Future-Proofing Investments Against Climate Change
Investors should not only withstand the impending changes the energy transition will bring, but also tap on the enormous return potential from investing in climate-related transformational trends.
By Andreas Nigg, Head of Equities Core Global & U.S., Barbara Janosi, Portfolio Manager & Alban Cousin, Portfolio Manager, J. Safra Sarasin Sustainable Asset Management
Going into 2021, there is much hope for a normalization – of lives, societies and economies. Yet, there is an area that cannot simply «return to normal», and that is the human activities that have brought lasting damage to the climate and environment.
Today, we see growing impetus from more countries to reduce their greenhouse gas emissions (GHG) to net-zero, including Japan, the U.K. and Switzerland. Even China, one of the largest GHG emitters is aiming to reach net-zero by 2060.
In this inevitable transition to a low-carbon future, there will be many winners and losers. And as investors, it is crucial to ensure that our portfolios are «future-proof» – meaning they are able to not only withstand the impending changes the energy transition will bring, but can also tap on the enormous return potential from investing in climate-related transformational trends.
Why should investors be concerned about climate change?
Andreas Nigg (pictured above): The devastating economic impact of climate change cannot be underestimated. Beyond the primary effects from droughts, flooding, and other natural disasters, it is the secondary impacts, such as increased migration, higher intra-regional conflicts and more frequent disruptions to supply chains that will account for a larger share of economic losses.
For instance, in 2011, heavy monsoons in Southeast Asia wreaked havoc in the technology sector, as the bulk of hard-disk drive manufacturing was concentrated in an area that was flooded for weeks. There are two main categories of climate-related risks: physical risks and transition-related risks.
The first relates to the direct impacts of the changing climate, such as natural disasters. The second refers to the risks that arise as companies fail to prepare for the transition to a low-carbon economy.
How can investors assess climate transition-related risks?
Alban Cousin (pictured above): In order to assess such risks, we have developed a proprietary framework to project a company’s climate temperature scenario path. With this forward-looking framework, we aim to analyze the de-carbonization objectives companies have set for themselves.
As economies align with the goal of the Paris Agreement to limit global warming to well below 2°C, individual companies are judged on their efforts to achieve these targets. The targets, as well as their historical success in achieving carbon intensity reductions, are used to calculate an alignment with a climate temperature scenario path. While this methodology is dependent on many modeling choices and assumptions, it should provide a clearer perspective on how prepared companies are for the transition.
A company is likely to be better positioned for a low-carbon future if it has:
- Proven it is capable of reducing carbon emissions over time
- Is displaying through its strategy a real commitment to continuing on this transition pathway
- Shows efforts that are in line to make it compliant with the Paris Agreement
To paint a fuller picture of a company’s exposure to climate risks, the climate temperature scenario path assessment should be coupled with an in-depth fundamental analysis to understand the company's strategic thinking in relation to the energy transition.
Other than risks, are there also opportunities to invest in the climate transition?
Barbara Janosi (pictured above): Besides analyzing the risks related to climate change, the transition will also offer new opportunities and requires new solutions to provide low-carbon replacements for existing needs. This opens many attractive opportunities to invest in companies that are on a 2°C path or provide innovative solutions to help tackle climate change.
Moreover, the climate transition provides new entrants with an opportunity to compete effectively with established players for new markets. This can happen across a large cross-section of sectors.
Tesla was founded only 17 years ago, but is already the largest seller of luxury cars in the US, ahead of over 100-year-old European stalwarts such as Daimler-Benz or Audi. General Electric’s own on-shore wind business generates similar revenues as its legacy gas turbine unit.
How can investors find the winners of tomorrow’s low-carbon future?
Nigg: In order to build a resilient portfolio that can successfully withstand the changes climate change is bringing, we believe it is crucial to invest in two groups of companies – «Climate Pledgers» and «Green Champions».
Climate Pledgers are companies whose GHG emissions put them on a temperature path that is below 2°C. Given the increasing pressure from governments, regulators and consumers to fight climate change, Climate Pledgers are already well-positioned in the face of climate risks, giving them an edge against their competitors.
Green Champions are businesses that provide innovative solutions for a low-carbon world, for instance in the areas of smart mobility, building insulation or renewable energy. These companies stand to benefit from strong growth in the demand for their products and services, and they enable others to fight climate change.
By investing in both types of companies, we can mitigate risks and harness the opportunities of the climate transition within a global, benchmark-oriented portfolio.
Can you provide an example of a Green Champion?
Cousin: A Green Champion we have identified is Shimano. While traditional renewable companies are often viewed as the most obvious green champions, our analysis goes beyond that to identify other structural winners of the climate transition. 16 percent of the world’s greenhouse gas emissions are connected to transport, and 12 percent to road transport, of which 60 percent come from passenger travel.
Bicycles offer many advantages for short-distance mobility, including being non-pollutive, as well as positive health effects for cyclists. The use of bicycle transport within cities has been growing steadily for years, and COVID-19 has only accelerated this development further.
Shimano, a Japanese company with a long history in manufacturing bicycle components, is at the heart of this sustainable trend. 80 percent of its revenues come from its bicycle segment. Taking into account its low-carbon cycling business, Shimano is considered a Green Champion in our investment universe, with 80 percent of green revenues.
- Learn more about the «Climate 2035» strategy here.
