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Liontrust’s Appleby: What the IPCC 2021 means for investors

Mike Appleby, investment manager on the Liontrust Sustainable Investment team, shares his thoughts on what the latest IPCC report means for investors.

“This week’s report from the UN’s Intergovernmental Panel on Climate Change (IPCC) was heralded as its starkest warning yet and a code red for humanity. As investors, we continue to challenge all the companies held across our funds to decarbonise their businesses at a rate consistent with the science, and also focus on those helping to drive the required energy transition.

Since the Panel’s last report in 2018, the evidence of observed changes in extremes such as heatwaves, heavy precipitation, droughts, tropical cyclones and, in particular, their attribution to human influence has strengthened. As a result, conclusions from this latest work are as follows: we need to materially reduce emissions from human activity within the next decade (approximately halving them) to limit the global average temperature rise to a manageable rate that does not seriously limit our quality of life in the future.

The sooner we cut emissions, the less negative impacts and costs in trying to adapt to climate change will be. In short, this is an emergency.

Here are some conclusions from the report worth remembering:

  • Carbon dioxide is the biggest single source of greenhouse gas (GHG) emissions and most of this is from burning fossil fuels. We need to displace this with ultra-low carbon alternatives, which do exist.
  • We cannot ignore other greenhouse gases such as methane, volatile organic compounds, and carbon monoxide and halogenated gases. When analysing emissions, make sure you are looking at CO2-equivalent measures that include all GHG rather than just carbon dioxide.
  • There is limited scope for offsetting through geoengineering and planting trees to soak up carbon will not be enough to get to zero emissions. We have to reduce absolute GHG emissions considerably before it is feasible to soak up the residual in this way.
  • Concerns about how much it will cost to do this often fail to mention the fact not taking action to halve emissions by 2030 will cost orders of magnitude more in limiting growth and development (for more on this, see the Stern Review on the Economics of Climate Change from 2006).
    What does this means for investors, and how do we apply what we know about climate change to our Sustainable Future (SF) funds?

We believe the following and have positioned our SF funds accordingly:

  • Materially reducing emissions will affect many areas across the whole economy, including our energy system, how we heat and cool buildings, transport, industrial processes, agriculture and changes to land use.
  • We are looking for companies innovating to provide products and services that are smarter and help reduce emissions while providing the same utility. Our SF funds, on average, have 28% invested in companies improving resource efficiency and reducing emissions.
  • There will be inevitable increases in regulation to reduce emissions and our SF funds, on average, emit 68% less than the market in which they are invested. This means our favoured companies have less carbon costs to pass on to customers and their margins will be more resilient to tightening emission regulations.
  • We are challenging all the companies held across our SF funds to decarbonise their business at a rate consistent with the science (halving absolute emissions by 2030) as we think this will give them a competitive advantage in an increasingly carbon-constrained world. Small incremental changes will not get us there and we urgently need to respond to this crisis.
  • There are carbon-intensive businesses offering lower-carbon alternatives that will struggle to survive as profitable enterprises and we choose not to invest in these.
  • Climate change is mistakenly thought of as a purely ‘environmental’ issue but there is also a big social dimension. Local air quality, for example, can be vastly improved by reducing toxic emissions and the social benefits from improving health are enormous. The transition to an ultra-low carbon economy needs to bring people with it, in terms of the industries, workforces, and local communities affected, and ensuring there is affordable, clean energy for all. This is referred to as a Just Transition.
  • Tackling climate change is a major challenge but not the only area where we can do things much smarter. Our SF funds are exposed to 21 Sustainable investment themes that help make our shared economy cleaner, healthier and safer.”

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