Investing in a low carbon economy
Hello again, one and all!
Investments, your investments, matter a lot. They can help your savings grow and give you more money in retirement. They are also providers of finance to the markets and the companies that are going to change the way humans interact with our planet. This seems a rather grand statement but it’s true. There is a clear need to transition to a low carbon economy and the timescale to do it is more likely to be short. But how do your investments help make that happen?
As mentioned in the Summer 2021 newsletter, we’ve selected an investment strategy that rewards companies that have low carbon emissions. That part is relatively straightforward and is on most investors’ radars already. However, the strategy also rewards companies that don’t currently have low carbon emissions but do have a credible plan to reduce their emissions and to move to the low carbon economy. If we simply screen out the ‘bad’ companies then we miss out on potential high returns on the table while another investor rewards them for polluting and nothing really changes. This is where the “TPI” framework comes in, the Transition Pathway Initiative. The TPI framework allows investors to reward those companies who are making credible plans to reduce their emissions and change the way industry interacts with the planet. The scores given by the TPI guide how much or how little to invest in each company.
Why such a focus on carbon emissions? Well, even though nitrogen oxides or ‘NOx’ are around 240 times more damaging than carbon dioxide, it’s the amount of carbon that we put into the atmosphere that is not sustainable. Forestry is an exciting area where you have an investment that has both a capital and income value to it, is sensitive to inflation, and can help capture carbon that is being emitted elsewhere. And timber is currently one of the most effective ways to capture carbon and because of this you can earn carbon credits or offsets. But carbon offsets are where green investing gets even more complicated...
If I buy a forest to offset emissions elsewhere, that helps me to claim to be “net zero”. Is that good? In part it is, but it hasn’t stopped the carbon being emitted and that doesn’t help the move to the low carbon economy. The changes happen when you engage with companies in your portfolio and assess whether they can change the way they do things and become more sustainable.
Carbon allowances are another area to consider in becoming more sustainable. In Europe, carbon allowances are issued, and these can be bought by companies to allow them to emit carbon. The plan is to reduce the amount issued each year so that by 2050, the economy is net zero, the Paris agreement can be reached, and global temperatures are around 1.5 degrees higher than post-industrial levels. If a pension scheme rather than a manufacturer buys these allowances, you increase the cost of polluting. This then should trigger companies to innovate and produce products that are less carbon intensive and help move us to a sustainable planet. It’s early days for this market and it needs to evolve so we will be keeping a keen eye on progress.
Overall, my belief is that we have to be as impactful as we can and manage the risks due to climate change rather than bluntly striving to achieve targets. This is part of the reason why the Trustees selected the Climate Transition World Equity Fund, the other part being to grow your investments above inflation (after fees) over the longer term!
If you’d like to hear more from me about investing in general, or specifically about how investments are changing because of the need to transition to a low carbon economy, please let us know what interests you by completing the online form ‘Suggestions for the Trustees’ at https://rmdcp.uk/help-how-to/get-in-touch.
All the best, Ben