John Green, chief commercial officer, Ninety One, argues that decarbonising the world demands that capital leans into the problem ‘thoughtfully and actively’.
What we are all learning is that investing for active returns and for net zero in the real world is a difficult and challenging task. As investors we have had to learn an entirely new discipline for the industries and companies we assess – what is their sustainability model and how does this affect a company’s value.
Additionally, we are now having to analyse and price externalities which do not have open markets, are not supported by hard data, and need much more fundamental analysis and judgement.
In the last 10 years, in pursuit of efficiency and insight, the investment ecosystem has focused its effort on data, speed of information and quantitative techniques, all in an effort to reduce the investment decision to a simple set of numbers easily assessable from afar.
A question is whether this can work in the new world, where assessing companies’ and countries’ transition pathways and commitment to achieving net zero requires thorough analysis, active engagement, and deep sector knowledge.
Decarbonising the world demands that capital leans into the problem thoughtfully and actively. Selecting low carbon trackers or excluding high emitters from portfolios does nothing for decarbonisation in the real world. An energy company on a strong transition pathway should not be treated in the same way as an energy company committed only to hydro carbon generation.
The pursuit of simplicity is working against the kind of thoughtful investment required to meet the innovation and financing challenges we face. Linear portfolio carbon reduction targets ambitiously set by company boards and pension fund trustees mean that capital takes the easy route – why try to explain that portfolio carbon has increased in pursuit of greater impact and an effective transition when it is easier just to sell the high emitting companies and countries?
Rewarding high emitters who are actively pursuing a transition and successfully redeploying cashflows into new technologies and products with lower costs of capital will have a much more meaningful impact in the real world. Done well by active managers this will also result in portfolios that can harvest the transition premium arguably a meaningful source of return in the coming decade.
To achieve a successful net zero mission, the capital markets must function by rewarding the companies and countries who are most actively facing off to the transition challenge, regardless of their sector. The time has now come for portfolios to make a difference rather than making a statement. Asset owners and asset managers must work together to avoid taking the easy route and lean into the challenge. Decarbonising by numbers will not do the job.”
Green will be speaking in the panel session, Active and passive – different approaches, similar goals, at the Green Horizon Summit during Cop26 at 2.30PM GMT today. You can register to watch the panel here.
