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Savvy investors “hone in” on carbon outputs

By: Jack Dominy


Shrewd investors are watching corporate carbon emissions closer than at any point in recorded history, and with good reason.

Companies with larger carbon footprints than their peers are larger contributors to climate change. They are also leaving themselves open to greater risks from regulatory, reputational, and client sentiment shifts.

There are also secondary investor considerations from climate change more broadly. Assets invested in fossil fuels are projected to lose value as governments increase penalties for corporate practices that are harmful to the environment and tighten regulation to bring about change. At the same time, natural catastrophes from climate change are likely to lead to a decline in asset values, increased prices for CO2 and a decrease in demand for emission intensive products.

Meanwhile, governments and private sectors are also under pressure to align with the Paris Agreement’s 2-degree scenario and are already responding by introducing carbon taxes, incentivising renewable energy, and even divesting from fossil fuels.

Investors recognise that a transition is underway. Global assets under management in ESG funds are said to be nearly US $2 trillion. While the year 2020 saw major developments for climate funds, with a record 76 new launches globally, and the launch of nine passive Paris-aligned funds in Europe.

Carbon conscious reporting

Despite this, carbon emissions have grown substantially over the past century. Data from the Global Carbon Project show that more than 46 billion tonnes of carbon dioxide were emitted in 2020.

For this year’s World Environment Day on Saturday 5 June, Research in Finance released findings from two proprietary studies looking at investor scrutiny of carbon emissions.

The first study, conducted among 210 retail investment professionals, found that 46% of those polled said that they now considered the carbon footprint of an asset manager’s investment strategy prior to investing in a fund.

The second study, conducted among 152 institutional investment professionals, found that half of those surveyed claimed to have actively sought carbon reporting details when analysing an asset manager’s responsible investment performance. To find out more about the UK Responsible Investing Study (UKRIS) click here.

This increasing awareness of how carbon intensity can affect investment performance is entirely logical. Global financial assets at risk from climate change have been estimated at $2.5 trillion by the London School of Economics, so investors that side-line carbon reporting could lose out. With pressure on firms to ultimately become carbon neutral mounting, investments in carbon intensive companies or industries are unlikely to be sustainable long-term.

Costs of climate change

Carbon heavy companies that resist the transition from a fossil-fuel based economy to a lower-carbon economy are already encountering challenges.

Oil giant Shell was recently ordered by a Dutch judge to reduce its CO2 emissions by 45% by 2030, after a court case brought by Friends of the Earth and 17,000 Netherland citizens. This landmark win represents a significant milestone in stakeholders holding carbon intensive organisations to account.

Carbon reporting is increasingly being encouraged by governments. In 2013, the UK government outlined legislation requiring all UK quoted companies to report on their greenhouse gas emissions. By 2018, the UK government published new mandatory reporting requirements to “provide greater transparency for investors, and other stakeholders, on business energy efficiency and low carbon readiness.”

It is thought that mandatory reporting will prevent investors from being duped by greenwashing and enable them to make more informed decisions.

With the Paris Agreement deadline looming in the next two decades, the European Commission has set ambitious policies for the continent. This includes Europe’s aim to become the world’s first climate-resilient continent by 2050.

If investors want their portfolios to be sufficiently resilient to generate returns over the next decade, paying close attention to carbon emissions will be key. Failure to do so could lead to asset values falling or worse still, with a portfolio of assets that they are unable to sell.

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