This week’s report from the UN’s Intergovernmental Panel on Climate Change (IPCC) was heralded as its starkest warning yet and a code red for humanity. As investors, we continue to challenge all the companies held across our funds to decarbonise their businesses at a rate consistent with the science, and also focus on those helping to drive the required energy transition.
Since the Panel’s last report in 2018, the evidence of observed changes in extremes such as heatwaves, heavy precipitation, droughts, tropical cyclones and, in particular, their attribution to human influence has strengthened. As a result, conclusions from this latest work are as follows: we need to materially reduce emissions from human activity within the next decade (approximately halving them) to limit the global average temperature rise to a manageable rate that does not seriously limit our quality of life in the future.
The sooner we cut emissions, the less negative impacts and costs in trying to adapt to climate change will be. In short, this is an emergency.
Here are some conclusions from the report worth remembering:
- Carbon dioxide is the biggest single source of greenhouse gas (GHG) emissions and most of this is from burning fossil fuels. We need to displace this with ultra-low carbon alternatives, which do exist.
- We cannot ignore other greenhouse gases such as methane, volatile organic compounds, and carbon monoxide and halogenated gases. When analysing emissions, make sure you are looking at CO2-equivalent measures that include all GHG rather than just carbon dioxide.
- There is limited scope for offsetting through geoengineering and planting trees to soak up carbon will not be enough to get to zero emissions. We have to reduce absolute GHG emissions considerably before it is feasible to soak up the residual in this way.
- Concerns about how much it will cost to do this often fail to mention the fact not taking action to halve emissions by 2030 will cost orders of magnitude more in limiting growth and development (for more on this, see the Stern Review on the Economics of Climate Change from 2006).
What this means for investors: applying what we know about climate change to the SF funds
We believe the following and have positioned our Sustainable Future (SF) funds accordingly:
- Materially reducing emissions will affect many areas across the whole economy, including our energy system, how we heat and cool buildings, transport, industrial processes, agriculture and changes to land use.
- We are looking for companies innovating to provide products and services that are smarter and help reduce emissions while providing the same utility. Our SF funds, on average, have 28% invested in companies improving resource efficiency and reducing emissions.
- There will be inevitable increases in regulation to reduce emissions and our SF funds, on average, emit 68% less than the market in which they are invested. This means our favoured companies have less carbon costs to pass on to customers and their margins will be more resilient to tightening emission regulations.
- We are challenging all the companies held across our SF funds to decarbonise their business at a rate consistent with the science (halving absolute emissions by 2030) as we think this will give them a competitive advantage in an increasingly carbon-constrained world. Small incremental changes will not get us there and we urgently need to respond to this crisis.
- There are carbon-intensive businesses offering lower-carbon alternatives that will struggle to survive as profitable enterprises and we choose not to invest in these.
- Climate change is mistakenly thought of as a purely ‘environmental’ issue but there is also a big social dimension. Local air quality, for example, can be vastly improved by reducing toxic emissions and the social benefits from improving health are enormous. The transition to an ultra-low carbon economy needs to bring people with it, in terms of the industries, workforces, and local communities affected, and ensuring there is affordable, clean energy for all. This is referred to as a Just Transition.
- Tackling climate change is a major challenge but not the only area where we can do things much smarter. Our SF funds are exposed to 21 Sustainable investment themes that help make our shared economy cleaner, healthier and safer.
Key Risks
Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities – fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.
Disclaimer
The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.