Often, investors who care about sustainability steer clear of high-carbon-emitting companies. But there can be value in investing in firms willing to transform their businesses to make a contribution to decarbonisation.
The rapid growth of investment strategies focused on decarbonisation has led to more attention on corporations in high-carbon-emitting industries like power supply, heavy industry, and transport. However, it is important to differentiate between the different companies. Although some activities, like thermal coal mining, are incompatible with a low-carbon economy, other businesses will play a critical role in the energy transition if they are willing and able to transform their business models, for instance by adopting low-carbon technologies.
In a low-carbon economy, many high-emitting companies will still be needed to provide essential resources. For example, industries such as steel and aluminium production are crucial for the energy transition. Steel is a critical component of wind turbines, while aluminium is essential for the development of lighter-weight transport systems. Importantly, these industries could still achieve emission reductions in their operations and production.
If investors overlook the willingness of some of these heavy emitters to implement more climate-friendly operating and production models, they may be missing opportunities to invest in attractively valued businesses that are on the path to decarbonisation while also potentially offering interesting returns.
For climate-conscious investors, this means that a significant impact on decarbonisation can be achieved by targeting high-emitting companies that fulfil two criteria: they can continue to play a key role in a low-carbon economy, and they meet the requirements to become decarbonised, for example, because they have set decarbonisation targets. We often refer to these companies as 'low-hanging fruit' since their role in the economy today and in future is likely (but not guaranteed) to remain secure.
Investing in such firms means accepting relatively higher carbon emissions in the portfolio today. However, it can also mean unlocking long-term benefits, inter alia through using investor engagement as a tool to encourage these companies to implement a decarbonisation strategy.
For investors, the key is to identify those high-emitting businesses that are attractively valued and have the potential and a strategy to decarbonise in future.
The most compelling incentive for the companies themselves is the economic benefit of adopting new technologies that address climate challenges. In many cases it makes perfect business sense for high emitters to invest in products and services that enable them to reduce their water and energy consumption. By saving energy and resources, these firms not only improve their bottom line, they can also make a positive contribution to decarbonisation goals. It's a win-win situation.
Some major emitters are already committed to reducing their carbon emissions. Others lag behind, often due to limited resources or lack of expertise. In both cases, successful decarbonisation can benefit from an ongoing dialogue with long-term investors. This is where engagement can become a tool to foster positive change.
Investments offer not only potential financial success, but also aim to contribute to the decarbonisation of the real economy.
In an investment context, stewardship is defined as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, environment, and society (UK Stewardship Code). Ideally, stewardship activities are facilitated by investors with experience and expertise in this area. Stewardship can take several forms, including the diligent exercise of voting rights, and establishing constructive and proactive dialogue with decision-makers within the company. Ongoing active dialogue also provides an opportunity for investors to gain valuable insights into the risks and opportunities relevant to a company's business model, and to understand how ready this is for a decarbonised global economy.
Over the past few years, recognising the importance of engagement, investors have formed initiatives to collaboratively engage companies. Two key initiatives are the Climate Action 100+ and the Net Zero Engagement Initiative (NZEI). LGT is an active member of both initiatives, and as such, we are committed to achieving the benefits of engaging with selected high-emitting companies.
For the transition to a low-carbon economy to be successful, it is crucial that large emitters adopt low-emission operating and production methods. Investing in these companies offers not only potential financial success but also aims to contribute to the decarbonisation of the real economy.
LGT uses the definition "Stewardship is the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society, on which returns, and client and beneficiary interests, depend." This is based on the UK Stewardship Code and the definition of the Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment.
