Mike Appleby

Measuring impact: the climate change crisis

Mike Appleby

The world continues to grapple with the consequences of the climate change crisis and now is the time to accelerate the shift to an ultra-low carbon economy. The science is telling us we need to quicken the pace of decarbonisation as current progress and ambition both fall considerably short of internationally agreed goals to limit average global temperature rises to less than two degrees centigrade, and ideally less than 1.5, in line with the Paris Accord.

In 2020, the world grinding to a halt during the Covid-19 pandemic led to a 2.6 gigatonne (a billion tonnes) drop in CO2 emissions and a so-called anthropause, a term coined to describe the more welcome ecological consequences of lockdown. Academics suggest similar cuts are needed every two years to meet Paris targets, highlighting the huge scale of the decarbonisation challenge.

On average, among countries cutting their output during the pre-Covid period of 2016 to 2019, carbon dioxide emissions fell by 0.19 gigatonnes, roughly 10 times less than the necessary levels of one to two gigatonnes a year.

We have been thinking about how climate change will affect our economy and how we can best position our investments for this since our Sustainable Future (SF) funds launched 20 years ago. We believe the market continues to underestimate both the rate of change needed to decarbonise and the magnitude of the positive impact on companies that are helping towards this, as well as the structural decline in businesses continuing with carbon-intensive products and services.

How does this affect our investment decisions? First, we want to invest in companies helping to reduce emissions as they will experience significant growth. Of our 21 sustainable investment themes, all those associated with increasing resource efficiency will benefit from, and contribute to, the shift towards an ultra-low carbon economy. As well as using more renewables to generate electricity, equally important is reducing the amount of energy we waste (to cut bills as well as emissions), increasing recycling, improving how we manage water, making industrial processes more efficient, ongoing shifts in transport and how we heat and cool buildings. On average, the SF funds have 28% invested in companies exposed to our Better resource efficiency themes.

SF Funds - Resource Efficiency

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 inevitably tightening regulations. We launched our 1.5 Degree Transition Challenge in early 2020 to engage with companies in our portfolios, encouraging them to increase their ambition to decarbonise and capture the benefits of doing so in an increasingly carbon-constrained world. We continue to make progress on this work and plan to report our findings later in the year.

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 products and 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.

Independent analysis of carbon emissions in SF funds

As part of impact reporting, we disclose portfolio carbon emissions for our single strategy funds and have been doing this since 2012; this work is carried out independently using MSCI Carbon Analytics. On average, the SF funds emit 68% less carbon dioxide than the markets in which they invest, have 22% exposure to companies whose products help reduce emissions, and hold 0% in companies exposed to the extraction and production of fossil fuels (such as coal miners and oil and natural gas exploration and production).

 

SF Funds - Carbon Emission Reduction

SF Funds - Cleantech Exposure

In addition to the SF funds emitting less carbon, there are important positive attributes of lower-carbon portfolios. In the event of a tax on carbon, for example, companies that can pass this cost on to their customers will not face a negative impact on their margins (and profitability); in contrast, those unable to pass these costs through to customers will have to bear it themselves. The low carbon emissions coming from the businesses in our SF funds mean they will have more resilient margins as carbon-related regulations tighten.

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

Liontrust Insights



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.

Friday, May 14, 2021, 10:53 AM