Mike Appleby

1.5 Degree Transition Challenge: engagement update

Mike Appleby

In early 2020, Liontrust’s Sustainable Investment team committed to our One and a Half Degree Transition Challenge. This involves engaging with all the companies held in the Liontrust Sustainable Future funds and challenging them to revisit their decarbonisation targets and raise their ambition to reduce absolute levels of emissions at a rate consistent with a one and a half degree global average temperature rise.

The science is telling us we need to decarbonise rapidly, the sooner the better, to avoid the negative impacts of climate change on our economy, society and the environment. While estimates vary, this involves an unprecedented decarbonisation rate that halves global emissions by 2030 and continues at this pace to 2040 and 2050. But to increase the probability of remaining within the one and a half degree global average temperature rise this century, this rate should be front loaded by happening faster within the next five to 10 years.

This is a huge challenge: to put it in context, from 1 January to 11 June 2020, the latter half of which was under lockdown conditions, global emissions were only around 8.6% lower than last year. At the peak of the lockdown in April, emissions in the UK had fallen by 31% but they are already rising back towards normalised levels as the economy reopens. Put simply, reducing global absolute emissions by more than 5% a year will require major changes across the economy.

In terms of our own targets in this area, the pandemic has slowed our progress as we suspended new engagement on the climate crisis in Q2 and Q3. During that time, we focused instead on understanding how the businesses in our funds were impacted by Covid-19, as well as how they were managing during the pandemic. We pushed for companies to take a longer term view where possible and manage their businesses for eventual recovery, adopting a stakeholder approach to minimise the impact on staff and supply chains, which will be needed as the economy gradually opens up again.

Given the backdrop, we have not been able to finish our climate crisis engagement or publish a report on our findings in 2020 as originally intended. That said, we are on track to have contacted companies that account for well over 70% of all emissions from the Sustainable Future Funds by the end of this year and have met and discussed the One and a Half Degree Transition Challenge with over 40 companies already.

We are continuing this work and intend to publish our findings in time for the United Nations Climate Change Conference of Parties (COP 26) which is due to be held in Glasgow in early November 2021 after being postponed for a year.

As part of our work so far, we have found:

• An encouraging number of companies have already taken a very proactive approach and made considerable progress in setting ambitious targets as we have requested. Many of these have done this by signing up to the Science Based Target Initiative, which is helping businesses work out a consistent approach.

• The majority of companies are receptive to increasing their decarbonisation targets and actively looking into including more timely absolute emissions targets. Even so, the scale of this challenge means not all are on track for a 50% reduction in emissions by 2030.

• There are a small number of companies where it is not clear that there is an obvious pathway to achieve this accelerated rate of decarbonisation (largely in so-called hard to decarbonise industries such as materials).

As we continue our engagement as part of this Challenge, it will be interesting to see the response from less carbon-intensive companies we have yet to contact. These are businesses where carbon emissions have not historically been seen as a major material driver, and given our findings so far, this could be an area where we can identify some relatively easy, economically attractive, actions that can make a meaningful contribution to quickly reducing easy-to-abate emissions.

To reiterate, we believe there is an imperative for businesses to commit to reducing their contribution to emissions in our economy. The challenge of rapidly reducing emissions will drive innovation, both in terms of how operations are run as well as highlighting the opportunity to develop ultra-low carbon products and services. There is a competitive advantage to be gained by proactively managed businesses that will be rewarded economically in an increasingly carbon-constrained world.

It is worth pointing out that the Sustainable Future Funds are aggressively positioned for an ultra-low carbon economy due to the thematic analysis that drives our investment ideas. This is designed to help us find companies expected to experience structural growth in demand for their low-carbon goods and services while avoiding those predicted to suffer structural decline from regulation and consumer preferences for much lower emissions.

Our engagement is looking at a proactive sub-set of the economy and these companies are better than the market average on carbon abatement. This should also serve as a wake-up call to those not aware of the ever- more urgent need to speed up the pace of change in addressing the climate crisis as well as the subsequent uneven impacts this will have on investment returns for businesses across our economy. The One and Half Degree Transition Challenge has involved a significant amount of work already and we have learnt a great deal about reducing emissions across the economy. We look forward to sharing this in our report in late 2021.

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Monday, December 7, 2020, 11:06 AM