Climate change report: the key takeaways for fund investors

How fund managers are pushing for change to stop climate change having a devastating impact.  

The report issued last week (9 August) by the Intergovernmental Panel on Climate Change (IPCC) makes stark reading – though its message is hardly surprising, given recent deadly floods, fires and record high temperatures around the world.

The earth’s climate system is changing in dramatic, unprecedented and in some cases irreversible ways as a consequence of human activity, the report finds. And it’s getting rapidly worse. More physical damage is unavoidable under any of the IPCC’s scenarios, and limiting global warming to the target 1.5 or even 2C degrees in the coming decades will be impossible without “immediate, rapid and large-scale reductions in greenhouse gas emissions”.

Clearly, that imperative has huge implications for governments, companies and individuals.

At a global level, says Andy Howard, global head of sustainable development at Schroders, the IPCC’s warnings “may provide the catalyst governments still need to coordinate ambitious and comprehensive action to reach net zero emissions by the middle of the century”.

The upcoming COP26 UN Climate Change Conference is the next step on that path. According to Gabriela Herculano, co-founder of the iClima Global Decarbonisation Enablers UCITS ETF: “The next few months ahead of COP26 are critical and give us an opportunity to focus on the key points that must be agreed on promptly”.

These include “a clear ban on new coal power plants” – vital, given that 600 such plants are currently planned within Asia – and a globally agreed deadline to take existing coal plants out of action.

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Call for ‘far quicker’ political action

Governments also need to set out clear parameters for their domestic asset management industries, says Ninety One Global Environment fund manager Graeme Baker. He calls for “far quicker” political action that will “leave the investment industry in no doubt that understanding how the flow of capital can help solve the climate crisis”.

However, Mike Appleby, manager on the Liontrust Sustainable Investment team, points out that there are only limited ‘quick fixes’ on the path to net zero. “There is limited scope for offsetting through geoengineering (intervention in the Earth’s natural systems to counter climate change), and planting trees to soak up carbon will not be enough to get to zero emissions,” he says. “We have to reduce absolute greenhouse gas emissions considerably before it is feasible to soak up the residual in this way.”

Keeping the pressure up

So what action do companies need to take, and how can professional and private investors best keep the pressure up?

First, more businesses need to focus on a swift transition to net zero. “Companies representing around 15% of the value of global equity markets have committed to reducing emissions quickly enough to limit long run temperature rises to 1.5C,” reports Howard.

Liontrust aims to identify “companies innovating to provide products and services that are smarter and help reduce emissions, while providing the same utility,” says Appleby. Liontrust’s Sustainable Future funds, on average, have 28% invested in companies improving resource efficiency and reducing emissions, he adds.

The manager is challenging all the businesses in which it invests to decarbonise their business at a rate consistent with the science (halving absolute emissions by 2030), on the grounds that such a path will give them a competitive edge as emission regulations tighten. “Small incremental changes will not get us there and we urgently need to respond to this crisis,” stresses Appleby.

Howard makes the additional point that companies need to adopt a more holistic perspective, so that clean technologies and new growth products are embedded across entire product ranges rather than being siloed into ‘green’ products.

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Technology innovation is key

Across the board in this race, technological innovation is critical. While green infrastructure spending commitments worth up to $2 trillion over the next decade have been made - largely funded privately rather than by government – “much of the hard work on delivering these pledges is still to come and will rely heavily on technological advancements for those harder-to-abate sectors,” Howard says.

Stuart Forbes, co-founder of Rize, which runs the Environmental Impact 100 ETF, argues that the asset management industry could make corporates change their behaviour much more rapidly than they are at present, if managers as a whole were willing to divest from non-compliant companies.

“As things stand, asset managers don’t delete big bad companies from their portfolios because they have to answer to huge institutional clients who don’t at present feel the urgency of the situation,” he comments.

Randeep Somel, manager of M&G’s Climate Solutions fund, sums up the challenge: “As investors, we need to continue pushing companies to adopt science-based targets for their own emissions.  We need to encourage highly pollutive companies to transition their business models to more sustainable paths, and we also need to channel capital to those companies that are researching and providing the climate solution tools that we all need to adopt.”