Cop26 climate change and the impact on investment strategy

How has climate change affected your strategy or investment process?

We have always been focused on Sustainability assessment across all companies that we research, so our investment process has remained unchanged.

All companies that we invest in have a low Sustainability risk based on our assessments of 52 components across Governance, Environmental and Social risks. We analyse the climate change risk for every company we research, which gives us  a clear understanding of what is an important and growing investment risk for all businesses.

Specifically, within environmental and social risks, we assess each company’s carbon footprint, the pollution risk of its activities, the resources risk that it is drawing from operating, but also the impact on the environment across its supply chain - as well as the social impact that its activities has on the societies in which it operates.

Our research has been concentrating on some of the long-term 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, and food & water solutions.

At the same time, because climate change impacts all businesses across all sectors of the economy, we have been engaging with every company to understand their plan and how they are  managing their climate change and environmental and social risks related to that.

It’s essential to understand and assess the impact of carbon emissions because they constitute a cost of doing business, which directly influences the investment risk.

Which of your portfolio companies are doing the most interesting work in this area, in your view?

Many companies are working towards reducing their carbon footprint, across all sectors. Some examples include:

• Linde

Industrial gasses leader Linde, which is a major player in the hydrogen value chain as an alternative energy source. It provides energy solutions to its customers through its onsite industrial gas plants, which help its customers to reduce their own carbon emissions. which is targeting a 35% cut in absolute emissions by 2035

• Nemetschek and Autodesk

Nemetschek and Autodesk in the technology sector, are, through their IT software offering, helping to reduce waste in the construction sector, which 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.

• L’Oréal

Cosmetics company L'Oreal is also a noticeable leader.  They have committed to all sites being carbon neutral by 2025 with 100% use of renewables and improving energy efficiency.;  They are also building sustainability into innovation with products whose use will reduce CO2 emissions (per finished product) by 25% (in 2030 using 2016 as a base).

In addition, they are driving change into their supply chain with the goal to reduce strategic suppliers direct emissions (scope 1 & 2) by 50% in absolute terms by 2030 compared to 2016. And they have made many other significant commitments covering reduced water use, lowering the carbon footprint of packaging, and increasing the use of biobased ingredients.

What opportunities is climate change presenting for investors?

Climate change is a critical challenge that is leading corporates to tackle their carbon footprint in a more meaningful way. Governments are regulating in a more stringent manner, and stakeholders  demand an increased effort to bring their carbon intensity down.

As such, this is leading to many investment initiatives by corporates.

The energy transition towards greener energy sources is bringing some major shifts in investment programs. All of this is leading to opportunities for investors in areas such as renewable energy, electric transportation, more efficient and greener buildings, or robotics & 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 & water solutions.

Overall, this is vibrant period for investors to find opportunities in innovative areas, but 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 areas of bubbles that could be forming as part of this increased focus on climate change opportunities.

How do you expect COP26 to impact investment opportunities in your sector?

COP26 could introduce increased incentives and/or subsidies for companies and individual households to reduce their carbon emissions.

It may also increase regulation and tax on higher emitting areas of the economy  and increase the momentum of co-ordinated investment programs that aim to tackle climate change.

As part of that, there will be a need to manage the energy transition in a manner that avoids  unintended negative consequences  such as rapid cost escalation, to ensure a smooth transition in terms of energy usage towards greener energy sources.

We could see a more co-ordinated approach towards carbon emissions tax and credits, which highlights the need for investors to have a detailed assessment of carbon emissions intensity for each business that they are invested in, as well as a good knowledge of how each corporate is tackling the path to net zero, and what it will mean for their costs and investment in capital expenditure.