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ESG – Feature


You cannot see, smell, taste or touch it, but carbon dioxide (CO₂) is all around us. Rising temperatures, bushfires, floods, droughts and an increasing number of asthma suffers are proof that the gas not only exists but that there is an abun- dance of it. Carbon is released during some industrial processes, such as making cement, and from burning fossil fuels. It then lingers in the air for years, stopping the sun’s rays from escaping back into space, a process known as the greenhouse effect. It is accelerated among others by deforestation as trees remove car- bon from the atmosphere. Human activity such as burning oil and cutting down trees has dramatically accelerated this effect, experts now warn that without a dramatic reduction of CO₂ emissions, large parts of the world will become uninhabitable over the coming decades thanks to higher average temperatures and rising sea levels. Wearing a surgical mask to protect yourself from Covid is bad enough but imagine having to cover your whole body every time you step outside to protect against the sun’s harmful rays. It is a possibility if temperatures rise too steeply. This, understandably, is scaring people around the world. Campaigns to push for change have been launched in response, which have resulted in many companies promoting their prod- ucts as climate friendly. More importantly, these campaigners have succeeded in get- ting governments to take responsibility for dealing with the growing threat to our future. The leaders of some of the world’s richest countries have not only pledged to make their economy net-zero carbon by 2050 they have enshrined the tar- get into law. But transitioning to a cleaner world is an easy goal to set, but harder to achieve in less than 30 years. It means producing less carbon and removing more of it from the atmosphere. This is a big task.


If we stop burning oil today then we may not be able to gener- ate all the electricity we need, while the world’s much-needed infrastructure upgrade cannot happen without tonnes of cement. Perfecting the technologies and infrastructure to change this could take years and huge sums of capital. Indeed, the International Energy Agency estimates that $10.5trn (£7.6trn) needs to be invested globally in low-carbon energy and efficiency technologies by 2030 to keep temperature rises below 2 degrees Celsius, the level the United Nations believes will see us avoid a catastrophic climate change scenario. Governments cannot do this alone. Consumers and corporates have to play their part, as do investors. Private capital is “critical” if the world’s leaders are serious about creating a net zero carbon economy, says Lucian Pep- pelenbos, a climate strategist at Robeco. “The Paris Agreement cannot be achieved without private capital.”


28 | portfolio institutional | February 2021 | issue 100 We can work it out


A low carbon strategy is not just about making a return or building good relations with governments. It is in long-term investors interests to consider climate risks in their decision making as extreme weather events caused by climate damage could erode the value of their investments. But here is the issue. Investors and fund managers who have a policy of banning companies with large carbon footprints from their portfolios are not helping to solve the problem. The way to remove this threat to our future is through working with companies in the traditional energy sector as well as miners, property managers and transport businesses to lower the levels of harmful gases that they emit. “Encouraging companies to transition through engagement and through investment strategy is critical to achieving the net zero targets,” Peppelenbos says. Working with companies to change is the goal here, but if the message is not getting through and a portfolio company’s board are not being responsive to shareholder requests to clean up its operations, then they will have to implement the ulti- mate threat. Robeco is one such asset manager that agrees with divestment if there is no positive engagement outlook. This means cutting off a company’s access to funding. If enough investors adopt low carbon strategies, and more and more institutional investors are judging by the flurry of an- nouncements on the topic in recent years, then corporates may have to rethink their attitudes towards climate change. Mark Lewis, BNP Paribas Asset Management’s chief sustaina- bility strategist, says: “If you cannot finance an activity, the activity will not be around for long. “All businesses need capital and, unless it is nationalised, that capital comes from the private sector,” he adds.


Building new markets Reducing the level of pollution in a portfolio is only half the battle in the transition to a low carbon world. “We need to rebuild the economy, which means capital flows need to be re-allocated from carbon intensive to green activi- ties,” Peppelenbos says.


This means new technologies need to be developed, such as cleaner energy sources contributing more power to the nation- al grid like wind and solar parks as well as developing more electrically powered cars, trucks and buses. Then there is the important issue of reversing the damage caused by previous generations by removing carbon from the atmosphere and storing it. All this needs investment.


“Entire new industries will have to be built around carbon removal technologies,” Peppelenbos says. “All this needs to be built with private capital.” This is about creating the technologies and infrastructure that


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