With COP26 underway, the Association of Investment Companies (AIC) has spoken to Alliance, Witan, Brunner and Martin Currie Global Portfolio investment companies about climate change. They discuss what they’re expecting from COP26, the portfolio companies doing most to tackle environmental impact and where climate change is presenting the most attractive opportunities for investors.
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “COP26 could bring increased incentives or subsidies for companies and households to reduce their carbon emissions, as well as increased regulation to tax higher-emitting areas of the economy. It could also bring some bigger momentum in terms of coordinated investment programs to continue to tackle climate change. As part of that, there will be a need to ensure a smooth transition of energy usage towards greener energy sources, avoiding unintended consequences such as rapid cost escalation.
“We could see a more coordinated approach towards carbon emissions tax and credits. Investors need to have a detailed assessment of carbon emissions intensity for each business they are invested in, as well as a good knowledge of how each company is tackling the path to net zero, and what it will mean for their costs and capital expenditure needs.”
James Hart, Investment Director at Witan Investment Trust, said: “Witan currently has over 5% of its portfolio invested in climate change and renewable energy strategies. Whilst we expect this figure to increase over time, we are fortunate in that we are not compelled to invest at any price or restricted to one sector or style of management. Clean energy stocks are hot property at the moment and the focus on COP26 is likely to accentuate this demand and may help push valuations in sustainable companies to unsustainable levels.
“Meanwhile less clean companies (which may be an essential part of the climate solution) are lowly rated as investors look to avoid being accused of greenwashing. We and our managers therefore take a pragmatic and patient approach to this theme by buying companies when their growth potential is underappreciated, or which may be less obvious beneficiaries of the drive to deliver clean transport, energy efficiency, and renewable power generation, storage and distribution.”
Mark Atkinson, Head of Marketing and Investor Relations at Alliance Trust, said: “The COP21 introduction of the Paris agreement was arguably a climate change turning point. As we still have much to do here and globally to get on the right track to achieving net zero carbon, we hope COP26 will prove the final turning point at which all nations truly commit to tackling climate change. As engaged investors we will look to support businesses with good ESG credentials and purpose. As the UK transitions to net zero carbon by 2050 there will be many opportunities to invest in those committed companies and produce returns for investors.”
Portfolio companies – tackling environmental impact
Matthew Tillett, Portfolio Manager of the Brunner Investment Trust, said: “Electrification is a clear long-term structural trend, offering both technological benefits for industry and consumers, but also significant scope for decarbonisation. Schneider Electric is a portfolio company with an almost singular focus on this goal, at the same time as having a sector-leading approach to its own ESG performance.
“In addition to providing the physical components which enable electrification, Schneider has also invested heavily in software platforms including its investment in UK company Aveva. Integrating these into Schneider’s broader offering allows clients to understand their energy usage but also monitor and respond to situations as they evolve.
“These industrial applications for the Internet of Things, while less glamorous than electric vehicles or driverless cars, offer meaningful productivity gains for companies across a range of sectors. At a company level, Schneider has committed to carbon neutrality in its operations by 2025 and has set science-based targets which it is on track to meet by 2030.”
Mark Atkinson, Head of Marketing and Investor Relations at Alliance Trust, said: “An example of our pragmatic approach is BP. It is highly ranked among peers in terms of ESG risk, investing in renewables and looking to improve its reporting and transition risk management. A shareholder resolution tabled by Climate Action 100+ aims to ensure BP provides better climate-related reporting and aligns each new material capital investment with the goals of the Paris Agreement on climate change, so we expect better disclosure and, over time, a shift in BP’s fuel mix towards lower carbon intensity.
“Another example is HeidelbergCement, which produces and distributes cement worldwide, emitting significant amounts of carbon. The company has implemented numerous projects towards the goal of reducing its carbon footprint, including carbon capture and storage methods, recycling absorbed CO2 into marketable building materials, and using CO2 for algae cultivation. In addition, HeidelbergCement employs a region-specific biodiversity protection and quarry rehabilitation approach.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “We would single out a few companies such as industrial gases leader Linde. It is targeting a 35% cut in absolute emissions by 2035 and is a major player within the hydrogen value chain as an alternative energy source. Linde provides energy solutions to its customers through its on-site industrial gas plants, which help its customers to reduce their own carbon emissions. We would also single out companies such as Nemetschek and Autodesk in the technology sector. Through their IT software offerings, they help improve project management and therefore reduce waste in the construction sector. Construction is a sector that we believe consumes more than half of all extracted raw materials globally and accounts for more than 36% of the waste generation in Europe alone.
“Within the consumer space, cosmetics company L’Oreal is a noticeable leader. They have committed to all their sites being carbon neutral by 2025 with 100% use of renewables and improving energy efficiency. They are also building sustainability into their innovation, with products whose use will reduce CO2 emissions by 25% per finished product in 2030 compared to 2016. In addition, they are driving change in their supply chain with the goal to reduce their strategic suppliers’ scope 1 and 2 emissions by 50% in absolute terms by 2030 compared to 2016. Outside of these goals they have many others covering reduced water use, lowering the footprint of packaging, and increasing the use of biobased ingredients.”
Opportunities in climate change
Matthew Tillett, Portfolio Manager of the Brunner Investment Trust, said: “Decreasing the global economy’s reliance on fossil fuels is an essential part of combating climate change. Doing so will be a multi-decade process that will involve not only investment in renewables, but also the infrastructure to transmit electricity, build energy storage, improve efficiency in existing systems and offset the impact from continued fossil fuel consumption. By its nature this is a highly capital-intensive project requiring trillions of dollars in investments across many different industries. The energy transition therefore offers one of the clearest opportunities for us as investors, given both the timescale and breadth of solutions necessary.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “The energy transition towards greener energy sources is also bringing some major shifts in investment programmes. All of this is leading to opportunities for investors in areas such as renewable energy, electric transportation, more efficient and greener buildings, or robotics and automation as a way to reduce energy intensity. It is also unleashing a major innovation cycle which can benefit investors in areas such as climate solutions, and food and water solutions. Overall, this is a vibrant period for investors to find opportunities in innovative areas. At the same time, it is important that investors stay disciplined in terms of assessing the investment attractions through a structured valuation framework, in order to avoid bubbles that could be forming as part of this increased focus on climate change opportunities.”
James Hart, Investment Director at Witan Investment Trust, said: “We believe that a blunt exclusion policy to greenwash a portfolio runs counter to meeting the goals set by the Paris Agreement and is likely to be detrimental to shareholder returns. Therefore, in addition to investments in climate change and renewable energy strategies, our portfolio may contain mining companies (copper for electrification or nickel for battery storage), steel manufacturers (to make wind turbine towers or electric grids), paper and packaging companies (to address overuse of single-use plastics) and aerospace manufacturers (developing fuel efficiency in aviation). Our belief is that it is more important to focus on what a company’s contribution to the long-term global carbon reduction is, rather than to fixate on its historic carbon footprint – provided of course that these companies are best-in-class and that there is a clear path to reduce emissions over time.”
Climate change affecting strategy and investment process
Mark Atkinson, Head of Marketing and Investor Relations at Alliance Trust, said: “We generally prefer to engage with companies on how they run their businesses, rather than having blanket exclusions on certain industries or sectors, except where it is futile as is the case with companies with significant exposure to tar sand and thermal coal. But as responsible long-term investors, we believe it’s essential to integrate environmental, social and governance factors into Alliance Trust’s investment processes. It can help manage risks better, improve returns and have a positive impact on society.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, said: “We have always been focused on sustainability assessment across all companies that we research, so our investment process has remained unchanged. Specifically, within environmental and social risks, we assess each company’s carbon footprint, the pollution risk of its activities, the resources risk involved in its operations, but also the impact on the environment across its supply chain – as well as the social impact that its activities have on societies in which it operates. Our research efforts have been pointing towards stocks in some of the themes that we believe are likely to benefit from the increased focus on climate change, such as electric transportation, renewable energy infrastructure, more efficient and greener buildings, climate solutions and food and water solutions.”