Climate change remains the central challenge of sustainable investing: we have been aware of the issue for over 30 years, and yet the latest Intergovernmental Panel on Climate Change report shows greenhouse gases at record levels and that we are already experiencing extreme weather-related impacts.
With more than 80% of global energy still from fossil fuels, is this a challenge too far? We think not. While data is deeply concerning, there is evidence of an ongoing energy transition and change is both non-linear and happens quickly: once a better, cheaper alternative is found, it displaces the incumbent rapidly. For years, renewables plodded along supported by regulation and subsidies, then there was a tipping point where, in region after region, it became the cheapest form of energy generation. Since 2010, solar has fallen by 90% in price and onshore wind by 60% – and cost deflation continues. The consequence is the picking off of fossil fuels.
In the Liontrust Sustainable Future (SF) investment process, we talk about an interlinked pyramid of actors driving structural shifts, with science bringing understanding of an issue, society calling for change and governments setting policy, and businesses developing solutions.
As we have stressed since launching the SF funds in 2001, the required reduction in emissions will impact the whole economy, including our energy system and how we heat and cool buildings, as well as driving transformations in transport, industrial processes, agriculture and land use. Many of our sustainable themes are therefore linked to the shift away from fossil fuels, including energy and industrial efficiency, renewable energy, more circular economies, how we build cities, feed ourselves and finance a rapid transition.
To stay on the right side of this transition in our funds, we have avoided fossil fuel extraction and production and, more broadly, internal combustion engine car manufacturers, airlines and energy-intensive businesses not positioning for a lower-carbon world. In terms of more positive themes, our funds, on average, have 26% invested in companies improving resource efficiency and reducing emissions across areas such as energy waste, smarter water management and increasing recycled material.
We are also challenging companies held across the funds to be more ambitious on decarbonization through our 1.5 Degree Transition Challenge. Based on our work so far, around a quarter of companies have absolute targets consistent with 1.5 degrees and a further 9% have committed to 2 degrees, which means a third are aligned with the Paris Agreement. This means two-thirds do not, at present, have targets in line with the science but this is moving quickly, with many demonstrating positive momentum.
Arguably, asking companies to set ambitious targets to decarbonize is the easy part; this needs to result in meaningful emission reductions and we continue to monitor progress. We called this initiative a challenge for a reason – it will not be easy to reduce emissions sufficiently to avert the worst impacts of climate change. But as proactive investors, we want to play our part by encouraging a more rapid response to achieve this vital goal.
Guest contribution by Mike Appleby, Investment Manager at Liontrust.