The global economy is producing an unsustainable level of CO2 emissions. However, 194 countries signed the Paris Climate Agreement at COP21 in December 2015, with the objective of limiting the rise in global temperature to 2oC above pre-industrial levels.
In Exhibit 1 below we compare the CO2 outcome of GBP 10 million invested in the global economy as it is today with the same amount invested in the lower carbon economy we will need if we are to achieve the 2oC target. The chart shows that a “2oC economy” still emits CO2, but significantly less so than is the case today. A huge change in our energy use and substantial investment in new environmental technologies are required if we are to meet these goals. Yet this shift is already well underway, driven by the rising adoption of energy efficiency, renewable energy and waste management, as well as changes in land use and farming practices around the world.
Exhibit 1: Net CO2 impact per GBP 10 million invested in the current global economy, a ‘2oC economy’, and via two Impax investment strategies. The black bars reflect the range of estimates of value invested.
Source: United Nations Framework Convention on Climate Change (UNFCCC), 20141
Today’s global economy is undergoing a huge transition to a lower carbon economy.
We have already seen huge declines in coal usage and we will have to lower our consumption of other fossil fuels dramatically if we are to meet the 2oC target set at COP21. Governments around the world – significantly perhaps apart from the new US administration, whose policy action in this area remains unclear – are enforcing ever tighter environmental regulations, which is one of the major drivers of this transition. Tougher regulation on emissions of greenhouse gases should encourage investment in many new environmental technologies – in particular in the alternative energy sector, which is enabling cleaner and more efficient energy usage across a much broader investment universe than is generally realised, encompassing construction, real estate renovation, industrial processes and vehicle design. Other investible areas include renewable power generation and – of rapidly growing importance – new battery technology, energy storage and smart grid systems.
Impax equity investment strategies have a significant exposure to these low carbon "transition technologies". Investors seeking to contribute to the low carbon transition, perhaps by reallocating divested fossil fuel allocations towards environmental solution providers, may be interested in the significant reduction in CO2 impact that an investment of GBP 10 million in two different Impax strategies can achieve, as indicated in Exhibit 1. The six-fold difference in outcome between the two illustrated strategies can be explained by the different levels of exposure to environmental markets required of the companies each invests in.
The environmental leaders strategy invests in environmental solution providers that tend to be larger, more diversified companies with a minimum 20% environment-related activity level, although in practice this is generally significantly higher, at around 50%. In comparison, the Specialists element of Impax’s environmental markets strategy also invests globally in environmental solution providers, but these must have at least 50% exposure to environmental markets, and in practice it is generally around 80%, as they are often smaller, ‘pure play’ stocks. Such stocks include energy efficiency companies, e.g. those manufacturing building insulation materials, LED lighting and energy efficient components for vehicles. They also include renewable energy generation companies and their suppliers. The products made by these companies help to mitigate CO2 generation.
It is the different levels of exposure to environmental solutions (smaller pure play versus larger, more diversified companies with less environmental exposure) that leads to the large difference in CO2 impact shown in Exhibit 1. This explanation hinges on Impax’s CO2 impact measurement work. Whereas carbon footprinting merely measures the CO2 emitted by a company it does not take into account the CO2 saved by its products and services. Impax has developed a methodology to measure net CO2 impact.
It is clear that the CO2 emissions/impact of these alternative energy sector holdings will be much lower than those of traditional energy holdings in oil, coal and gas companies. Environmental solution providers give investors exposure to a high growth area of the market which may be missing or underrepresented in their equity portfolios. Companies developing new technologies to combat environmental challenges generally deliver superior growth. We believe the drivers of these markets will continue to strengthen and these investment opportunities will remain compelling for decades to come.
Written on 14 February 2017
You can read more detail on Impax’s carbon impact methodology here.
1Aggregate effect of the intended nationally determined contributions: an update – synthesis report by the secretariat, McKinsey Global Institute, Haver, BIS, Deutsche Bank estimates, 2014, and IMF, National Central Banks and Statistical Offices, Thomson Reuters, 2014. Bar reflects the range of estimates of value invested.
2Impax Environmental Leaders and Impax Environmental Markets are representative accounts of Impax Leaders strategy and Impax Specialists strategy, respectively.