ESG Club
Lloyd McAllister is head of ESG research at Newton Investment Management
FINDING NET ZERO
What measures are necessary to achieve net-zero carbon emissions?
Under most scientific projections around climate change, it is anticipated that global carbon emissions will peak around 2030, at a level that is around 16% higher than it is today, as the growth of emerging markets outstrips the reductions in emis- sions made by developed markets. This path is at odds with what most scientists agree is needed if we are to limit the worst effects of rising global temperatures. On a historical and cumulative basis, the modernisation of the western world has caused most of the emissions, but from a forward-looking perspective, the popula- tion and wealth growth in emerging mar- kets, in India and China in particular, is where much of the future concern lies. As wealth increases, people buy increas- ing amounts of energy-hungry items – from fridges to cars. While some of the energy required to support those goods will come increasingly from renewables, we expect that the bulk will continue to be derived from fossil fuels, at least over the next 10 to 20 years. Thus, while the bur-
den of historic emissions lies with the developed world, balancing the improve- ment of living standards in Asia and Africa with a reduction in carbon emis- sions presents a significant challenge over the next two to three decades. The International Energy Agency has released a ‘net zero scenario’ which sets out some of the necessary (and quite radical) condi- tions
it believes will be necessary to
achieve net zero in the most cost-effective way. Several key points stand out: – No new oil and gas fields or coal mines to be approved
– Electric vehicles (EVs) to make up 60% of the global market by 2030
– Net-zero electricity to be achieved glob- ally by 2040
EVs currently represent around 9% of new car sales and clean energy supplies around 35% of the grid globally, but these are at least areas where progress is being made; we know that in areas such as cement, shipping, long-distance aviation and trucking many of the technologies required to produce effective, affordable and scalable solutions don’t yet exist. The transition to a low-carbon energy sce- nario
re-quires significant invest- ment. The world currently spends around $2trn (£
1.trn) per year on its energy sys- tem, and economists estimate that it will require around $4trn (£3.2trn) of annual investment to achieve net zero, signifi- cantly more than current levels of invest- ment. When weighed against annual GDP, the cost for the US alone has been estimated at around $1.6trn (£1.2trn). At Newton, we are trying to play our part. We have joined the Net Zero Asset Man- agers initiative and have aligned ourselves
also
PI Partnership – Newton Investment Management
with an independent methodology pro- duced by the Science Based Targets initia- tive. Through the latter, we are commit- ting to having 50% of the financed emissions of the companies we invest in on behalf of our clients tied to credible net-zero plans by 2030, with the aim of reaching 100% by 2040. We will seek to meet these headline tar- gets via a range of transparent measures around investments in climate ‘solution providers’, engagement with fossil-fuel com-panies to support their energy transi- tion, and active stewardship activities. While the 2030 and 2040 milestone tar- gets might still seem some way off, we are making investment deci-sions today that we believe will aid our progress along the way. First, we are stepping away from areas we deem to be unacceptably risky, such as new coal mines, new coal-fired power stations, and speculative or high- cost oil projects. These are also areas car- rying the high-est regulatory risk, as well as being at greater near to mid-term risk of substitution by cleaner energy sources. We also focus on selective, well-managed opportunities around energy-transition metals like copper, EV infrastructure or supply chains, and clean energy. Just because something is ‘green’ doesn’t necessarily make it a good investment, but we expect to see a grow-ing number of investment opportunities in the energy- transition area over the coming months and years. If a company is well managed, executes well and operates in a stable reg- ulatory environment, it is more likely to offer greater green-growth opportunities in the future.
Important information This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies de- pends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions. Issued by Newton Investment Management Limited. ‘Newton’ and/or ‘Newton Investment Management’ is a corporate brand which refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIMNA was established in 2021 and is comprised of the equity and multi-asset teams from an affiliate, Mellon Investments Corporation. In the United Kingdom, NIM is authorised and regulated by the Financial Conduct Authority (‘FCA’), 12 Endeavour Square, London, E20 1JN, in the conduct of investment business. Registered in England no. 01371973. NIM and NIMNA are both registered as investment advisors with the Securities & Exchange Commission (‘SEC’) to offer investment advisory services in the United States. NIM’s investment business in the United States is described in Form ADV, Part 1 and 2, which can be obtained from the
SEC.gov website or obtained upon request. Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’).
36 | portfolio institutional | July–August 2022 | issue 115
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