The global gaze has been trained firmly on Glasgow over recent weeks, with celebrities, world leaders and everyone in between descending on the city for the COP26 event on climate change.
By Mike Appleby, manager on the Liontrust Sustainable Investment team
Headline-grabbing announcements included 100 countries pledging to cut methane emissions by 30 percent and a goal to halt deforestation, both by 2030, as well as U.K. Chancellor Rishi Sunak calling for large companies to develop net-zero plans by 2024.
We saw a deal on emissions between the US and China and a Global Coal to Clean Power Transition Statement signed by more than 190 parties, committing to phase out coal from major economies by 2030. Both are key to COP 26’s mantra of «keeping the 1.5 degrees alive».
Seminal Report
This goal to limit average temperature rises, compared to industrial levels, to less than 2 degrees centigrade, and ideally, less than 1.5, was approved in the Paris Agreement, adopted at COP21 in December 2015. But the seminal Intergovernmental Panel on Climate Change (IPCC) report, published in October 2018, still shocked many with its conclusion: to meet that 1.5-degree target and stand any chance of keeping climate change manageable, we need to halve absolute emissions by 2030.
Such a reduction will impact the whole economy, including our energy system and how we heat and cool buildings but also driving transformations in transport, industrial processes, agriculture and land use.
With Sustainable Future Funds on the Right Side
This move to an ultra-low carbon economy will also have an impact on investment returns: companies contributing to this shift should prosper while those on the wrong side of the transition, or not confronting its ramifications, are at risk of secular decline.
To stay on the right side in our Sustainable Future funds, we avoid areas such as fossil fuel extraction and production and, more broadly, internal combustion engine car manufacturers, airlines and energy-intensive businesses not positioning for a lower-carbon world. In terms of positive themes, our funds, on average, have 28 percent invested in companies improving resource efficiency and reducing emissions across areas such as energy waste, smarter water management and increasing recycled material.
Recognizing the Pace of Change
As part of our ongoing engagement with companies, we are challenging those held across the funds to be more ambitious in terms of decarbonization. We launched our 1.5 Degree Transition Challenge last year, recognizing the pace of change was falling well short of the level demanded.
Around a quarter of companies with which we engaged have absolute decarbonization targets consistent with 1.5 degrees and a further 9 percent have committed to 2 degrees, which means a third are aligned with the Paris Agreement. This means two-thirds do not, at present, have targets in line with the science but this is moving quickly, with many demonstrating positive momentum.
Social Dimension
The biggest challenge lies in fast-growing companies, where carbon intensity targets have to be significantly higher than how much the business is expanding for there to be any fall in absolute emissions.
Responding to this crisis is important but climate change also has a social dimension. Many people work in industries facing formidable change and must be able to afford a fulfilled life in an ultra-low carbon economy. We must remember not to solve only for the best climate change outcome but ensure we also use this as an opportunity to reduce inequality, help alleviate fuel poverty and not lose sight of people. If people do not willingly move with the energy transition, it will fail.
Meaningful Reductions
Arguably, asking companies to set ambitious targets to decarbonize is the easy bit; this needs to result in meaningful reductions and we continue to monitor progress. We called this initiative a challenge for a reason – it will not be easy to cut emissions sufficiently within the timeframe to avert the worst impacts of climate change.
But as proactive investors managing sustainable funds, we want to play our part by encouraging a more rapid response to achieve this vital goal.
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