The UK Committee on Climate Change (CCC) issued its latest report on 2 May, including the target to reduce greenhouse gas emissions to net zero by 2050.
If taken on board, these recommendations from the government’s official climate change adviser would replace previous targets agreed in 2008, which aimed to reduce emissions by 80 per cent of 1990 levels by that 2050 date.
This comes ten years after the Climate Change Act became law. The CCC says the time is right to set a more ambitious goal in line with the UK’s commitment under the Paris Agreement.
We welcome the report, which brings a further sense of urgency to act now on climate change and further impetus to move away from a high to low carbon economy. We think the timeframe proposed to act and reduce emissions if anything should be shorter and more aggressive.
Build on change
It reinforces our belief that climate change will have a very material impact on investment returns over the next decade and beyond; particularly in the difference between businesses set to win from capitalising on the opportunities presented by combating climate change as opposed to those for whom this is a threat to their business. We have positioned our portfolios accordingly.
The CCC’s report clearly lays out that the world is facing a crisis in climate change, but it is important we also celebrate the improvements that have already been made and can be achieved in the future. Air quality in cities across the world, for example, has improved and in London, Sulphur oxide (SOx) and Nitrogen oxide (NOx) and particulates are a fraction of their levels in 2000. This shows the positives that can be achieved.
Clearly, the sooner we reduce carbon emissions the better the outcome for everyone. It is becoming easier to meet these targeted reductions in CO2 emissions as a result of the impressive falls in the costs of renewables.
Government legislation and action will play a significant role in us going further and reaching net zero emissions. There is also much we as consumers and individuals can do, such as focusing on the amount and type of energy we use in our homes, the types of transport we use, and how we consume and dispose of our waste.
Invest in innovators
The other way we can reach the target is through the investments we make, and the Liontrust Sustainable Investment team focuses on finding companies that are making our world cleaner, healthier and safer.
Improvements have come, and will continue to be achieved, through the help of ingenious, efficient businesses whose profits have grown in line with demand for their solutions.
There are already implications for investors due to attempts to reduce our greenhouse gas emissions and this will become increasingly acute over the next decade as consumer preferences are felt and regulation tightens.
We continue to expect companies whose products or services reduce emissions to benefit from secular demand and find substantial investment opportunities in stocks on the right side of this energy transition.
This includes those providing renewable energy, energy efficiency and more efficient transport, as well as waste sorting, treatment and recycling to reduce the carbon intensity of industrial processes.
The end of fossil fuel era
In contrast, companies that produce carbon-intensive products or services where there are lower-carbon alternatives will increasingly find themselves on the wrong side of regulation to reduce emissions.
In electricity generation, we see huge risks to coal for example, which is effectively dead as it is the most carbon-polluting way to generate electricity. In transport, we see incumbent car manufacturers struggling to meet tightening pollution targets without severe margin pressure.
We believe the magnitude and pace of this change is underestimated by the market and will be a major driver of returns over the next decade and beyond.
Mike Appleby is is an investment manager on the Liontrust Sustainable Investment Team. To find out more about Liontrust’s approach to sustainable investing, click here
