Uncovering Climate Change Winners

    Stockholm (NordSIP) – In July 2017, Schroders launched its Climate Progress Dashboard, which measures the progress made towards fighting climate change on several indicators at the global level. On Monday, February 10, NordSIP met in Stockholm with Yashica Reddy, Associate Investment Director for Global and international Equities at Schroders, and one of the people behind the Dashboard, to discuss how far we have come.

    “According to the Dashboard, at this point in time, we are heading for a 3.8°C increase in temperatures, given the current level of investments in the oil and gas production,” warns Reddy, Associate Investment Director for Global and international Equities at Schroders.

    “We are encouraged by the strides made in renewable energy capacity and the adoption of electrical vehicles but a lot more stringent action is required to meet the goals set out in Paris to limit the temperature rise to no more than 2°C from the pre-industrial baseline of 1850 .”

    The Cost of Inaction

    “If we fail to meet the Paris goals we will have a lot more to worry about than our investment portfolios. The physical effects of climate change will be devastating. We will see unprecedented storms, flooding and droughts,” Reddy warns. “Physical property asset values will be extremely impacted. We already see the vulnerability of the real estate markets in Florida and Hong Kong. The impact on expected returns will also be very notable in the energy, utilities and consumer staples industries.” However, according to Reddy, there is still hope. “The effects of climate change on returns will inevitably depend on the climate scenario that plays out.”

    “Fortunately, while we are not yet there, the evidence suggests that we have been making some progress,” Reddy explains. “While the 3.8°C headline figure might still be above the 2°C goal, it is encouraging that this figure is down from 4.1°C when we launched the tool a year ago. The precision of the estimate is less important perhaps than the directionality of the change. There is change, but it is happening at a slow pace. The benefit of the Climate Progress Dashboard is that it allows us to stay focused. It helps fund managers and analysts to navigate a challenge that will have a huge impact on the financial markets.”

    Picking Climate Change Winners

    “While markets are good at factoring in short term concerns, but they are not very good at considering and pricing in long term uncertainty and inflexion points and disruption.

    “We launched the Schroders Global Climate Change Equity strategy back in 2007 – where I work. We have twelve years of clear thought leadership on the investment implications of climate change.” she points out. “Investing in this theme is not new to us. It is something we have felt very strongly about for a long time. We can contribute to the structural change in capital allocation necessary to fund the projects and companies that will help us overcome this threat.”

    “Our strategy invests in public markets and integrates ESG factors in the investment process. We also screen out companies involved in the production of fossil fuel and weapons. This sustainable strategy seeks to invest today for tomorrow’s world,” Reddy explains.

    Given the strategy’s mandate, Reddy feels she and her colleagues are incredibly well-placed to find the opportunities presented by the ongoing adjustment. “We focus on understanding how physical and transitional risks will affect companies and invest in those that will enable us to transition to a low carbon economy. We are holistic in our approach and look for opportunities across the market-cap spectrum, and across all industries ” she explains. “. In the energy sector, renewable energy has come of age and is cheaper than fossil fuels in many geographies. In the passenger vehicle market, electric vehicle technology is fast maturing.”

    “But we also look at companies that are driving change in less obvious sectors, including sustainable food or sustainable fashion companies. The textile industry is responsible for 10% of GHG emissions. That’s more than the aerospace and shipping industries combined,” Reddy explains. “Reducing these numbers would go a long way to meeting the Paris agreement’s goals”.

    “We invest in five key themes. One of our themes is the Low-Carbon Leader theme, where we look for companies with low carbon cost structures that are shielded from carbon prices now and in the future. Companies not proactively considering their carbon emissions are not thinking competitively. They are ignoring problems that will persist in the future.”

    “There are great opportunities for sustainability leaders, but we also see stranded asset risks in several industries, including blast furnace steel mills, combustion engine factories or anywhere where there are fossil fuel infrastructure assets. In 2019, 79% of Europe’s coal-fired power plants were unprofitable, with predicted losses of more than €6.5bn. But we also understand that some of these industries will continue to exist. In certain industries, such as aerospace and aluminium, electrification is not yet a viable alternative to fossil fuels.”

    “Because we want to help companies move towards more sustainable practices, we also engage with them. At Schroders, we engaged with over 200 companies on climate-related issues in 2019. However, engagement requires patience and persistence in order to achieve real change. It can take up to 2 to 4 years to achieve meaningful change,” the investment director explains.

    A Matter of Personal Responsibility

    “The world has a lot to learn from the Nordics,” Reddy tells NordSIP. “The region is a leader in renewable energy, energy efficiency and transit infrastructure .”

    “However, to accomplish the Paris goals of 2°C, we will each need to reduce our individual emission profile by 80% by 2050. While governments and companies can pave the way towards that future, our individual consumption choices are equally pertinent. We need to take personal responsibility for our own emissions. It will go a long way in ensuring our wellbeing and the wellbeing of our planet.” she concludes.

    Image © Schroders

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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