The world continues to grapple with the consequences of the climate change crisis and now is the time to accelerate the shift to an ultra-low carbon economy. The science is telling us we need to quicken the pace of decarbonisation as current progress and ambition both fall considerably short of internationally agreed goals to limit average global temperature rises to less than two degrees centigrade, and ideally less than 1.5, in line with the Paris Accord.
In 2020, the world grinding to a halt during the Covid-19 pandemic led to a 2.6 gigatonne (a billion tonnes) drop in CO2 emissions and a so-called anthropause, a term coined to describe the more welcome ecological consequences of lockdown. Academics suggest similar cuts are needed every two years to meet Paris targets, highlighting the huge scale of the decarbonisation challenge.
On average, among countries cutting their output during the pre-Covid period of 2016 to 2019, carbon dioxide emissions fell by 0.19 gigatonnes, roughly 10 times less than the necessary levels of one to two gigatonnes a year.
We have been thinking about how climate change will affect our economy and how we can best position our investments for this since our Sustainable Future (SF) funds launched 20 years ago. We believe the market continues to underestimate both the rate of change needed to decarbonise and the magnitude of the positive impact on companies that are helping towards this, as well as the structural decline in businesses continuing with carbon-intensive products and services.
How does this affect our investment decisions? First, we want to invest in companies helping to reduce emissions as they will experience significant growth. Of our 21 sustainable investment themes, all those associated with increasing resource efficiency will benefit from, and contribute to, the shift towards an ultra-low carbon economy. As well as using more renewables to generate electricity, equally important is reducing the amount of energy we waste (to cut bills as well as emissions), increasing recycling, improving how we manage water, making industrial processes more efficient, ongoing shifts in transport and how we heat and cool buildings. On average, the SF funds have 28% invested in companies exposed to our Better resource efficiency themes.
Second, we want to ensure the companies we own understand the magnitude of the energy transition and are managing their businesses in a proactive way that protects them from inevitably tightening regulations. We launched our 1.5 Degree Transition Challenge in early 2020 to engage with companies in our portfolios, encouraging them to increase their ambition to decarbonise and capture the benefits of doing so in an increasingly carbon-constrained world. We continue to make progress on this work and plan to report our findings later in the year.
Finally, there are some industries, no matter how proactively managed, on the wrong side of this transition and these will experience secular decline in demand for their products and services. We choose to avoid areas such as fossil fuel extraction and production, internal combustion engine car manufacturers, airlines and energy-intensive businesses that are not positioning themselves for a lower-carbon world.
Independent analysis of carbon emissions in SF funds
As part of impact reporting, we disclose portfolio carbon emissions for our single strategy funds and have been doing this since 2012; this work is carried out independently using MSCI Carbon Analytics. On average, the SF funds emit 68% less carbon dioxide than the markets in which they invest, have 22% exposure to companies whose products help reduce emissions, and hold 0% in companies exposed to the extraction and production of fossil fuels (such as coal miners and oil and natural gas exploration and production).
In addition to the SF funds emitting less carbon, there are important positive attributes of lower-carbon portfolios. In the event of a tax on carbon, for example, companies that can pass this cost on to their customers will not face a negative impact on their margins (and profitability); in contrast, those unable to pass these costs through to customers will have to bear it themselves. The low carbon emissions coming from the businesses in our SF funds mean they will have more resilient margins as carbon-related regulations tighten.
Key Risks
