Cornelia Andersson
Asset managers face difficult choices as they focus on how to foster decarbonisation in a rapidly warming world. It’s becoming clear that proactively investing in companies developing climate solutions is more effective than divesting high carbon emitters.
After the excitement of the formation of the Glasgow Financial Alliance for Net Zero (GFANZ) at the 2021 COP26 meeting, the huge scale of the task ahead is becoming apparent. It’s estimated that $100 trillion[1] is needed to decarbonise the global economy by 2050 along with significant technology innovation.
From the steel industries of China to the US automotive sector, to the mines of Australia and the factories of India, the transition required has hardly begun. On its current trajectory, the world is on course for global warming of close to 3°C,[2] rather than the 1.5°C target set at the Paris Agreement of 2015 to limit impacts like heatwaves, storms and wildfires.
What’s becoming clear is that asset managers simply divesting companies with high carbon emissions from their portfolios is not the answer. What’s more, doing so might reduce an investment portfolio’s aggregate emissions but it changes little in the real world. Instead, asset managers should consider investing in the businesses developing ways to eliminate emissions.
“The crux of the matter really lies in strategic asset allocation,” explained Mahesh Roy, Investment Practices Programme Director at the Institutional Investors Group on Climate Change, speaking at the 2023 Climate Investment Summit, hosted by World Climate Foundation at London Stock Exchange. “Arguably, the best way investors can reduce real world emissions is to invest in climate solutions. We need those solutions to decarbonise the real economy. So, we encourage climate solutions targets as this is about capital flows.”
According to the latest Intergovernmental Panel on Climate Change report, global greenhouse gas emissions in 2030 implied by nationally determined contributions make it likely that warming will exceed 2°C.
Listen to the Listed Equities: Decarbonisation and Divestment for a 1.5oC panel from the Climate Investment Summit On Demand.
Adapting to climate change reality
Why should such a seemingly small difference in temperature make such a big difference for how to invest?
It’s the difference between a 3% drop in crop yields and a 7% drop,[3] which has an enormous effect on investment opportunities in food production, for instance. Similarly, it’s calculated to be the difference between 17% of the population being forced to migrate and 37%,4] which again has a big influence on portfolio management decisions.
In the former 1.5°C scenario, an investment portfolio might focus on decarbonisation and climate change mitigation opportunities in equal measure, according to Kristina Church, Global Head of Sustainable Solutions at BNY Mellon. Yet in the latter 2°C scenario, she says, climate adaptation and mitigation become more important.
For portfolio managers investing for a net zero world, the options are limited.
Church believes that portfolio managers should engage with policymakers to push for system change. She’s a particular advocate of policies such as the US Inflation Reduction Act that encourage investment in areas such as the hard-to-abate steel, chemicals or buildings industries, rather than the exclusionary approach of EU policies.
“There’s a lot we can do,” she says. “Impact engagement is absolutely key, but that engagement maybe needs to shift as we get further away from the reality of 1.5°C. We need to engage for system change, to drive more policy support that's really going to generate opportunities for investment.”
Adapting portfolios
With climate change beginning to affect the real economy, investors have an opportunity to more meaningfully turn commitments into action by adapting portfolios. The reality of global warming and the transition are increasingly apparent. equally there are more investible climate solutions companies emerging. It’s important for portfolio managers to understand the fast-emerging risks and opportunities, while encouraging supportive regulation.
Discover more about the climate solutions that LSEG offers to help you create sustainable growth.
1. Source: An investor’s guide to net zero by 2050. BNY Mellon Investment Management.
2. Intergovernmental Panel on Climate Change calculations.
3. Source: Net zero by 2050. International Energy Agency.
4. Source: Kristina Church, Global Head of Sustainable Solutions, BNY Mellon. Speaking at the Climate Investment Summit. 28 June 2023.
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