What is driving the climate transition?
The climate transition is the shift to a Net-Zero future in order to reduce the risks of climate change. One reason to act is changes in consumer behaviour. In a survey by IPSOS, 69% of consumers globally have altered the products and services they use due to concerns about climate change. It is notable that this is a global trend and not just a concern in the Western world, since emerging market populations are most likely to experience the impacts of the loss of biodiversity.
Consumers are also holding companies accountable for their actions. In response, we have seen an ever-increasing number of companies setting ambitious climate targets: announcing goals to reduce their greenhouse gas emissions to Net-Zero by 2050 or before. To get there, we have seen automakers channel investment into electric vehicles, energy companies expanding their renewable energy capabilities and being less reliant on fossil fuels, and increasing carbon capture technologies in industry, amongst other measures.
As the reality and the risk of climate change becomes increasingly visible, it is inevitable that governments will be forced to act more decisively than they have done so in the past. The speed and coverage of regulatory developments related to sustainable finance are expected to keep growing and gaining in complexity. Adapting early may mitigate the risk of forced losses.
Finally, the climate transition provides significant impetus for strong investment flows. According to the OECD, investment of more than USD 6.9 trillion a year is needed to meet the goals of the Paris Agreement, opening up many avenues for future returns. Companies that are slow to adapt could miss out on the first-mover advantage and even cease to exist.
Are we heading in the wrong direction?
Companies setting out targets is a step in the right direction but how can we tell if there is any weight behind these often ambitious claims? Looking at current CO2 emissions intensity pathways, it appears that the gap between the market’s desired pathway to reach the targets of the Paris Agreement and the reality – based on current actions – is actually widening. Furthermore, the expected cost per unit of emissions is increasing, creating a growing carbon liability risk.
The Climate Engine
EFG’s Climate Engine has been designed to align the complete portfolio with decarbonisation goals. While we actively incorporate targets announced by companies into the model, the backbone of the assessment lies in real data and real decarbonisation. This systematic approach is scalable across sectors, market maturities and time-frames while also allowing us to keep a good factor exposure and achieve a high level of diversification. Our approach allows us to reduce negative impacts, capturing all the opportunities without creating additional absolute or relative financial risks. The Climate Engine approach allows for the identification of companies that represent a low warming implied risk while avoiding those whose pathway is not consistent with climate change goals.