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“Let’s get all portfolios to net zero by 2050. This might be bold, but it’s necessary.”

Of course, statements like these are meaningless without context. First, let me explain what we mean by net zero. This means investing in companies that emit zero carbon dioxide on a net basis by 2050 at the latest.

July 21, 2022

Jeroen Bos

Global Head of Sustainable Investing at Credit Suisse Asset Management

Here is some more context. In 2015, the Paris Agreement was signed by 192 countries, which was unprecedented.1 The goal was to limit the rise in temperature well below 2°C above pre-industrial levels, plus pursue efforts to limit a temperature increase to 1.5°C. These measures aimed to significantly reduce the risks and impacts of climate change. 

Limiting the rise in temperature is essential for our society’s future and the generations to come. At the same time, limiting global warming is not only important for society but also for long-term returns on investment portfolios.

This is about protecting investors against climate change

If you are a millennial or younger, having a 2050 target date to reach net zero makes a lot of sense. Many people in this age cohort expect to retire after this date. The risk these investors face is that they might not be able to retire – climate change could jeopardize the performance of their pension portfolios in the coming decades. On top of this there is a risk that they would retire in a world where the quality of life has rapidly declined due to the negative effects of climate change. 

Markets often do not fully price in climate risk so far ahead. This is because the timing of the potential impact is difficult to pinpoint exactly. The complexity of the topic, meanwhile, makes it challenging for the average investor to act upon it today. 

Progress has been made, however, through improved reporting on the impact of climate change on investments. For instance, the Task Force on Climate-related Financial Disclosures (TCFD) has set standards for companies to provide clear, comprehensive, high-quality information on the impact of climate change. This mandatory disclosure is currently being discussed by regulatory authorities.

In my view as an asset manager, beyond regulations and reporting frameworks, we also need to help investors achieve their goals through our guidance. We should do this no matter how long the time horizon and how complex the topic. By building portfolios that manage climate risks properly and by investing in solutions for the energy transition, we can help serve investors well. This approach can help deliver returns that are attractive, sustainable and long-term, and support the transition to a more sustainable and net-zero society.

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Take an active ownership approach to climate risk

It is also important to realize that as an investor you are the (partial) owner of a company. This ownership should also be used to support and influence companies that we invest in. This includes actively engaging with the management teams of these companies to ensure they commit to the transition to a net-zero society and incorporate climate risk seriously in their business and strategy.

Engaging as an active owner can therefore have a positive impact on society as well as on the companies we invest in, which in turn should support longer-term financial returns as well.

It is about making attractive financial returns while having a positive impact on society

Ultimately, taking into account risks and opportunities stemming from climate change makes a lot of sense for investors, both from a financial and societal perspective. Integrating climate aspects in portfolios will make these portfolios more resilient, better able to deal with climate risk, and allow them to benefit from potential opportunities stemming from the transition. This should not only benefit society but also support long-term investment returns.

Therefore, this investment approach will become even more important in the future as a greater number of investors around the world are likely to adopt it. This is not about trying to be groundbreaking. This is about being ready for the future when it comes and reducing the exposure our investors have to climate risk.

Ultimately, this is a story about managing long-term risk. Climate risk is one of the key risks of our lifetime. The transition to a net-zero society will be one of the most important trends of the next few decades. Making sure investment portfolios are ready is critical. The transition to net zero can be a win-win for both investors and society and that’s why we commit to it!

How a plan to get to net zero by 2050 might work

Climate risks and opportunities can be integrated into portfolios in different ways.

First, it is important to assess how prepared companies are in dealing with the impact of climate change. For instance, how exposed is a company to the impact that climate change could bring through floods, droughts, or extreme weather events?

Second, it is important to assess how well a company can cope with the disruptive nature of the energy transition. You also need to assess how resilient its business model is and its products are, and whether its products are at risk of being displaced. Furthermore, you need to look at what the impact on the long-term sustainability of its business model will be and its future profitability.

The level of preparedness can also be assessed by the company’s commitment to a net zero transition. Observing whether they are intensively working on this transition with a clear strategy or committed to reaching net zero is a good sign. Evidence that they are using science-based targets to see how quickly they need to reduce emissions to meet their goals is even better.

The other aspect is that climate transition also brings opportunities for investors. Therefore, it is important to assess which companies can actually benefit from the transition to a net-zero society, where the greatest potential could exist.

Those companies that are ill prepared for climate risk should be approached with caution when building portfolios for clients. If there is a climate shock event, these are the companies that are likely to suffer the most. Their revenues and profits could take a big hit, which will likely hurt portfolio performance. This is exactly what investors should avoid, while focusing much more on investing in the winners of the transition to a net-zero society.

Jeroen Bos

Inflation: “Some days you tame the tiger. And some days the tiger has you for lunch.”

To what extent and for how long will inflation rise? The uncertainty surrounding the effects of inflation has increased massively. The current situation is calling for existing investment strategies to be reviewed and new opportunities to be evaluated.

 

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1 United Nations. (n.d.). The Paris Agreement. Retrieved May 25, 2022, from https://www.un.org/en/climatechange/paris-agreement.

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