How investors get climate change wrong

 

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In this episode of Cool Heads, Ned Salter, Head of Equities, and Portfolio Manager, Velislava Dimitrova call for investors to change the way they think about carbon emissions, as the latest United Nations climate change conference gets underway in Madrid. Instead of comparing portfolio emissions to those of a benchmark, investors should consider which climate pathway (1.5 to 4+ degrees) their portfolios are on.

Climate change is the issue of our time. The science is clear, but how to tackle it is not. And we are approaching a defining moment: if we do not go further and faster on cutting emissions soon, the consequences could be severe. The United Nations, which is holding its latest climate change conference in Madrid, has identified a clear gap between national pledges to cut emissions and what needs to be cut to avoid catastrophic climate change. The challenge now is to persuade the world to emit less carbon - or go ‘net zero’ - more quickly, even if US leadership is lacking. Investors can help reduce emissions by investing in low-carbon alternatives and knowing their portfolio’s climate pathway.

World needs to halve emissions by 2030
The world needs to almost halve emissions by 2030 to limit global warming to the 1.5 degrees recommended by scientists in order to prevent catastrophe.1 We are nowhere near that target, and instead are currently on a path towards more than 4 degrees of warming. Mitigation policies agreed so far only take us nearer to 3 degrees. Fortunately, the tools to get us closer to the 1.5 degree target are available, but need to be much more widely adopted and supported by governments. This will affect every sector, dis-intermediate many existing business models and create new opportunities for long-term growth.

Knowing your portfolio’s climate pathway
Companies will not only have to speed up their transition to low carbon but also give investors more information to be able to assess corporate progress against clear targets. Measuring the level of carbon emitted across a portfolio relative to the benchmark will not trigger sufficient reductions in emissions. Instead, investors will need to ask what climate pathway their investee companies are on. For example, are their activities and emission cuts consistent with a 1.5 degree Celsius pathway? Or are they headed towards 3-4 degrees and climate disaster? Some of the largest, most engaged pension funds are still running portfolios with climate pathways of 3-4 degrees. That has to change, as their capital allocation decisions have an impact in the real world. 

Technologies that will power the low-carbon transition
In our view, there are specific technologies that will aid the low-carbon transition across five sectors: transport, power, industry, buildings and consumer. Electric and autonomous vehicles, as well as ride sharing platforms, are already offering transport alternatives, while renewables and the smart grid will enable green power to be delivered efficiently, even for large industrial users. The most talked-about changes are underway in the consumer sector, where changing behaviours, particularly among the young, are leading to more recycling of goods, meat alternatives and electronic health services. In aggregate, these technologies can help reduce our global carbon footprint and, if universally adopted, should go some way towards closing the emissions gap.

 


1 Intercontinental Panel on Climate Change, 2018

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