Recent demonstrations in London by climate change activist group Extinction Rebellion have served to highlight the risks of global warming. The principal aim was to persuade governments to treat climate change as a national emergency and establish a Citizens’ Assembly to achieve zero carbon emissions by 2025. Here we review the facts and implications for investors.
The Paris Climate Agreement, with nearly 200 signatories, set targets to keep global warming ‘well below’ 2°C. One of The United Nations (UN) Sustainable Development Goals is to take urgent action to combat climate change and its impacts.
The UN Intergovernmental Panel on Climate Change warned last year that global carbon emissions will need to be reduced by 45% by 2030 to meet this goal. Meanwhile, 2018 brought more intense heatwaves, wildfires and severe storms as greenhouse gas emissions continue to rise. In fact, 16 of the 17 warmest years on record have occurred since 2001.
A recent report from the Committee on Climate Change (which provides independent advice to the UK government) concluded that the UK could cease being a contributor to global warming by 2050 if we change how we consume energy. This would mean implementing policies such as: low carbon energy, electric vehicles, reducing landfill and increasing tree planting.
The recommendations, if adopted, appear more realistic than those of Extinction Rebellion and should cost only 1-2% of GDP even before accounting for any benefits of decarbonisation. However, while this would make us a world leader in tackling the issue, Britain only accounts for 1% of global emissions and these policies would not address the high carbon imports we consume.
Protests have centred on the developed world, yet China has been one of the worst emissions offenders, due to its reliance on coal-fired power stations. Nevertheless, its government has acknowledged that tackling air pollution is essential. The IMF has suggested that a carbon tax would be the most effective way of reducing emissions for coal-dependent economies.
What is being done?
Climate change is set to be a dominant theme for the global economy and stock markets in the coming years with both governments and companies spurred into action. In the UK, Parliament has approved a motion to declare an environment and climate emergency. The EU is expected to adopt similar policies to the UK and even the US is waking up to the challenges.
The dilemma is the conflict between the need to eliminate carbon while meeting the world’s growing demand for energy. Clean technology is making considerable progress, with new power capacity coming from renewable sources. However, the ability to capture and store carbon emissions still has technical hurdles to overcome. For sure, if all new cars are to be electric by 2035, they need to become cheaper to own and drive.
Companies that measure and improve their overall environmental footprint should lower their cost of capital and enhance returns. Those that fail to do so will face financial penalties which will ultimately hit their profits and share price performance, like BP following the Deepwater Horizon oil spill. Indeed, the Governor of the Bank of England, Mark Carney, warned ‘firms must acknowledge the risks to avoid catastrophic impact.’
Large investors are also being more proactive as they can have a significant influence on corporate behaviour through exercising their voting rights.
How does this affect our investments?
Investors are becoming more engaged with environmental issues as the threats to the planet are recognised. For example, The Oil Pressure Gauge, a 2018 survey of fund managers' attitudes to climate risk and fossil fuel companies, reported that 97% of respondents have become more interested in carbon reduction strategies in the last 12 months.
Sustainable investing and financial returns are not mutually exclusive. On the contrary, encouraging companies to exhibit better behaviour should lead to better long-term financial performance. Consequently, ESG (Environmental, Social & Governance) considerations are being incorporated into the investment process as fund managers recognise they can reduce risk by avoiding companies with unacceptable practices and participate in growth sectors such as clean energy.
Some leading asset managers have been increasing their efforts. Legal & General Investment Management (LGIM) recently published its annual engagement report showing it has led the way in engaging with companies and voting on climate related proposals.
Blackrock advocates that investors should consider fossil fuel usage, water consumption and carbon emissions as a percentage of sales when evaluating an investment. Schroders has also warned of the need to protect portfolios from the outcomes of global warming.
Which funds take climate change into account?
A growing number of funds have specific sustainability, environmental or impact mandates. It is important to understand their investment approach as they can vary considerably. You can filter by ‘Socially Responsible’ funds or the ‘Morningstar Sustainability Rating’ in the :explore
funds area of the Willis Owen website.
Stewart Investors Worldwide Sustainability
fund is silver rated by Morningstar and focuses on the sustainability of earnings and business models. There is a bias to consumer defensives which benefit from the sustainable development of the countries in which they operate. Royal London Sustainable Leaders
fund has a UK focus and is bronze rated. It has more of an ethical approach; the portfolio consists of companies associated with improving the environment, human health and safety.
If you prefer funds which focus on protection of the environment, Jupiter Ecology
(bronze) aims to identify companies that have the potential to generate sustainable profits and benefit from long-term environmental drivers. Similarly, Impax Environmental Markets
(bronze) invests in businesses that focus on cleaner energy, water and waste, particularly alternative energy and energy efficiency, water treatment and pollution.
Out of interest, I took one of the many carbon footprint questionnaires
and, unfortunately, my score was the wrong side of 100 - time for me to ditch the diesel perhaps! So I’ll finish with the summary of John Gummer (Lord Deben), the Chairman of the Climate Change Committee: “The science demands it; the evidence is before you; we must start at once; there is no time to lose.”
Important Information: We do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser.