An interview by Neil Brown, Head of Equities, GIB Asset Management
Why does GIB Asset Management consider net-zero to be important?
It is clear that rising global temperatures will create significant challenges for humanity that go far beyond fears that we cannot maintain business-as-usual economic growth. A rapid acceleration in our transition to a net-zero economy is required to prevent irreversible global warming. As UN Secretary-General António Guterres said, this is a “code red for humanity”.
However, the challenge of transitioning our economies and financial system presents opportunities for investors. Reversing the climate crisis and creating an environmentally and socially sustainable world will provide significant financial benefits.
It is not enough for there to be a few leading ‘clean’ companies and a few de-carbonised investment portfolios. Investors don’t just want their own investments to be contributing to a positive future, and generating good returns; they also want a safe world in which to enjoy the fruits of their investments. The real value of an investment depends not only on its own financial return but on the state of the world in the future – the concept of ‘total contingent wealth’.
As a result, it is imperative that all companies get over the finish line in the Race to Zero.
Why should companies be focused on 2030 as the critical date?
While the attainment of net-zero emissions by 2050 (NZE2050) has become the mantra among policy makers, investors and companies, it is emissions cuts by 2030 that are required to combat the climate crisis we face.
Carbon budgets are nearly exhausted. The world has 8% of its carbon budget remaining, which will be used up in the coming decade at current emission rates, according to the Global Carbon Budget report 2020.
The International Energy Agency (IEA) calculates that for the world to reach NZE2050, annual energy and industrial emissions would need to fall by around 45% from 2010 levels by 2030. This decade is where we need to see the steepest declines and we can’t wait any longer to accelerate the transitions needed.
What has been holding investors back?
To drive a wholesale reduction in the carbon-intensity of economic growth rapidly, but also in a way that enables a just transition, is a tough challenge. Even assuming that investors want to see a decarbonisation of their portfolios – either through investing in the leaders or working positively to change the rest – there remain practical challenges to doing so.
Without an ability to understand a company’s current emissions, or their targets for emissions reductions in the future, it is impossible to judge who is the ‘best’ to allocate capital to, or to determine whether engagement strategies have been successful. Data is a vital ingredient needed in the goal to translate real world decarbonisation into reality.
An increasing number of companies are providing useful data for decarbonisation. CDP, for example, runs an annual non-disclosure campaign that engages with under-reporting companies to increase their reported data points.
Many helpful frameworks and toolkits have been developed to assist investors looking to encourage the race to zero. These include: amendments to the climate benchmarks in the EU benchmark regulation; the Net Zero Investment Framework; the Target setting protocol of the UN Net Zero Asset Owner Alliance; and the financial sector’s Science-based Targets Guidance of the SBTi.
How do you assess companies on the path to net-zero?
As investors, our aim is to integrate fully detailed analysis of decarbonisation strategies into our view of companies’ long-term prospects – their forecast earnings and therefore value. To do this in a systematic way, we have developed a framework to assess the action that a company is taking on net-zero.
Whilst companies may be net-zero aligned, we want to understand the substance and impact of their strategy and examine the overall performance towards their targets. This remains challenging: approximately 40% of companies with net-zero targets have yet to disclose how they plan to achieve them, according to the IEA. As part of our assessment, we consider whether their business activities, both at the revenue line and throughout their operations, will affect our acceleration toward net-zero.
At GIB AM, we are long term investors and will engage positively with companies to support continued raising of ambitions in both target setting and pace of achievement. We support the positive impact companies can have on decarbonizing the global economy, and through doing so, on their own financial performance.
What do you think the priorities should be looking ahead?
We are focused on a number of sector priorities that we see as particularly pressing on the path to net-zero.
The substantial emissions reductions required prior to 2030 necessitate a radical transformation of the energy and power sectors in particular. Primary energy demand in the NZE2050 scenario falls by 17% between 2019 and 2030, to a level similar to 2006, even though the global economy is already twice as large. This will require resource and energy efficiency improvements to reduce the overall demand for energy across the economy without sacrificing economic development. This is especially important over the coming decade as the efficiencies from renewable-driven electrification of the power system are yet to be realised.
Transport is another critical focus for us as we believe the safe and efficient mobility of people and goods is a key factor in sustainable development. The significant decarbonisation of transport presents challenges and opportunities; not least in the requirement for the transition to be fair and just.
Finally, our built environment is key through the way our buildings are constructed, powered, heated and cooled. According to the IEA, the use of cooling in buildings will become one of the top drivers of global electricity demand due to incomes and populations rising over the next three decades. Building cooling provides significant developmental benefits in warmer regions. The sector provides multiple health, recreational and productivity benefits, which presents significant opportunities if their transition to net-zero can be achieved.
At GIB AM, the identification of these sustainability challenges, and the opportunities they present, is an integral part of how we then put together low-carbon intensive portfolios that deliver both financial returns and solutions to climate change.