Glasgow’s COP26 summit on climate change towards the end of last year caught the global imagination, with headline-grabbing announcements on cutting methane emissions and halting deforestation by 2030.
By Mike Appleby, manager on the Liontrust Sustainable Investment team
We also saw a Global Coal to Clean Power Transition Statement signed by more than 190 parties, committing to phase out coal from major economies by 2030 and by 2040 for the rest of the world, seen as key to COP 26’s mantra of «keeping the 1.5 degrees alive».
This goal to limit global 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 stark 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 or sooner.
The Future of the Low-Carbon Economy
Whatever ultimately comes from announcements at COP26, we will continue to see huge disruption as the world grapples with the energy transition. All actors in the economy, whether governments, companies or individuals, need to halve emissions and we cannot stand back waiting for others to take the lead.
Such a reduction will impact the whole economy, including our energy system and how we heat and cool buildings but also drive transformations in transport, industrial processes, agriculture and land use.
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 are at risk of secular decline.
Focus on the Right Funds
To stay on the right side in our Sustainable Future funds, including the GF SF Multi-Asset Global fund that launched in October las year, we have always avoided 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 more 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.
The funds emit 68 percent less (in terms of companies held) than the markets in which they invest and our stocks have fewer carbon costs to pass on to customers, meaning margins will be more resilient to tightening emission regulations.
Potential not Exhausted
As part of our ongoing engagement with companies, we are also challenging those held across the funds to be more ambitious in terms of decarbonization. We launched our 1.5 Degree Transition Challenge in 2020, recognizing the pace of change was falling well short of the level demanded.
Based on our work so far, 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 overall is Paris aligned. That means two-thirds do not, at present, have targets in line with the science but the situation is moving quickly, with many demonstrating positive momentum.
React Quickly
Responding in a timely manner to the climate crisis is important but we have to bear in mind climate change also has a social dimension. Many people work in industries facing formidable change and must be able to afford to live 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 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.
Arguably, asking companies to set ambitious targets to decarbonize is the easy bit; this needs to result in actual meaningful emission reductions and we will continue to monitor progress.
We called this initiative a challenge for a reason – it will not be easy to reduce emissions sufficiently within the remaining timeframe to avert the worst impacts of runaway 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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Mike Appleby
Investment manager on the Liontrust Sustainable Investment team
Key Risks and Disclaimer
This document is issued by Liontrust International (Luxembourg) S.A., a Luxembourg public limited company (société anonyme) incorporated on 14 October 2019 and authorised by and regulated as an investment firm in Luxembourg by the Commission de Surveillance du Secteur Financier (“CSSF”) having its registered office at 18, Val Sainte Croix, L-1370 Luxembourg, Grand Duchy of Luxembourg and registered with the Luxembourg trade and companies register under number B.238295. Information for Swiss Investors. This is an advertising document. Note: This is marketing information. Investment in investment funds is subject to market risks. Past performance results are no indication of future results. Especially performance results referring to a period of less than twelve months are no reliable indicator for future results due to the short comparison period. Issuance and redemption commissions are not included in the performance figures. The domicile of the Funds is Ireland. For interested parties, the Statues, the Prospectus, the Key Investor Information Document as well as the Annual Reports and, if applicable, the Semi-Annual Reports may be obtained free of charge from the Swiss Representative and Paying Agent in Switzerland: RBC Investor Services Bank S.A., Esch-sur-Alzette, Zurich Branch, Bleicherweg 7, CH-8027 Zurich.
