It's time for climate action

Why offer investors a climate change strategy?

Human activity has been making our planet warmer since the mid-20th century. The scientific evidence supports this.

According to the IPCC report[1], greenhouse gas emissions continue to rise, leading to rapid global warming. Reducing these emissions immediately is crucial to limiting the global temperature rise to 1.5°C by the early 2030s.

Studies show the considerable impact of global warming on the ecosystem, the economy, society and, indeed, on all human activity. The number of meteorological disasters has increased five-fold in the past 50 years[2]. Hurricane Otis, which hit Acapulco, Mexico in 2023, resulted in insurance claims exceeding $2 billion[3]. And that's just one example!

According to the International Energy Agency, $3,000 billion of investment is needed each year in the energy transition – three times the current amount – to avoid exceeding the 2°C threshold. And companies are already offering solutions. Our conviction is that investing in these companies can generate long-term performance. Launching a strategy that combines our long-standing expertise in both ESG (Environmental, Social, and Governance) analysis and thematic equity management is therefore an obvious choice.

How do you come up with your investment ideas?

Renewable energies, recycling, green buildings, are all obvious sources.

But we also find investment possibilities among less obvious innovative solutions such as virtualisation software, or enzymes capable of streamlining a manufacturer’ production processes and improving its energy efficiency. There are many roads to energy transition and many possible solutions to environmental challenges. We look at two types of approach:

• Mitigation: These types of solutions involve preventing GHG (Greenhouse Gases) emissions. They include alternative energies such as solar; energy storage such as electric vehicle batteries, and energy efficiency such as insulation, which can help mitigate the causes of climate change and limit green house gas emissions.
• Adaptation: The second category is solutions to adapt to the negative consequences of climate change and pollution. Examples include floodwater management, and waste management or recycling.

Our climate investments are supported by Candriam’s own Climate Change Committee of four experts. They help identify companies which can profit from climate change challenges through their products, services and technologies. This team can also rely on the expertise of our partner Carbone4Finance[4]. The decisive advantage of the Carbon4Finance method lies in an in-depth analysis of companies’ Scope 3 for our internal ESG analysis.

In which sectors do you find companies acting to cure the climate?

The four economic sectors that emit most CO2 obviously have to reduce their carbon footprint. Energy, industry, transport and construction are the sectors most affected.[5] Within these sectors, we shall target those companies that provide solutions to fight global warming, and those operating within these companies’ ecosystem – such as providers of insulation for the construction industry. We seek companies of all sizes, from all sectors and geographical regions, and from a wide range of industries.

How do you choose companies?

We exclude companies that do not adhere to the 10 Principles of the United Nations Global Compact, as well as those whose activities are controversial such as arms, tobacco, thermal coal and other activities we consider to be unsustainable.

This process enables us to reduce the investment universe by at least 20%. Our fundamental analysis process is based on three pillars, each of which establishes strict criteria that the company must meet: the thematic pillar, the fundamental financial profile and the valuation.

This process ultimately enables us to reduce the investment universe by 20% or more. Our fundamental analysis process is based on three pillars, each of which has strict criteria that the investee company must meet: Thematic, Fundamental Financial, and Valuation.

We first use a double thematic filter to compile our “investable[6]” universe:

the companies are split into categories based on our two approaches: mitigation and adaptation. To this end, we have developed a proprietary tool that enables us to conduct a detailed analysis of each company’s contribution to environmental issues (as a percentage of their turnover). We carry out extra-financial analysis in order to better understand the risks and opportunities associated with ESG criteria[7]. We also assess the extent to which a company’s activities are exposed to major sustainability issues, and how it manages its relations with stakeholders. We then conduct an indepth analysis of each company within the investment universe based on five fundamental criteria combining financial and extra-financial analysis: quality of management, growth potential, competitive positioning, high profitability and low debt levels.

Finally, we value the equities selected, retaining those with the potential for longterm Investment return.

What does this strategy mean for my investments?

In our opinion, investing in this strategy is obvious for a host of reasons.

For both today and for future generations, climate change is a global challenge. Global warming is forcing us to seek solutions to mitigate new GHG emissions, and adapt to the consequences of GHGs already in the atmosphere. As responsible investors, we all have a part to play in financing the transition to a lowcarbon economy and in helping companies that deliver solutions to combat the major environmental challenges. This is why we have developed an active, pure and forwardlooking strategy.

With these 3 criteria, our environmental strategy goes well beyond excluding large emitters of CO2. We invest only in companies whose core activity offers a positive, tangible and direct impact in the fight against global warming. Within the investment reporting, we will integrate this dimension and measure the impact on 2 specific indicators related to climate change: the quantity of CO2 emissions avoided and the percentage of waste recycled.

This allows you to measure the positive results of your investments.

From a pure financial performance view, we believe this thematic represents an investment opportunity in new growth sectors. We believe companies able to rise to climate technology challenges and deliver practical solutions will, enjoy above average long term growth.

The integration of ESG factors into the financial analysis of companies, the commitment to a constructive dialogue[8] with companies to encourage best practices, and the exercise of our voting rights should be the norm for committed investors. ESG is more than just three letters. At Candriam, these three actions have been a reality in our daily investing life for more than 25 years, now and the new strategy is no exception to the rule!