Jupiter’s Sustainable and Impact fund managers have highlighted the growing importance of climate change and natural capital to investors.
“The momentum is breath-taking,” said Abbie Llewellyn-Waters, Head of Sustainable Investing. “There is a convergence of legislative, regulatory, and commercial commitments to decarbonise our society.”
She pointed to the US and China as catalysts for legislative progress.
“A key event was the climate change cooperation agreement between US and China, brokered by US special envoy John Kerry on Chinese soil earlier this year, in good time for the UN Climate Change Conference (COP26), which is to take place in Glasgow in November 2021,” she said. “On the regulatory front, the Task Force on Climate Related Financial Disclosures (TCFD), provides financial markets with a clear way of measuring the impacts of climate change, and will become mandatory across the G7 group of nations, after the agreement in Cornwall last June. Thirdly, there are commercial commitments, with increasing numbers of companies pledging net zero emissions targets.”
Llewellyn-Waters warned that, when considering greenhouse gas emissions targets, offsetting carbon was not enough.
“We need to focus on emissions reduction, not just offsetting,” she said. “The landmass required to plant trees to meet the current carbon offset market is beyond imagination and would displace entire countries: it is just not practical.”
She predicted that externalities – costs borne by everyone, because a company has, for example, polluted the environment – would become increasingly important to companies’ profits and market shares.
“Externalities will increasingly become a direct cost to business,” she said. “They will increasingly affect companies’ ability to generate attractive returns. The millions of tons of carbon in the air will soon become a direct cost to businesses.”
Green bonds surge
Rhys Petheram, Head of Environmental Solutions, explained that sustainability was important right across the capital structure – not just equities (company shares).
“There has been a massive proliferation in ESG-labelled debt,” he said. “The first green bonds were issued in 2007. The 13-year period up to the end of 2020 saw US$1 trillion of green bond issuance. In 2021 alone we expect – based on current growth rates and expectations – another US$1 trillion of issuance.”
Variety in issuers is as important as overall size of issuance, he pointed out.
“From an active portfolio manager’s perspective, issuance size is not the only question: the breadth of issuers is also impressive,” he said. “Issuers are not just development banks and corporates but also governments, including from emerging markets. Breadth helps us manage key risks such as interest rate risk, duration and credit risk. Bond markets have an important role when it comes to Net Zero. They also tap into areas that investors may not have had access to, including government expenditure.”
Despite the growth in size and breadth, he cautioned that there was still a lot of progress needed in the green bond market.
“Despite the impressive issuance, I don’t feel that fixed income markets are yet living up to their full potential in helping to achieve Net Zero,” he said. “There is a wide range of quality in the frameworks used in the green bond market. Unfortunately, many issuers tend to gravitate towards standards that are weaker and more open to interpretation, rather than more rigorous. Whereas some issuers are strong from an impact perspective, others unfortunately are more about a tick box exercise. Our process seeks to eliminate tick box issuers.”
The big picture: Nature
Jon Wallace, Fund Manager, Environmental Solutions, emphasised the importance of interconnectivity to investing sustainably.
“Companies are increasingly looking up and down their supply chains,” he said. “Food retailers, for example, to have a credible Net Zero target, have to look upstream at where the food is coming from, and also to look downstream into where the food is going – and how food is wasted, for example.”
Wallace sees climate change as part of a larger picture.
“Climate change is just one part of the natural capital picture,” he said. “A company we invest in has a feed additive for dairy cattle which can reduce their production of methane, a powerful greenhouse gas, by up to 40%.”
Biodiversity is linked to climate change in complex ways. “Oceans that are becoming less diverse can absorb less carbon,” Wallace said.
Although Wallace identifies energy solutions as the area of most rapid change, it goes way beyond that sector.
“Any big corporate looking at their Net Zero plan has to look at their energy systems, outside of their own four walls: where they get their energy from. But sustainable energy is not the only area of growth: also prominent are materials, packaging and ingredients for everyday products,” he said.
Wallace forecasts that the current linear economy would be replaced by a circular economy.
“Until now we have been living in a linear economy, a ‘take, make, waste’ model that is unsustainable and environmentally damaging,” he said. “The transition is underway to a ‘circular economy’ – where the focus is on activities that can return material back to its previous usable state or materials that can be returned to the environment without risk.”
Llewellyn-Waters predicted that the momentum for sustainability will continue.
“The pandemic has provided precedents for global collective action,” she said. “That suggests a favourable tailwind for the negotiations at COP26. We launched our range of sustainable and environmental strategies to give clients the opportunity to invest in companies leading the transition to a more sustainable world – seeking the highest quality companies that actively balance the needs of three core stakeholders: Planet, People and Profit.”
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.