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Mike Appleby
Mike Appleby 11-08-21

IPCC 2021 Summary for policymakers – a few thoughts for investors

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise.

This week’s report from the UN's Intergovernmental Panel on Climate Change (IPCC) was heralded as its starkest warning yet and a code red for humanity. As investors, we continue to challenge all the companies held across our funds to decarbonise their businesses at a rate consistent with the science, and also focus on those helping to drive the required energy transition.

Since the Panel’s last report in 2018, the evidence of observed changes in extremes such as heatwaves, heavy precipitation, droughts, tropical cyclones and, in particular, their attribution to human influence has strengthened. As a result, conclusions from this latest work are as follows: we need to materially reduce emissions from human activity within the next decade (approximately halving them) to limit the global average temperature rise to a manageable rate that does not seriously limit our quality of life in the future.

The sooner we cut emissions, the less negative impacts and costs in trying to adapt to climate change will be. In short, this is an emergency.

Here are some conclusions from the report worth remembering:

- Carbon dioxide is the biggest single source of greenhouse gas (GHG) emissions and most of this is from burning fossil fuels. We need to displace this with ultra-low carbon alternatives, which do exist.

- We cannot ignore other greenhouse gases such as methane, volatile organic compounds, and carbon monoxide and halogenated gases. When analysing emissions, make sure you are looking at CO2-equivalent measures that include all GHG rather than just carbon dioxide.

- There is limited scope for offsetting through geoengineering and planting trees to soak up carbon will not be enough to get to zero emissions. We have to reduce absolute GHG emissions considerably before it is feasible to soak up the residual in this way.

- Concerns about how much it will cost to do this often fail to mention the fact not taking action to halve emissions by 2030 will cost orders of magnitude more in limiting growth and development (for more on this, see the Stern Review on the Economics of Climate Change from 2006).

What this means for investors: applying what we know about climate change to the SF funds

We believe the following and have positioned our Sustainable Future (SF) funds accordingly:

- Materially reducing emissions will affect many areas across the whole economy, including our energy system, how we heat and cool buildings, transport, industrial processes, agriculture and changes to land use.

- We are looking for companies innovating to provide products and services that are smarter and help reduce emissions while providing the same utility. Our SF funds, on average, have 28% invested in companies improving resource efficiency and reducing emissions.

- There will be inevitable increases in regulation to reduce emissions and our SF funds, on average, emit 68% less than the market in which they are invested. This means our favoured companies have less carbon costs to pass on to customers and their margins will be more resilient to tightening emission regulations.

- We are challenging all the companies held across our SF funds to decarbonise their business at a rate consistent with the science (halving absolute emissions by 2030) as we think this will give them a competitive advantage in an increasingly carbon-constrained world. Small incremental changes will not get us there and we urgently need to respond to this crisis.

- There are carbon-intensive businesses offering lower-carbon alternatives that will struggle to survive as profitable enterprises and we choose not to invest in these.

- Climate change is mistakenly thought of as a purely ‘environmental’ issue but there is also a big social dimension. Local air quality, for example, can be vastly improved by reducing toxic emissions and the social benefits from improving health are enormous. The transition to an ultra-low carbon economy needs to bring people with it, in terms of the industries, workforces, and local communities affected, and ensuring there is affordable, clean energy for all. This is referred to as a Just Transition.

- Tackling climate change is a major challenge but not the only area where we can do things much smarter. Our SF funds are exposed to 21 Sustainable investment themes that help make our shared economy cleaner, healthier and safer.

Understand common financial words and terms See our glossary
Key Risks 
 
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
 
Some of the Funds and Model Portfolios managed by the Multi-Asset Team have exposure to foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The majority of the Funds and Model Portfolios invest in Fixed Income securities indirectly through collective investment schemes. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. Some Funds may have exposure to property via collective investment schemes. Property funds may be more difficult to value objectively so may be incorrectly priced, and may at times be harder to sell. This could lead to reduced liquidity in the Fund. Some Funds and Model Portfolios also invest in non-mainstream (alternative) assets indirectly through collective investment schemes. During periods of stressed market conditions non-mainstream (alternative) assets may be difficult to sell at a fair price, which may cause prices to fluctuate more sharply.
 
Disclaimer
 
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
 
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 
Mike Appleby
Mike Appleby
Mike Appleby joined Liontrust in April 2017 as part of the acquisition of ATI. Having started his investment career in 1992, Mike joined Aviva Investors in 2004 where he was a Fund Manager and then appointed Head of SRI Thematic Research.

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