Climate change poses an existential risk to humanity. The Paris Agreement, which was signed by almost every country in 2015, commits the world to stabilising emissions such that the global average temperature rises no more than 1.5 degrees Celsius above pre-industrial revolution levels.
We all need to play our part in the transition to a net zero world, and Jupiter has made a commitment to achieving net zero emissions by 2050 across our full range of investments and operations. That commitment recognises our dual footprint of investments and firm, and aligns to the priorities of our clients and regulatory bodies across the world, as well as of society as a whole.
What implications does the transition to net zero have for portfolios, how fast might the transition happen, and what challenges does this process present?
An acceleration in collective action, but data is key
Abbie Llewellyn-Waters, Head of Sustainable Investing, highlights that greenhouse gases – like viruses – do not care about borders. It is therefore encouraging to her that new ground has been broken on global collective action through the pandemic period. It creates a supportive landscape for a faster acceleration towards addressing climate change than could have been anticipated at the end of 2019.
The Task Force on Climate-related Financial Disclosures is in place, the US back at the negotiating table on climate change under President Biden/John Kerry, and the upcoming United Nations COP26 conference sets a supportive structure for an accelerated policy agenda that will enable the beginnings of a net zero economy.
From an investment standpoint, Abbie says that the companies her team invests in have clear strategic plans to be net zero before, or at least by, 2050. One challenge that all investors face in this regard, however, is that the world is in the early stages of standardising methodologies to measure emissions.
Calculating whether a company is net zero, Abbie points out, is essentially balancing emission produced by emissions avoided. At the moment, companies tend to self-report this data (when they report anything at all) and these figures are largely unaudited. There are also third-party agencies that collate data, but this is averaged across sectors. In Abbie’s view, this currently doesn’t allow reliable calculations in which investors can feel fully comfortable.
To achieve clear net zero alignment by investing in companies committed to delivering a net zero economy, Abbie and her team conduct detailed analysis , looking at strategic alignment in the intent of the corporate commitment and seeking performance-based targets to which each company can be held accountable. Abbie stresses that in the future a robust and standardised methodology for determining emissions, both those produced and avoided, will be essential for asset managers and their clients to claim with integrity that companies are producing net zero emissions. Abbie is optimistic that COP26 will help accelerate that standardisation and, as the real cost of carbon emissions rises, she expects companies to move very quickly to be on the right side of the decarbonisation of the global economy.
A transformation in management attitudes to climate
Today, 84% of global energy demand is still met by hydrocarbons (such as coal and gas), highlights Richard Buxton, Head of Strategy, UK Alpha, so he says we have to recognise that the world is in a transitional phase. Rather than screening out notable emitters such as mining companies, Richard’s preferred approach is to “engage to improve”.
Through this engagement with senior management, Richard has seen a remarkable transformation in attitude over just the last few years, from initial reluctance to an absolute embracing of the need to address climate change, setting ambitious targets, and for example stopping all investment in coal mines and running down those assets over time while reinvesting the cash flow into other areas.
Of course, mining companies have to take extremely seriously the impact their operations have on the environment, says Richard, but natural resources such as copper, nickel, cobalt and zinc are integral to the technologies underpinning the transition to green energy. Rather than disinvesting, Richard wants to be part of the force for good in urging companies to improve their behaviours. If company management aren’t willing to listen, however, then disinvesting becomes the only remaining option, and it’s one that Richard is absolutely willing to take in those circumstances.
A fantastic development in a UK context, he says, has been the 2020 revision to the UK’s Corporate Code, which makes it absolutely explicit that stakeholders such as employees, suppliers, the environment and society are equally as important as a company’s shareholders. That really helps focus the minds of UK-listed company boards as they consider the impact of their business on the world.
The only caveat to that, however, is that the more regulations and disclosure requirements are placed on listed companies, says Richard, the more likely they are to go private (or not list on stock exchanges in the first place) and that would allow them to fly under the radar. Coming back to the coal mining example, if a listed mining company sold its coal assets they’d most likely end up in the hands of a private enterprise that would have far fewer obligations to manage that asset responsibly and report on its impact. It is therefore incumbent upon governments, in his view, to ensure that the legal frameworks are in place across the board and not simply rely on stock market disclosures and investor pressure.
‘Disclosure disco’ is in full swing
It’s a wonderful thought that one day every investment portfolio might be considered properly sustainable from an environment and social perspective, says Abbie, but it’s clear there’s still a long way to go.
It is remarkable to her how parts of the asset management industry have raced to relinquish control of stakeholder analysis through a total reliance on third-parties, something which they’d never dream of doing for financial analysis. The resulting tendency towards overly simplified measures of sustainability, where the rewards are largely for making disclosures rather than taking genuine action fuels concerns of ‘greenwashing’ or ‘rainbow washing’. It also creates an intrinsic bias towards large developed market companies, which are better resourced to make the disclosures although not necessarily those making the best positive impact.
These are complex, non-binary issues that require discretion – active fund managers should have an advantage in upfront analysis and ongoing engagement on these topics as an integral part of their investment process. She sees it as investment due diligence, in the same way as establishing corporate profitability or solvency.
For Abbie and her team, understanding how companies are positioned in the context of these long-term systemic risks is fundamental to investment analysis. She’s passionate about leading the way on this topic, and the Chartered Financial Analyst Institute have invited her team to co-author the new Climate and Investing Certificate that will help train current and future investment analysts about these challenges.
Richard agrees, and has long been interested in looking at how climate and sustainability issues impact the potential future path of companies. In the last 3-5 years we’ve crossed the Rubicon, he says, and he finds that, when he engages with companies on climate issues, he’s pushing on an open door. Companies recognise the urgent need for change and all their customers want to see it happen too. What excites him for the coming years is that consumers increasingly demand that they can identify the components of what they’re buying are sustainably sourced, and that will further drive a positive change in company behaviour.