MJ), a 69% reduction in electric power (kgCO2/MWh), and a 41% reduction in auto manufacturing (gCO2e/km). Simply cutting capital to carbon intensive sectors is not a solution: we still need to generate sufficient power at a reasonable cost. With that in mind, we are pleased that it has committed to finance or facilitate investments in sustainable solutions of US$2.5tr over the next 10 years, including green and social bonds.
Key takeaway: We are encouraged by the direction of travel but would like JPMorgan Chase & Co’s carbon-intensity disclosures to become more granular. We would also like a clear roadmap to track the progress on reduction targets. We continue to engage with the bank closely alongside a team of Jupiter managers across asset classes in pursuit of these improvements.
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