Article
An Environmental Impact Equity strategy is a rewarding way for investors to gain access to publicly traded companies that have urgently needed potential solutions to the many environmental challenges facing society in the decades ahead.
June 25, 2020
As reported by Forbes.com, the ten worst climate-driven disasters of 2018 cost a combined USD 85 bn. The financial impact of climate change and environmental pollution has in recent years been of a material size for the global economy. Large-scale action is urgently required to safeguard the future of generations to come (see Chart “The global risk landscape 2020”). This calls for a mix of solutions that can be implemented efficiently over the short, medium and long term.
Researchers still do not know exactly how bubbles of methane gas reach the surface of the ice. The gas could come from methane hydrates on the sea bed that are breaking down due to warming sea water. After carbon dioxide, methane is the most significant greenhouse gas.
The likelihood (x axis) of environmental risks such as loss of biodiversity and extreme weather events materializing is considered very high. As the potential for long-term and irreversible damage (y axis) is also high, businesses that can deliver urgently required solutions to such challenges may offer attractive returns over the long term.
According to the UN Environment Programme’s Emissions Gap Report 2019, emissions of carbon dioxide and other greenhouse gases reached a record high of 55.3 metric gigatons in 2018. Even if all countries adhered to their nationally determined contributions under the Paris Agreement, we would still be heading for a 3.2°C rise in temperatures. To meet the goal of the planet warming by no more than 1.5°C, emissions will need to be cut by 7.6% every year between 2020 and 2030.1
The significant impact of the manufacturing sector on the environment (CO2 emissions, energy and water consumption, and waste generation) is a source of frequent calls for a circular economy. Emissions from producing and reusing cement, steel, plastic, and aluminum, for example, could be cut by 40% by 2050 if the principles of the circular economy were adopted. In food production, emissions could be as much as halved by 2050, according to estimates by the Ellen MacArthur Foundation.2 Back in 2016 the foundation hit the headlines when it forecast that there could be more plastic than fish in the world’s oceans by 2050.3
As the chart titled “Global anthropogenic CO2 emissions” illustrates, the following sectors have the greatest potential to reduce them: electricity/heating, transportation, industry and residential buildings. These four sectors combined account for over 90% of worldwide CO2 emissions.
Measures taken by individuals in their day-to-day lives are all well and good, but simply driving less or cutting meat consumption are not enough on their own. If we want to be truly effective in making a positive impact, we need to focus on achieving significant results as quickly as possible. There are already some very interesting approaches in certain areas, such as sustainable infrastructure and the efficient use of resources. By contrast, it will be some time yet before we see others, e.g. the circular economy, technologies such as carbon capture, and widescale use of hydrogen fuel cells, being deployed at scale (see Figure “Impact roadmap”).
It is at least true that the alarming facts and figures have set in motion a shift in values throughout society and across the generations. This is being underpinned and accelerated by regulations and political programs. The UN’s Sustainable Development Goals (SDGs), the Paris Agreement of 2015 (a follow-up to the 1997 Kyoto Protocol), the European Commission’s Green Deal, and the EU Taxonomy (a classification system for sustainable activities) have established targets and signposted the way forward.
While this path is strewn with huge challenges, they offer enticing opportunities for businesses and investors alike. More and more companies are specializing in products and services that solve environmental problems or significantly reduce their negative impact. The novel business models of firms like these enable investors to participate in potential sources of return that were previously very difficult to tap into.
The first questions that spring to investors’ minds are how to find such businesses and how to invest in them while maintaining a reasonable level of risk diversification. Having heard questions like these on many occasions, Credit Suisse Asset Management has risen to the challenge by developing an innovative investment approach. This encompasses listed companies that specialize in developing solutions to issues such as the ceaseless population growth, the growing scarcity of natural resources, the mountains of waste, and high greenhouse gas emissions.
"Our approach is to identify investments that leverage these themes which are critical to planetary health and can generate attractive financial returns in the process,"
comments Marisa Drew, CEO Impact Advisory and Finance, Credit Suisse.
The focus on these new areas reflects the fact that companies in established business segments are increasingly coming under pressure from environmental regulations and a generational shift in values. The investment focus is generally on small and mid caps. As firms of this size are not often found in conventional portfolios, our aim is to tap into sources of return that have not previously been accessed, thus increasing diversification.
"Investing exclusively in companies whose business makes an impact by solving the problems people really care about is attracting extraordinary interest from our clients. And for our next generation of clients, this is becoming the default,"
Marisa Drew explains.
The potential is huge – according to estimates by the World Economic Forum (WEF), the combined volume of the market as a whole is set to reach USD 26 tn by 2030. In addition, investors can look forward to more extensive reporting, including an impact report. Alongside the usual financial performance figures, an impact report sets out how the individual businesses contribute to solving environmental challenges. Impact reporting is intended to illustrate tangible progress over the medium to long term.
"The greatest threat to our planet is the belief that someone else will save it."
Robert Swan, polar explorer and environmentalist: the first person ever to walk unassisted to both the North and South Poles.
Investments are made across the world. But given that northern European companies are well positioned in innovative environmental solutions, Europe plays a key role at the relative expense of the US. This results in a roughly equal distribution of the investable universe across the US, Europe, and rest of world (RoW) regions. To ensure the best possible portfolio positioning at all times, each company within the investable universe is assigned to one of four subgroups.
1 The UNEP Emissions Gap Report 2019 finds that even if all unconditional Nationally Determined Contributions (NDCs) under the Paris Agreement are implemented, we are still on course for a 3.2°C temperature rise. Our collective failure to act strongly and early means that we must now implement deep and urgent cuts. This report tells us that to get in line with the Paris Agreement, emissions must drop 7.6% per year from 2020 to 2030 for the 1.5°C goal and 2.7% per year for the 2°C goal.
2 Completing the Picture: How the Circular Economy Tackles Climate Change, 2019.
3 Ellen MacArthur Foundation, The New Plastic Economy: Rethinking the future of plastics, 2016.