Mike Appleby

Investing to reduce carbon emissions

Mike Appleby

Renewable energy

CO2 emissions in the UK fell for the sixth consecutive year in 2018, the longest series of continuous reductions since records began in the 1850s.

Data from Carbon Brief shows CO2 emissions were an estimated 361m tonnes last year, some 39 per cent below 1990; excluding years with general strikes, this is the lowest since 1888. The estimated 1.5 per cent reduction in 2018 was once again driven by falling coal use, down 16 per cent compared to a year earlier, whereas oil and gas were largely unchanged.

How we generate and consume energy is clearly undergoing huge change and this is affecting many parts of our economy. The science is telling us to act ever faster to reduce greenhouse gas emissions. We believe the transition from high to low-carbon energy sources and how we can use energy more efficiently to reduce emissions represents a huge structural shift and potentially has a major impact on investment decisions.

First, companies helping to reduce emissions will experience significant growth and those that can meet this demand in a profitable way can potentially make for interesting investments. The energy transition will reduce emissions in power and heat generation, industry, transport and in heating and cooling buildings. Many of our themes play directly into this and we have meaningful exposure to companies set to benefit from delivering lower emissions across the following broad range of areas:

  • Increasing electricity generation from renewable energy sources.
  • Improving the efficiency of energy use.
  • Making transport more efficient.
  • Improving industrial and agricultural processes.
  • Increasing waste treatment and recycling.


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 inevitable tightening regulations. We engage with companies to encourage them to manage this (and other key) material impacts on their business.

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 carbon-intensive products or 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.

We disclose the aggregated carbon emissions for our single strategy funds, which we started doing in 2012. This work is carried out independently and, on average, the Sustainable Future funds emit 72 per cent less carbon dioxide than the markets in which they are invested, have 24 per cent exposure to companies whose products help to reduce emissions and hold 0 per cent in companies exposed to the extraction and production of fossil fuels (such as coal miners and oil and natural gas exploration and production).

Reduction in carbon emissions relative to the market

Reduction in carbon emissions relative to the market

Exposure to companies offering clean technology solutions

Exposure to companies offering clean technology solutions

Source: MSCI Carbon Analytics Report, December 2018; Liontrust: Average carbon exposure of Sustainable Future fund range

In addition to our Sustainable Future funds emitting less carbon than the markets in which they invest, there are important positive investment attributes of these low-carbon portfolios. In the event of a tax on carbon, companies that can pass this cost on to their customers will not face a negative impact on their margins (and profitability).

Companies unable to pass these carbon costs through to clients will have to bear it themselves. The very low carbon emissions coming from the businesses in our Sustainable Future funds mean these portfolios will have related more resilient margins as carbon-related regulations tighten.

For a comprehensive list of common financial words and terms, see our glossary here.

 

Key Risks

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 and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided 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. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Monday, March 18, 2019, 10:15 AM