Wealth Management: Mosaique Insights
Amaya Gutiérrez, CFA, Investment and Portfolio Adviser, Rothschild & Co Bank AG
A new wave of awareness
Investors can help to tackle the environmental challenges associated with climate change
The public debate over climate change gathered pace in 2019. Environmentalist campaigner Greta Thunberg sailed across the Atlantic and was named Time magazine’s person of the year; the global environmental movement Extinction Rebellion paralysed city centres; and the Oxford University Press chose ‘climate emergency’ as its word of the year.
During the summer of 2019, 30,000 fire outbreaks were detected in the Amazon, where 10% of the world’s biodiversity is endangered by deforestation. As the hot weather shifted to the Southern Hemisphere, record-high temperatures and severe droughts destroyed more than 10 million hectares of land in Australia – an area the same size as Hungary. Estimates suggest that more than 1.25 billion animals perished.1
To assess the impact of these extreme events, it’s important to consider not only their direct cost on the immediate environment but also wider issues. One example is the impact of rising temperatures from carbon emissions on food security. For instance, warmer weather has triggered a rise in desert locusts in the Horn of Africa. Infestations over one square kilometre can in one day eat the equivalent amount of food consumed by 35,000 people.
Calculating the cost of negative events arising from climate change is challenging, although the 2015 Paris Agreement attempted to model it. The accord commits signatories to keeping global temperature increases below 2°C from pre-industrial levels, and has a more ambitious target of just 1.5°C.
The agreement sets out nationally determined contributions, and requires signatories to report regularly on efforts they’ve taken to curb emissions. In addition, it identifies (among others) three different ecosystems that will suffer if no action is taken: seasonal tourism in winter destinations; infrastructure in tropical regions; and, most importantly for human life, habitats in sea-level communities and reefs.
1The Sunday Times, 12th January 2020
Figure 1: History tells us that signing protocols isn’t always enough
This area chart shows the global share in % of CO2 emissions by country, with the figures in parentheses indicating the change since the 1997 Kyoto Protocol.
Turning challenges into opportunities
As professional investors, we’re interested in how we can help our clients respond to the challenges associated with climate change. One of the key issues is to explore how governments and businesses are responding.
Based on the Emissions Gap Report 2019, by 2030 global greenhouse gas emissions need to be cut by 25% to reach the Paris Agreement goal of an increase below +2°C. To achieve this, national economies and individual businesses are transforming the way they operate (see box ‘Big business speaks up’). According to the United Nations (UN), opportunities will arise as public and private sector investment in clean energy needs to reach $1 trillion per year by 2030. In response, government regulations are developing at a national and supranational level to ensure these targets are reached.
The first widespread modern political response to climate change began with the founding of the Intergovernmental Panel on Climate Change in 1988, followed by the Rio Earth Summit in 1992 and Kyoto Protocol in 1997. There was significant progress in 2015 with the signing of the Paris Agreement and UN resolution on the 2030 Agenda for Sustainable Development. The latter gave rise to 17 sustainable goals, seven of which are directly or indirectly related to the environment (see six specific goals in ‘Calling Frankfurt’).
Yet signing protocols aren’t always sufficient (Figure 1). Companies need to be, and are becoming, more aware of their carbon footprints and duty to a wider set of stakeholders – beyond maximising shareholder profits. As a result, many businesses are radically overhauling their environmental policies (see box ‘Big business speaks up’).
Big business speaks up
Software giant Microsoft is planning to become carbon negative by 2030 and will use carbon sequestration technologies to reabsorb all the carbon it has emitted since its foundation by 2050. The company has been carbon neutral since 2012 and plans to spend $1 billion over the next four years to fund research into reducing, capturing and removing carbon dioxide from the atmosphere.
Consumer goods titan Nestlé recently announced its commitment to support the circular economy by aiming to use 100% recyclable or reusable packaging by 2025. It also launched a CHF250 million sustainable packaging venture to invest in start-ups focused on these capabilities. The move comes in response to the UNEP plastic waste report, which estimates that we produce around 300 million tonnes of plastic waste per year. That’s the equivalent weight of the entire human population.
"As shareholders in publicly listed companies, our clients are in a strong position to respond to the climate emergency through the way they choose to invest."
The role of investors
As shareholders in publicly listed companies, our clients are in a strong position to respond to the climate emergency through the way they choose to invest. In addition to integrating broader environmental, social and governance (ESG) factors in portfolios (see Beyond shareholder value), they can focus on thematic investments offered by specialist fund managers across a range of diversified, liquid strategies. For example, these managers can select companies set to benefit from decarbonisation initiatives, as well as actively engage with companies in order to bring about positive change.
In addition, clients to whom access to liquidity is less important can look to a growing number of private market opportunities targeting the causes of climate change. They include private infrastructure funds investing in renewable energy production, such as solar, wind and hydroelectricity.
At Rothschild & Co Wealth Management, we believe we can contribute positively to the world’s environmental challenges by making our clients more aware of the opportunities available in public and private markets, as well as through greater shareholder engagement.