The global effort to slow down climate change is unlikely to succeed unless it involves every type of human activity that generates greenhouse gas (GHG) emissions. Every one of them will need to be reassessed and modified, if it has not been done already. And that includes the carbon footprint of your investment portfolios.
Scientists have long established the link between climate and GHG emissions. There is plenty of evidence that their impact on the world’s climate has already been measurable1, and has triggered an increase in the number of floods, fires, forest fires, hurricanes and other extreme weather events linked to climate change over the past few decades.
Governments, companies and consumers are increasingly focusing on the objective of the Paris Agreement to keep the temperature increase in the 21 century under 2⁰C compared to the pre-industrial levels. However, it looks like Asian countries may find themselves the subject of particular attention from the international community due to their record. As the following chart shows, China and emerging markets of Asia have grown their share of CO2 emissions between 1990 and 2019, compared to the US and Europe. They will be expected to catch up and investors will have to play their part too.
The stakes have never been higher
There is a detailed ongoing scientific monitoring of the GHG emissions and the impact they make, with data and findings trickling down to specific research into possible solutions and policy decisions. The scientific consensus is channeled through the United Nations–sponsored Intergovernmental Panel on Climate Change (IPCC). IPCC develops and updates a series of important documents that describe the projected outcomes under different scenarios – the-so-called “alternative representative concentration pathways (RCPs)” for GHGs. They show that should the humanity be unsuccessful in keeping carbon emissions under control, the consequences can be truly disastrous
Every little helps
With everything at stake, all economic players will be expected to do their share. From the market perspective, three sectors in particular are exposed to climate change: utilities, energy and materials. They are facing bigger risks in the event of new regulations related to CO2 emissions but also in terms of asset destruction due to climate change.
As an investor, you have at least two options. The first is simply to exclude these three sectors from your portfolios. The disadvantage of doing that, of course, is that you miss out on sources of return from these three sectors. The second option is to continue to invest in each of them, but to focus on the best performers in terms of CO2 emissions.
At the same time, investors can engage with companies as shareholders to encourage change. For us at Candriam, climate change and biodiversity are two priority targets for our direct and collaborative shareholder engagement. For example, we have engaged and continue to engage with various banks and insurance companies to establish the extent of transparency in this area and encourage further improvements.
Companies can offset their CO2 footprint…
Companies’ voluntary carbon offsetting seeks to neutralise those activity-generated emissions that cannot be completely eliminated. It is an essential factor in financing energy transition and getting the rise of global temperatures under control. However, carbon offsetting is no substitute for the efforts made to cut energy consumption and CO2 emissions; rather is it an ancillary activity.
The Corporate Standard2 classifies a company’s direct and indirect GHG emissions into three “scopes,” and requires that companies account for and report all scope 1 emissions (“direct” emissions from owned or controlled sources) and all scope 2 emissions (“indirect” emissions from the generation of purchased energy consumed by the reporting company). While the Corporate Standard gives companies flexibility in whether and how to account for scope 3 emissions (all other indirect emissions that occur in a company’s value chain), we as investors pay particular attention to this type as it often represents the largest part of the company’s emissions. Any business aiming to comply with the 2015 Paris Agreement is duty-bound to do all it can to reduce its CO2 emissions by most it can. Whether this will be through increasing its energy efficiency or the use of renewable energy, it may take a while to achieve carbon neutrality.
At Candriam, we include companies’ CO2 emission levels in our stock analysis. We also go further and give you the tools in our monthly reports to measure your impact, through your investments, on climate change, as well as engaging with companies on this topic.
…and so can investors
Investors can also offset the carbon footprint of their own portfolios. For example, investors benefit from carbon offsetting mechanisms when they invest in our strategy designed specifically to help with a fight against climate change. We use Gold Standard to offset emissions by investing in projects around the world aimed at reducing GHGs or their impact on climate. Our three projects for the next three years are in renewable energy (a solar thermal energy plant in India), energy efficiency (using methane for energy production in China) and reforestation (tropical mix land restoration in Panama).
We firmly believe that carbon offsetting, as carried out by Candriam, complements our stock selection in that it limits temperature increases. While the companies in which we invest consume energy and emit CO2 in the process, our selection criteria ensures that they also invest in solutions aimed at reducing these emissions by at least 20% compared to our investment universe.