Investing in the low-carbon transition: Ninety One

Global investors have a role to play in engaging with companies to manage their climate change risks as well as investing in decarbonisation-exposed companies, according to Ninety One.

Listed companies have to spend more on managing climate change and their transition and exposures to a low carbon future economy, because "governments and private equity funds can't make up the shortfall by themselves, said Deirdre Cooper, portfolio manager, Ninety One.

One of the pathways available to investors is investment in renewable energy, mainly solar and wind which brings attractive aspects beyond just environmental, Cooper noted.

"I think our view is that asset owners and retail investors need to look at the sector not only because they want to be part of allocating capital positively to companies with positive impact, but because they may need to do so to generate the best returns for their stakeholders going forward," she said.

Ninety One is engaging with companies about their climate change targets and goals, not only their scope one and scope two emissions, but also the scope 3 emissions as well. Engaging with publicly listed companies is an important component of overall global decarbonisation, because governments and private equity funds alone can't finance solutions that contribute to the emissions cuts needed to hit the targets outlined under the Paris Agreement, Cooper sad.

"Rio and BHP have talked about this a lot," Cooper said. "The problem with product emissions is that businesses carry a lot of risk for things they don't control but they're still responsible for them. Those risks will come back and affect your business. This is the case for energy companies. Their problem isn't that they emit the carbon in their operations, but their customers do in using their products. If carbon emissions make your product obsolete, you need to build a more robust business around that."

To that end, Ninety One is engaging with invested companies on recording and reporting on carbon avoided, as the best measure of how a company's products and services contribute to decarbonisation

"The concept of carbon avoided is to understand those companies that have products that are helping to solve climate change," Cooper said. "That's not only carbon capture and storage, which would be taking carbon out of the atmosphere, but if you produce a solar panel, then that solar panel is producing electricity that is replacing higher carbon electricity. It's a very wide investment universe, but we will only invest in companies where we think they have products and service that avoid carbon."

Geographical location will have some impact on the carbon avoidance of companies, given that some companies that are located in countries that rely on coal fired electricity generation, Cooper noted.

Given accelerating trends towards decarbonisation, companies are beginning to link executive remuneration to decarbonisation targets. Cooper noted that there is a risk that targets are not set at a high enough stretch level, meaning that executives would be remunerated for easier accomplishments.

"The problem is, people are not ready to necessarily appropriately calibrate those sustainability targets, so in some ways it's a great opportunity for CEOs to earn remuneration from easy targets," she said. "We need to have a conversation on these targets, and companies need to accept those conversations. This is where truly fundamental active investors have an active role, in discussions around exec remuneration."

The starting point is the Paris Targets, which leads to discrete calculations of exactly how many tonnes of CO2-e need to be cut to be in compliance.

"What you want to make sure is that the company is setting realistic but stretch goals, and the investors need to understand how you're getting to those goals, and that they're not in the bag, and then hold management to account," Cooper said. "What usually happens is that companies set them at a level that management can for sure make. However, like everything, I think most investors are comfortable with pay for performance, but they're not comfortable with pay for non-performance."

Read more: decarbonisationNinety OneDeirdre Cooperlow carbon
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