This article is an excerpt from the Good Investment Review October 2021 , from Square Mile Research and Good With Money.
“It is unequivocal that human influence has warmed the atmosphere, ocean and land,” write the authors of the Intergovernmental Panel on Climate Change’s (IPCC) sixth assessment report. According to their best estimates, global surface temperatures were 1.09°C higher in the last decade, 2011 to 2020, than in the second half of the 19th century.
The IPCC conclude that “global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades”.
An urgent call to action
This stark warning comes in the run up to the latest United Nations Climate Change conference, known as COP26. In early November 2021, representatives from across the world will convene in Glasgow to discuss action towards meeting the climate goals negotiated in the 2015 Paris Agreement, which aims to limit global temperature rises to “well below 2°C above pre-industrial levels”, but preferably to 1.5°C.
The IPCC conclude that “global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in CO2 and other greenhouse gas emissions occur in the coming decades”.
What is COP26 and why does it matter?
The IPCC observes changes in weather and climate extremes, such as heatwaves, heavy precipitation, droughts, and tropical cyclones, and projects that these will accelerate as global warming continues. Physical climate risks, which include the consequences of rising sea levels and biodiversity loss, carry costs. One study estimated that the value of worldwide assets at risk because of climate change could reach US$24.2 trillion (£17.6 trillion) by 2100.
Global cooperation is needed to meet the 1.5°C target. To keep it within reach, countries are asked to present 2030 emissions reductions targets at Glasgow that align with reaching ‘net zero’ by 2050.
The role of ‘net zero’ targets
‘Net zero’ refers to achieving an overall balance between carbon emissions produced and emissions removed
from the atmosphere, either through nature – trees absorb CO2 – or through technological innovation, such as carbon capture and storage.
We need to achieve and sustain global net zero to stabilise CO2-driven temperature increases. Many countries have committed to transition their economies to net zero by the middle of the century. In turn companies are also making similar pledges, which will hopefully inspire innovation in new technologies and reinforce public policies to mitigate climate change.
Yet despite the advantages of corporate net zero targets, they are not a panacea: some industries key to the transition to
a sustainable economy will not, by their nature, be able to achieve net zero based on today’s technologies. Additionally, the merits of carbon offsetting – a practice used to balance out emissions, usually by planting trees or restoring natural habitats – are hotly debated.
Additionally, the merits of carbon offsetting – a practice used to balance out emissions, usually by planting trees or restoring natural habitats – are hotly debated.
What to consider when investing for ‘net zero’
Rather than insisting all companies adopt net zero targets, we believe it is more useful to look at the bigger picture. After all, it is the overall global economy that must arrive at net zero, not any single company. For investors, this means taking a portfolio approach.
When it comes to choosing funds aligned with a future, net zero economy, we believe there are three important things to consider. Firstly, what are the objectives of the fund and what does it invest in? Some strategies are designed to intentionally allocate capital towards well-run, sustainable businesses.
Secondly, how does the fund report on its climate change impact? You can expect information on the CO2 impact of a portfolio over a given period, based on the activities of companies it invests in.
Thirdly, how does the fund perform against its climate-related objectives? Whether compared against a net zero target or the current global economy, we believe it is important to put CO2 metrics into context.
How to take your portfolio carbon neutral
For more than two decades, Impax has been dedicated to investing in areas of the market that are providing solutions to sustainability challenges. Climate change not only creates risks for investors, but also opportunities.
We believe society is in transition from an old economy, built on a depletive model, to the next economy, built on a sustainable model. This transition is creating long-term opportunities for companies that are well positioned, through their products and services, to help mitigate climate change or adapt to its consequences. These companies should prove resilient over the decades to come.
The IPCC’s projections are a reminder of how urgent action is needed to address the drivers of climate change. By paying scrutiny to where their investments are allocated, and the impact those portfolios are having, we believe investors can drive solutions to the greatest challenge facing global society.
