Impact and sustainable investing
Applying 1.5-degree science to high portfolio risks
2 min read 7 Feb 22
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With more than 40 countries pledging to phase out coal power, COP26 drew to a close with an emphasis on consigning coal to history. Heading into 2022, how can investors tackle the high-risk elements in their portfolios – but with a forward-looking perspective?
Of the signatories committed to redoubling efforts to accelerate the global energy transition, 23 are new to the list, including Indonesia, Vietnam, Singapore, South Korea, Spain and others. The intention behind the transition is simple: to minimise global temperature rises in line with the Paris agreement and operate within planetary boundaries.
As global governments seek to move to tackle aspects such as thermal coal with increasing momentum, investors must be aware of the increasing spill-over effects on holding such assets.
While the initial steps can be daunting, it’s important to start somewhere and investors must ask two key questions, namely:
- What are the unintended consequences to be aware of?
- How are the high-risk elements of the portfolio being addressed with a forward-looking perspective?
“What we’re looking to do is to support the corporates that have the requisite threshold of transition plans,” said Phil Cliff, head of climate at M&G.
Demonstrating pre-requisites
“We make an assessment of alignment to confirm if corporates are phasing out thermal coal according to 1.5-degree science based timelines (by 2030 in developed markets, and 2040 in emerging markets). For Green bonds we will also assess use of proceeds and corporate strategic alignment as a pre-requisite to invest in green bonds. If there is consistency then we’re supportive of buying green bonds to build renewable power and to finance the transition in the real world, for the corporate and ultimately our portfolios emissions too.”
“Ultimately, those corporates need access to the finance to build that power, it requires a huge amount of capital.”
Here, investors can demonstrate the effective value of engagement over divestment with a corporate on a transition journey – providing they can show evidence of meeting key milestones and targets along the way. This, in turn, enables corporates to unlock financing and continue creating value while investors realise a sustainable stream of returns, both of which are aligned to the science.
“If you just take it purely from a backwards-looking perspective, there’s a real chance there that you missed some of the opportunities of the companies that are on the cusp of what is quite a radical transition, where they have detailed that plan publicly, but you’re just looking at that data in a rear view mirror,” added Cliff.
“Ultimately, those corporates need access to the finance to build that power, it requires a huge amount of capital.”
Listen to Phil Cliff, Head of Climate, discuss ‘Avoiding the unintended consequences of a net-zero portfolio’ in a recent interview.
The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.