Climate Transition: Beyond Low Carbon Investing

In partnership with Aviva Investors, [i3] convened a webinar to discuss the implications of climate transition to investors’ portfolios.

With combined backgrounds in Environmental Biology, Environmental Technology and Finance, Rick Stathers and Jaime Ramos Martin shared their perspectives on how investors can go beyond low carbon investing to build resilience into portfolios.

Key issues included:

• The urgency and scale of transformation required to align with the 1.5 degree C warming objective
• Why we need to go beyond exclusion – as the physical and policy impacts of climate change affect every actor in the global economy
• How can investors understand and quantify climate transition risk across corporate value chains? What opportunities does this present for alpha generation?
• How can we actively engage with companies to ensure they are committed to a 1.5 degree C warming pathway through the adoption of Science Based Targets?

Transcript (with timing)

4:30 We’re heading towards 3 degree warming by the end of this century. Every degree matters. What does this mean for the food system?

5:10 What does warming mean in terms of GDP loss for Australia and APAC?

6:05  One outcome of COVID-19 is that it has helped emissions decrease, but they need to continue declining by 7.5% a year to reach the goal of net zero by 2050!

7:25 The majority of carbon has to stay underground, hence the concept of ‘stranded assets’ – meaning many companies are overvalued, and that’s a market inefficiency.

8:30 There has to be a significant increase of investment in the energy system in order to achieve the 1.5 degree reduction, from $95 up to $110 trillion, ie. replacing fossil fuel turbines and boilers and increased electrification.

9:45 Onshore wind and solar is already the cheapest form of electricity generation for around 2/3 of the world’s population.

11:02 Around 20% of global greenhouse gas emissions are currently covered by some form of carbon pricing scheme, at an average of $2 per tonne. To hit the 1.5 degree target it’s estimated this needs to be a $70.

12:30 There are already chronic impacts of climate change affecting the value chain, ie. increased summer heat in Europe is affecting the ability of French nuclear power stations to operate effectively.

13:50 Transition risk and opportunities must be assessed across the market because climate change affects all sectors. The transition risk model addresses all asset classes – not just equities – across 159 sub-industries.

16:03 It’s essential to engage with companies so that they incorporate climate change into their business model, by aligning themselves with the Paris Agreement and adopting science-based targets.

17:18 Case studies of companies actively engaged on climate change: Volkswagen, Marsh & McLennan and Unilever.

20:35 Companies are the key to driving change, but Australia will start to come under pressure from its key trading partners.

23:22 How do you quantity emissions from a company’s supply chain and bring it into the model?

27:36 Consumer brands that take care of sustainability are going to have much more acceptance in future.

28:05 VW example shows them rated well in model but what about Diesel-gate? Is it OK to ignore bits of E, S or G, instead of looking at it holistically?

30:53 Engagement works, but sometimes you have no choice but to divest.

33:31 When it’s a group of businesses and some are doing well, but others not so well, how does that work in the model?

34:46 No new coal is the first step in the transition, it’s a journey towards ‘no coal’.

35:30 There is no time to waste waiting to see what happens, the focus needs to be on high-price targets.

36:07 Gas vs coal in terms of transition risk? Gas is a lot less carbon intense than oil or coal so it has been regarded as stepping stone for the low carbon transition, but it still releases greenhouse gases when combusted. New gas needs to be CCS compliant so that adds to the cost of fuel, and as a result favours renewables with smart grids and storage. There’s a short term role for gas, but the view has changed over the last 5 years and people are now talking more about hydrogen.

39:27 What is achieved from the model inputs? It forms idea generation but it’s not the only parameter. It enriches the research process.

43:08 We have to have hope that we will achieve the 1.5 degree goal – the alternative is not really worth thinking about.

For a general guide on ESG issues in Australia, please see here.