Cop27, the climate change conference that gathered more than 90 heads of state from 190 countries in Egypt this month, focused the world’s attention once again on net-zero ambitions.
While a lot has changed since Cop26, the role that investors can play in reaching those targets has again been highlighted.
There are many investor-orientated net-zero initiatives, all of which have the same objective: to provide broad guidelines to investors around the theme of decarbonisation.
Investors, especially those who follow these guidelines, increasingly include climate change considerations in their investment practices.
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Watch: Biden at Cop27 - climate crisis is about 'very life of the planet'
The ultimate goal of these initiatives is to guide investors who want to support a transition to a low-carbon economy or, in other words, achieve real-world decarbonisation.
This naturally tends towards decarbonising portfolios over time. However, the interaction between portfolio and real-world decarbonisation is an area of ambiguity.
Here, I explore these two concepts and try to shed light on how each one affects the other.
What is real-world decarbonisation?
As the name suggests, real world decarbonisation is the reduction of emissions in the real economy. Generally, investors influence this by engaging with companies directly, making primary market investments in climate solutions and green technologies, and by contributing to discussions with governments and regulators.
What is portfolio decarbonisation?
Portfolio decarbonisation refers more precisely to an improvement in the emissions profile of a specific investment portfolio.
Generally speaking, this can happen in two ways: the first is more passive, namely a “natural” reduction in emissions associated with the investment portfolio driven by a reduction of emissions by investee companies within it — effectively through real-world decarbonisation.
The second is a more proactive approach, where investors can adjust the allocation of investments held in a portfolio.
This might involve tilts towards companies with lower carbon emission profiles relative to peers, for example, by setting carbon intensity reduction criteria or excluding the most emissions-heavy companies altogether.
How do they influence each other?
The impact of real-economy emissions reduction on portfolio level metrics is fairly clear — if companies you’ve invested in are decarbonising their own operations, the portfolios that hold stakes in those companies are also decarbonising.
This is the main channel of impact that net-zero frameworks push for.
However, understanding the interaction in the reverse direction is trickier — a recent paper reviewed empirical evidence on the mechanisms of investor impact and concluded:
“ … We conclude that shareholder engagement is a relatively reliable mechanism. Capital allocation can either accelerate the growth of companies, or incentivise companies to implement ESG practices, but there remain gaps in the evidence …”
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Cop27 in Sharm El Sheikh — in pictures
In other words, both engagement and capital allocation approaches have supporting literature, but more evidence is needed to support the second approach.
In general, portfolio decarbonisation approaches affect capital allocation — less money is allocated to high-carbon intensity businesses and more is allocated to low-carbon intensity businesses.
However, given that most equity and fixed-income investments are made in secondary markets, changing portfolio allocations only really transfers the ownership of those emissions from one investor to another, without having a clear impact on real economy emissions reductions.
Advocates believe that if portfolio allocation changes are made by a critical mass of investors, the stock and bond prices of highly carbon-intensive companies may then fall, while prices for less carbon-intensive companies rise.
This potentially leads to changes in the cost of capital for those companies affected and sends a negative signal to carbon-intensive companies and a positive one to those that are less so.
What are the implications for asset allocation?
So, what should investors do with their portfolio allocations to achieve their respective goals?
There’s unlikely to be a universal approach.
For example, if the investor prefers to pursue climate-risk management as a dominant element in their portfolio (potentially driven by a belief that climate risks are not fully priced in), then the most straightforward approach might be to favour investments in companies that already have relatively low carbon intensity.
If, on the other hand, the investor wishes to pursue real-world decarbonisation as a primary objective, they might incorporate both engagement and capital allocation approaches.
A balanced approach would be to remain invested in broad public equities and fixed income (both indexed and active), and pursue engagement with investee companies, while also carving out an allocation to portfolio decarbonisation approaches and illiquid investments in climate solutions companies.
It's worth keeping in mind that the allocation of private capital was highlighted as one of the key contributors to changes needed to meet set climate goals by 2050
Carlo Funk,
EMEA head of ESG investment strategy at State Street Global Advisors
Where does this leave us?
For most investors, the path is likely to incorporate aspects of engagement, as well as capital allocation approaches to varying degrees.
When working with clients, we find that no two strategies are exactly alike, and perhaps one of the most important elements is the ability to tailor.
But we have seen more engagement on this issue in recent years than ever before. A decarbonisation investment strategy has gone from a specialist, esoteric concern to something many investors expect by default.
The world’s attention is focused on immediate announcements made during Cop27.
However, beyond the headlines, it is worth keeping in mind that the allocation of private capital was highlighted as one of the key contributors to changes needed to meet set climate goals by 2050.
Investors have a role to play.
Carlo Funk is the EMEA head of ESG investment strategy at State Street Global Advisors, a member of The Gulf Capital Market Association
Company%20profile
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Kamindu Mendis bio
Full name: Pasqual Handi Kamindu Dilanka Mendis
Born: September 30, 1998
Age: 20 years and 26 days
Nationality: Sri Lankan
Major teams Sri Lanka's Under 19 team
Batting style: Left-hander
Bowling style: Right-arm off-spin and slow left-arm orthodox (that's right!)
Takreem Awards winners 2021
Corporate Leadership: Carl Bistany (Lebanon)
Cultural Excellence: Hoor Al Qasimi (UAE)
Environmental Development and Sustainability: Bkerzay (Lebanon)
Environmental Development and Sustainability: Raya Ani (Iraq)
Humanitarian and Civic Services: Women’s Programs Association (Lebanon)
Humanitarian and Civic Services: Osamah Al Thini (Libya)
Excellence in Education: World Innovation Summit for Education (WISE) (Qatar)
Outstanding Arab Woman: Balghis Badri (Sudan)
Scientific and Technological Achievement: Mohamed Slim Alouini (KSA)
Young Entrepreneur: Omar Itani (Lebanon)
Lifetime Achievement: Suad Al Amiry (Palestine)
Company%C2%A0profile
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How to watch Ireland v Pakistan in UAE
When: The one-off Test starts on Friday, May 11
What time: Each day’s play is scheduled to start at 2pm UAE time.
TV: The match will be broadcast on OSN Sports Cricket HD. Subscribers to the channel can also stream the action live on OSN Play.
The alternatives
• Founded in 2014, Telr is a payment aggregator and gateway with an office in Silicon Oasis. It’s e-commerce entry plan costs Dh349 monthly (plus VAT). QR codes direct customers to an online payment page and merchants can generate payments through messaging apps.
• Business Bay’s Pallapay claims 40,000-plus active merchants who can invoice customers and receive payment by card. Fees range from 1.99 per cent plus Dh1 per transaction depending on payment method and location, such as online or via UAE mobile.
• Tap started in May 2013 in Kuwait, allowing Middle East businesses to bill, accept, receive and make payments online “easier, faster and smoother” via goSell and goCollect. It supports more than 10,000 merchants. Monthly fees range from US$65-100, plus card charges of 2.75-3.75 per cent and Dh1.2 per sale.
• 2checkout’s “all-in-one payment gateway and merchant account” accepts payments in 200-plus markets for 2.4-3.9 per cent, plus a Dh1.2-Dh1.8 currency conversion charge. The US provider processes online shop and mobile transactions and has 17,000-plus active digital commerce users.
• PayPal is probably the best-known online goods payment method - usually used for eBay purchases - but can be used to receive funds, providing everyone’s signed up. Costs from 2.9 per cent plus Dh1.2 per transaction.
'Ghostbusters: From Beyond'
Director: Jason Reitman
Starring: Paul Rudd, Carrie Coon, Finn Wolfhard, Mckenna Grace
Rating: 2/5
THE%20SWIMMERS
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APPLE IPAD MINI (A17 PRO)
Display: 21cm Liquid Retina Display, 2266 x 1488, 326ppi, 500 nits
Chip: Apple A17 Pro, 6-core CPU, 5-core GPU, 16-core Neural Engine
Storage: 128/256/512GB
Main camera: 12MP wide, f/1.8, digital zoom up to 5x, Smart HDR 4
Front camera: 12MP ultra-wide, f/2.4, Smart HDR 4, full-HD @ 25/30/60fps
Biometrics: Touch ID, Face ID
Colours: Blue, purple, space grey, starlight
In the box: iPad mini, USB-C cable, 20W USB-C power adapter
Price: From Dh2,099
Company%20profile
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SUZUME
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Director: Jon Favreau
Starring: Donald Glover, Seth Rogen, John Oliver
Rating: 2 out of 5 stars
SPECS
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The Voice of Hind Rajab
Starring: Saja Kilani, Clara Khoury, Motaz Malhees
Director: Kaouther Ben Hania
Rating: 4/5
MATCH INFO
Fixture: Ukraine v Portugal, Monday, 10.45pm (UAE)
TV: BeIN Sports
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OPINIONS ON PALESTINE & ISRAEL
Global state-owned investor ranking by size
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United States
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China
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UAE
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Japan
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5
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Norway
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Canada
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Singapore
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Australia
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Saudi Arabia
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South Korea
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UAE v Gibraltar
What: International friendly
When: 7pm kick off
Where: Rugby Park, Dubai Sports City
Admission: Free
Online: The match will be broadcast live on Dubai Exiles’ Facebook page
UAE squad: Lucas Waddington (Dubai Exiles), Gio Fourie (Exiles), Craig Nutt (Abu Dhabi Harlequins), Phil Brady (Harlequins), Daniel Perry (Dubai Hurricanes), Esekaia Dranibota (Harlequins), Matt Mills (Exiles), Jaen Botes (Exiles), Kristian Stinson (Exiles), Murray Reason (Abu Dhabi Saracens), Dave Knight (Hurricanes), Ross Samson (Jebel Ali Dragons), DuRandt Gerber (Exiles), Saki Naisau (Dragons), Andrew Powell (Hurricanes), Emosi Vacanau (Harlequins), Niko Volavola (Dragons), Matt Richards (Dragons), Luke Stevenson (Harlequins), Josh Ives (Dubai Sports City Eagles), Sean Stevens (Saracens), Thinus Steyn (Exiles)
KILLING OF QASSEM SULEIMANI
COMPANY%20PROFILE%20
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