Mike Appleby

Carbon exposure: mitigating risks and finding opportunities

Mike Appleby

Carbon exposure remains a central issue for sustainability and with many companies innovating in the energy space, it can represent a positive investment theme rather than simply a large corner of the market to avoid.

Liontrust’s Sustainable Future Funds continue to have a considerably smaller carbon footprint than mainstream equity indices, with holdings across the portfolios emitting 70% less CO2 on average.

This is consistent with previous analysis showing the Funds emit relatively low amounts of carbon dioxide. While this analysis has some shortcomings – failing to capture the emissions from the use of products or services the companies provide for example – it is a useful starting point for investors to see how our Funds compare on CO2.

By investing in companies that emit less CO2, the Funds are better positioned to withstand any carbon cost inflation as underlying holdings will have less additional costs to pass on to their customers. In short, the companies in the Funds have margins that are more resilient to emissions regulations, which we see becoming tighter over the medium term.

SF Funds Carbon Emissions vs Benchmarks
Source: MSCI ESG Carbon Analytics Report, 01.03.18, using holdings data as at 31.12.17. The measure for this analysis is Total Carbon Emissions (tCO2e /$m invested) for the Sustainable Future funds relative to their conventional benchmarks.

The same analysis, by MSCI ESG Carbon Analytics, estimates the Funds have an average of 28% (between 13% and 46%) invested in clean technology solutions to combat climate change.

SF Funds Exposure to Cleaner Technology Solutions
Source: MSCI ESG Carbon Analytics Report, 01.03.18, using holdings data as at 31.12.17 and MSCI classification of companies offering clean technology solutions 

We construct our portfolios from the bottom up, based on fundamental analysis, to identify well-managed companies that are beneficiaries of structural changes and have good prospects to remain profitable. We believe getting these elements right in an investment maximises the chances of generating competitive returns. 

While the focus of this year’s Earth Day was on our oceans, the UK was quietly working towards another milestone in electricity generation: the country was powered without coal for a record three days during April, underlining the polluting fuel’s ongoing decline. 

This came just a year after a watershed first 24 hours without coal since the nineteenth century in April 2017. Ofgem data shows power from coal fell to 10% in 2017 versus 48% in 2006.

Much of the electricity still comes from fossil fuels and we are far from completely renewable sources but progress, and opportunities, are clear. Our investment approach to carbon risk – as well as carbon opportunities – uses a combination of: 

  • Actively avoiding carbon-intensive businesses (as we believe their future profitability to be overestimated by the market). We do not invest in the primary extraction of fossil fuels such as coal, oil or natural gas, airlines or auto manufacturers
  • Seeking out the best operationally managed companies that are proactively managing their business to mitigate increasing regulatory burdens designed to make big emitters pay
  • Actively looking for exposure to profitable businesses providing solutions to help emit less pollution

While no investor can completely avoid exposure to fossil fuels, as all companies use electricity, we invest in businesses that profit from the positive change under way in our energy system.

We look for companies reducing costs through energy efficiencies, selling products that drive efficiencies for others or generating and transmitting renewable energy. Naturally, we avoid companies that stand to lose from these positive trends – the fossil fuel sectors.

The ‘Fossil Free’ movement calls for asset owners to end support for the industry by freezing new investment in fossil fuels and selling positions in equities or corporate bonds within five years. Our Funds have long taken a more positive approach, investing in companies profiting from accelerating the decarbonisation of our economies and those with low exposure to carbon risk, and also avoiding investment in coal, oil, tar sands and natural gas.

Our thematic investment ideas continue to evolve rapidly but currently include insulation providers, vehicle battery components and power semiconductors.

In summary, there are global commitments to transition away from fossil fuels and we believe there are profits to be made in meeting those challenges and risks for companies on the wrong side. By providing capital to companies that are leaders in these fields, we believe we can continue to profit from a credible pathway to a lower carbon economy and the UK’s recent coal-free stretch suggests this is gathering pace.

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 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 Equities team involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.


This content 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.  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, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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.

Thursday, May 10, 2018, 8:46 AM