Mike Appleby

Getting on the right side of the energy transition

Mike Appleby

Carbon Emissions

With many commentators and politicians predicting there will be a General Election before the end of 2019, Labour has issued a strong message of climate change and sustainability as part of its latest business proposals.

In a speech to City executives last week, shadow chancellor John McDonnell said a Labour government would give the Bank of England powers to monitor companies’ progress on cutting carbon emissions and investing responsibly to tackle the climate emergency. He also repeated his warning that firms which fail to meet environmental targets risk being delisted from the stock exchange, forcing them to become private businesses or list in other jurisdictions.

McDonnell’s assertion that regulation is necessary to “divert investment away from fossil fuels” comes just a few weeks after figures from BP showed carbon emissions from the energy industry rose at the fastest rate since 2011 in 2018. Temperature swings drove the biggest jump in gas consumption for more than 30 years and as carbon emissions climbed 2%, the company warned of a vicious cycle forming.

Against this backdrop, among her final acts as Prime Minister, Theresa May greenlit net zero greenhouse gas emission targets by 2050, as proposed by the UK Committee on Climate Change (CCC). As we wrote when the report was published, we are pleased with this tightening regulation and think the target is what the science is calling for, reinforcing our belief that climate change will have a very material impact on investment returns over the next decade and beyond.

While the CCC’s report clearly lays out that the world is facing a crisis, it is important we also celebrate the improvements that have already been made and can be achieved in the future. Air quality in cities across the world, for example, has improved and, in London, Sulphur oxide (SOx) and Nitrogen oxide (NOx) and particulates are a fraction of their levels in 2000. This shows the positives that can be achieved.

Clearly, the sooner we reduce carbon emissions, the better for everyone, and it is becoming easier to meet these targeted reductions as a result of impressive falls in the costs of renewables, advances making electric vehicles more affordable and policy instruments such as carbon pricing giving strong pricing signals to make dirty energy sources for power generation uneconomic.

There is no silver bullet to hit this 2050 target and it will require changes and developments on many fronts. Government legislation and other action will play a significant role in us going further and reaching net zero emissions. There is also much we as consumers and individuals can do, such as focusing on the amount and type of energy we use in our homes and choosing more sustainable forms of transport.

In conjunction with these, sustainable investing has an important role to play: not just in committing capital to businesses focused on combatting climate change but also in encouraging all companies to capture the opportunities this energy transition can bring.

Liontrust’s Sustainable Investment team focuses on finding companies that are making our world cleaner, healthier and safer. Improvements have come, and will continue to be achieved, through the help of ingenious, efficient businesses whose profits have grown in line with demand for their solutions.

Our 20 investment themes across the Sustainable Future fund range include Increasing energy from renewable sources, which we see as a multi-decade structural shift as the world moves towards lower-carbon energy. We also see interesting investment opportunities in another of our investment themes: Increasing the efficiency of energy use.

Wind and solar are now the cheapest ways to generate electricity in many countries, including the UK, and this should logically translate into even higher demand for renewables: it not only makes sense economically but is also the answer to reducing the carbon intensity of the electricity we use.

We continue to expect companies whose products or services reduce emissions to benefit from secular demand and to find substantial investment opportunities in stocks on the right side of this energy transition. This includes those providing renewable energy, energy efficiency, smartening our ageing grid infrastructure, providing more efficient transport, as well as waste sorting, treatment and recycling and innovations to reduce the carbon intensity of industrial processes.

In contrast, companies that produce carbon-intensive products or services where there are lower-carbon alternatives will increasingly find themselves on the wrong side of regulation to reduce emissions. In electricity generation, we see huge risks to coal, for example, which is effectively dead as it is the most carbon-polluting way to generate electricity. In transport, we see incumbent car manufacturers struggling to meet tightening pollution targets without severe margin pressure.

We believe the magnitude and pace of this change is underestimated by the market and will be a major driver of returns over the next decade and beyond.

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.


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.

Tuesday, July 2, 2019, 3:27 PM