As world leaders discuss the future of the planet in Glasgow at COP26, the renewed focus upon climate change is set to create new opportunities for investors, say investment trust managers.
Zehrid Osmani, manager of Martin Currie Global Portfolio Trust, said: “COP26 could bring some bigger momentum in terms of coordinated investment programmes to continue to tackle climate change. As part of that, there will be a need to ensure a smooth transition of energy usage towards greener energy sources avoiding unintended consequences such as rapid cost escalation.”
Osmani believes there could be a more coordinated approach towards carbon emissions tax and credits and investors will need a detailed assessment of carbon emissions intensity for each business they are invested in as well as a good knowledge of how each company is tackling the path to net zero.
There will also be more opportunities for investors in areas such as renewable energy, electric transportation, greener buildings and robotics and automation as a way to reduce energy intensity.
Osmani said: “Overall, this is a vibrant period for investors to find opportunities in innovative areas. At the same time, it is important that investors stay disciplined in terms of assessing investment attraction through a structured valuation framework in order to avoid bubbles that could be forming as part of this increased focus on climate change opportunities.”
Matthew Tillett, portfolio manager of the Brunner Investment Trust, said decreasing the world’s reliance upon fossil fuels will require investments running into trillions of dollars.
He noted: “The energy transition therefore offers one of the clearest opportunities for us as investors given both the timescale and breadth of solutions necessary.”
Meanwhile, James Hart, investment director at Witan Investment Trust, believes COP26 will accentuate demand for clean energy stocks but warns it could push valuations of sustainable companies to “unsustainable levels.”
Hart commented: “Less clean companies are lowly rated as investors look to avoid being accused of green washing. We therefore take a pragmatic and patient approach to this theme by buying companies when their growth potential is underappreciated or which may be less obvious beneficiaries of the drive to deliver clean transport, energy efficiency and renewable power generation, storage and distribution.”
Hart believes that taking a blunt exclusion policy to greenwash a portfolio is detrimental to shareholder returns.
“Our belief is that it is more important to focus on what a company’s contribution to the long term global reduction is rather than to fixate on its historic carbon footprint – provided of course that these companies are best in class and that there is a clear path to reduce emissions over time.”
How investors can make a difference.
While investment experts are agreed that the shifting landscape presents a wealth of new opportunities, it can also pose a minefield for investors to work out which areas to focus on.
Tillett cites electrification as a long term structural trend, offering significant scope for decarbonisation. He names Schneider Electric as an example of a company with a “sector-leading approach” to its own ESG performance.
Mark Atkinson, head of marketing and investor relations at Alliance Trust, said investors seeking a pragmatic approach should look to BP, which is highly ranked among peers in terms of ESG risk, investing in renewables and looking to improve its reporting and transition risk management.
Atkinson also lists cement producers HeidelbergCement which has implemented projects to reduce its carbon footprint, including carbon capture and storage methods, recycling absorbed CO2 into marketable building materials and using CO2 for algae cultivation.
Lastly, Osmani singled out industrial gases firm Linde as an attractive investment, due to the group targeting a 35% cut in absolute emissions by 2035 and becoming a major player within the hydrogen value chain as an alternative energy source.
Within the consumer space, Osmani lists L’Oreal as one to watch. The cosmetics company has committed to all their sites becoming carbon neutral by 2025 with 100% use of renewables and improving energy efficiency.
