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Climate Assets monthly update: The Good, the Bad and the Jolly

Date: 14 December 2021

By now you have heard and read about everything that has gone wrong with COP26. So instead, let’s focus on the positive and encouraging outcomes.

Biodiversity was a strong win for the Glasgow summit.

This is remarkable as biodiversity loss is often overlooked when we think about climate change. More than 100 global leaders, representing 85% of the world’s forest, have pledged to halt deforestation by 2030. Notably, Brazil, China and Russia are signatories.

India has committed to generate half of its electricity from renewable sources and to reduce the carbon intensity of its economy by 45% by the end of this decade. This is much more encouraging that the disappointing headlines about India only reaching carbon neutrality by 2070. Of course, there is always the question of whether India’s targets for 2030 are ambitious enough and what enforcement mechanisms will be in place that penalise any lack of action. We are still to understand the small print of India’s targets and the reporting mechanisms.

From an investment perspective, the big win of COP26 was zero emission vehicles and mobility. Transport contributes around 24% of carbon emissions globally, according the to the International Energy Agency, with road vehicles accounting for nearly three quarters of that. Thus, global adoption of electric vehicles is key to reducing carbon emissions. COP26 delivered on pledges to phase out internal combustion engine passenger vehicles by 2035 in developed countries and before 2040 elsewhere.

The move towards zero-emission vehicles has triggered structural change in the automotive value chain, from mining metals to battery recycling.

New electric models continue to be launched, and range and charging times are improving. Bans are taking over from CO2 targets as the key regulatory driver, with China and Europe leading the way.

So, the electric revolution in transport is in full swing. However, it needs to be supported by widely available EV charging infrastructure and we must ensure that it is powered by renewable energy. The International Council on Clean Transportation estimates that countries setting these targets will need to increase investment in charging infrastructure by around 30% each year to achieve them.

The winners will be those companies willing to embrace new technologies and those innovating to develop not only the vehicles but also the fuels of the future. Take aviation for example, the development of a sustainable fuel is critical, with biofuels and hydrogen as possible alternatives to kerosene. Airlines have committed to net-zero carbon emission by 2050. The sector is clear about where it must go but still needs to figure out how to get there.

Coincidentally, during COP26, the US electric pickup and truck manufacturer Rivian Automotive went public. Amazon has a c.18% stake in the company and has ordered a hundred thousand units for delivery by the end of 2030. However, Rivian is still loss-making. No one will be driving around in a Rivian truck until 2022, the launch date having been pushed back more than once already. Also, availability of Rivian vehicles is still subject to supply chain shortages caused by the pandemic lockdowns.

So, you many ask - what can I personally do to reduce emissions? Flying less and choosing your holiday destinations carefully is a good starting point.

Before COVID, nearly a tenth of household emissions in the UK were from flying. Flying return to the US (London to New York) produces about a tonne of CO2, whilst a flight to Spain (London to Majorca) emits around half of this. In addition, it is important to walk, cycle, use public transport and shared mobility where possible, as cars (electric or not) are the least environmentally friendly way to move around.

Post COP26 we will see more companies link executive pay and bonuses to ESG metrics. How a company is run will underpin its long-term value, and all stakeholders need to know how companies are planning to transition to net zero.

Away from Glasgow, we continue to see ESG and Sustainability as the fastest growing sectors within the fund management industry. This year, retail savers invested on average more than £1bn each month into funds applying ESG considerations. Given their popularity the UK financial regulator, the FCA, has been evaluating these funds to ensure that their ESG goals are reasonable and measurable. Having common standards and definitions around what assets and products are considered ‘green’ reduces the risk that fund managers make exaggerated or unsubstantiated claims. In particular, the EU’s ESG Taxonomy will be implemented next year, and the UK will use this as the foundation for its own definition of what qualifies as an ESG fund. We welcome the FCA’s scrutiny of greenwashing and believe that taxonomies are a powerful tool to offer clarity and accountability going forward.

 

Author

Claudia Quiroz

Investment Director

I am the lead Investment Manager for our sustainable investment strategy designed to serve clients who would like to invest in companies offering solutions to the economic and environmental problems of urbanisation, climate change and resource scarcity.

Climate Assets Fund

The Climate Asset Fund invests in companies that make a positive contribution to the world, with a strong underpinning of ethical values.
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