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COP26 and the 1.5° transition challenge

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

The global gaze has been firmly trained on Glasgow over recent weeks, with celebrities, world leaders and everyone in between descending on the city for the COP26 event on climate change.

Headline-grabbing announcements included over 100 countries pledging to cut methane emissions by 30% and a goal to halt deforestation, both by 2030, as well as UK Chancellor Rishi Sunak unveiling a mandate for large companies to develop net zero transition plans by 2024. We also saw a joint deal on emissions between the US and China and a Global Coal to Clean Power Transition Statement signed by more than 190 parties, committing to phase out coal from major economies by 2030 and by 2040 for the rest of the world. Both are seen as key to COP 26’s mantra of ‘keeping the 1.5 degrees alive’.

This goal to limit global average temperature rises, compared to industrial levels, to less than 2 degrees centigrade, and ideally less than 1.5, was approved in the Paris Agreement, adopted at COP21 in December 2015 and implemented a year later. But the seminal Intergovernmental Panel on Climate Change (IPCC) report, published in October 2018, still shocked many with its stark conclusion: to meet that 1.5 degree target and stand any chance of keeping climate change manageable, we need to halve absolute emissions by 2030 or sooner.

Whatever ultimately comes from the developments at COP26, we will continue to see huge disruption as the world grapples with the energy transition. All actors in the economy, whether governments, companies or individuals, need to halve emissions and we cannot stand back waiting for others to take the lead.

Such a reduction will impact the whole economy, including our energy system and how we heat and cool buildings but also driving transformations in transport, industrial processes, agriculture and land use. This move to an ultra-low carbon economy will also have an impact on investment returns: companies contributing to this shift should prosper while those on the wrong side of the energy transition, or not confronting its ramifications, are at risk of secular decline.

To stay on the right side in our Sustainable Future funds, we have always avoided areas such as fossil fuel extraction and production and, more broadly, internal combustion engine car manufacturers, airlines and energy-intensive businesses not positioning for a lower-carbon world. In terms of more positive themes, our funds, on average, have 28% invested in companies improving resource efficiency and reducing emissions across areas such as energy waste, smarter water management and increasing recycled material. The funds emit 68% less (in terms of companies held) than the markets in which they invest and our stocks have less carbon costs to pass on to customers, meaning their margins will be more resilient to inevitably tightening emission regulations.

As part of our ongoing engagement with companies, we are also challenging those held across the funds to be more ambitious in terms of decarbonisation targets. We launched our 1.5 Degree Transition Challenge last year, recognising the pace of change was falling well short of the level demanded: incremental annual targets of 1%-2% will take decades to halve emissions when science is telling us this needs to happen in less than 10.

Based on our work so far, around a quarter of companies with which we engaged have absolute decarbonisation targets consistent with 1.5 degrees and a further 9% have committed to 2 degrees, which means a third overall are aligned with the Paris Agreement. This obviously means two-thirds do not, at present, have targets in line with the science but this is moving quickly, with many demonstrating positive momentum. The biggest challenge lies in fast-growing companies, where carbon intensity targets have to be significantly higher than how much the business is growing for there to be any fall in absolute emissions. If a business is growing 5% a year and the target to reduce carbon intensity (per unit of sales) is 2%, absolute emissions are still rising by 3% annually.

Responding in a timely manner to the climate crisis is important but we have to bear in mind climate change also has a social dimension. Many people work in industries facing formidable change and must be able to afford to live a fulfilled life in an ultra-low carbon economy. We must remember not to solve only for the best climate change outcome but ensure we also use this as an opportunity to reduce inequality, help alleviate fuel poverty and not lose sight of people. If people do not willingly move with the energy transition, it will fail.

Arguably, asking companies to set ambitious targets to decarbonise is the easy bit; this needs to result in actual meaningful emission reductions and we will continue to monitor progress. We called this initiative a challenge for a reason – it will not be easy to reduce emissions sufficiently within the remaining timeframe to avert the worst impacts of runaway climate change. But as proactive investors managing sustainable funds, we want to play our part by continuing to encourage a more rapid response to achieve this vital goal.

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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 managed by the Sustainable Future team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Investment in Funds managed by the Sustainable Future team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. 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. Some Funds may invest in derivatives. The use of derivatives may create leverage or gearing. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.


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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