PI Partnership – Jupiter Asset Management
As inflation dominates the short-term policy landscape, we note the Oxford Mar- tin School have just published research indicating the world has the potential to save $12trn (£10.5trn) through a decar- bonised energy system by 2050.
Abbie Llewellyn-Waters is an investment manager for global sustainable equities at Jupiter Asset Management
PLANET, PEOPLE AND PROFIT – BALANCING STAKEHOLDERS
This summer saw several notable envi- ronmental events. In July was Earth Overshoot Day – which gets earlier and earlier – representing the point in time at which we run into an annual ecologi- cal deficit. We would need 1.75 Earths to support our current demands on earth’s natural capital.
There is no doubt the world requires sig- nificant changes to how our economies operate. Core to this is a regulatory agenda that drives these changes, incentivising practices and behaviours that value natu- ral capital. In August, the Inflation Reduction Act passed through Congress in the United States. It is the largest investment into addressing climate change in United States history and provides an allocation of $370bn (£324.2bn) for green initiatives and energy reforms.
The act also seeks to address the intersec- tionality of stakeholder need by including incentives to install solar and wind in low- income and disadvantaged communities. It also provides drought mitigation fund- ing to help parts of the US suffering under water restrictions and extreme temperatures linked to climate change, as well as nature-based water infrastructure and ecosystem restoration.
Investors cannot ignore the rate of policy convergence Global policy changes rarely happen fast, but when it comes to tackling the enor- mous challenge of climate change miti- gation and adaptation there has been meaningful and rapid convergence in the global response. The UN Convention on Biological Diver- sity (COP15) is set to be held in Montreal soon. Many investors have already started to consider the impacts of addressing cli- mate change on client portfolios, but we also need to think about the impact of biodiversity loss.
As part of COP15 there is a proposed 21-point agreement, which may become legally binding and become to nature what the Paris Agreement was for cli- mate, but with an accelerated implemen- tation scheduled. The framework sets out key targets to be achieved by 2030, includ- ing protection of land/sea globally through the utilisation of ecosystem- based approaches. The framework aims to reduce, reform or eliminate incentives harmful for
biodiversity by at $500bn (£437.8bn) per year.
What does this mean for investors? The implementation of TCFD – Taskforce for Climate-related Financial Disclosures – has sought to standardise climate-related reporting standards; similarly, the Task- force on Nature-related Financial Disclo- sures aims to provide a framework for companies’ use of nature from 2023. For investors, both reporting standards lead to greater comparability, which means inves-
least
tors like us can start to incorporate climate and nature-related risks more effectively into our valuation of assets.
Like carbon emissions, we believe that using nature’s resources is going to become a cost of business. Unlike carbon, where current and prospective pricing schemes now cover 23% of global emis- sions, addressing biodiversity is likely to require mechanisms for a wide range of ecosystem services which introduces additional complexity. While this greater clarity and comparability is important in the context of externalities becoming internalised costs of doing business, it will also help investors assess, address and incorporate biodiversity impacts into valuations. Our team has been speaking to companies across a range of sectors about their biodiversity impacts, which has informed capital allocation decisions. We
encourage consideration of these
issues on an integrated basis rather than in isolation. Analysing the environmental and societal needs on an integrated basis helps align our clients to a transition to a more sustainable economy – especially in the face of a cost-of-living crisis, economic contraction and tightening central bank rates. Understanding human capital man- agement for companies is core to our investment conviction, particularly on a post-pandemic basis whereby the progress of the UN Sustainable Development social goals have been meaningfully impacted. In our view, the convergence of legislative targets, regulatory frameworks and report- ing standards underlines the importance of investing in high-quality companies which are leading the transition to a more sustainable world. Our team consider companies which are able to balance the interests of addressing climate change and biodiversity loss alongside social consider- ations as being better placed to deliver sus- tainable, long-term returns.
Important information This communication is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This communication is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. No part of this [commentary] may be reproduced in any manner without the prior permission of JAM.
16 | portfolio institutional | October 2022 | Issue 117
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