Cop27 has highlighted the role investors can play in the world's net-zero ambitions. AFP
Cop27 has highlighted the role investors can play in the world's net-zero ambitions. AFP
Cop27 has highlighted the role investors can play in the world's net-zero ambitions. AFP
Cop27 has highlighted the role investors can play in the world's net-zero ambitions. AFP

Why investors have a key role to play in world's net-zero ambitions


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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

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Brief scores

Barcelona 2

Pique 36', Alena 87'

Villarreal 0

While you're here
The biog

Family: Parents and four sisters

Education: Bachelor’s degree in business management and marketing at American University of Sharjah

A self-confessed foodie, she enjoys trying out new cuisines, her current favourite is the poke superfood bowls

Likes reading: autobiographies and fiction

Favourite holiday destination: Italy

Posts information about challenges, events, runs in other emirates on the group's Instagram account @Anagowrunning

Has created a database of Emirati and GCC sportspeople on Instagram @abeermk, highlight: Athletes

Apart from training, also talks to women about nutrition, healthy lifestyle, diabetes, cholesterol, blood pressure

Volvo ES90 Specs

Engine: Electric single motor (96kW), twin motor (106kW) and twin motor performance (106kW)

Power: 333hp, 449hp, 680hp

Torque: 480Nm, 670Nm, 870Nm

On sale: Later in 2025 or early 2026, depending on region

Price: Exact regional pricing TBA

Brief scoreline:

Liverpool 5

Keita 1', Mane 23', 66', Salah 45' 1, 83'

Huddersfield 0

MATCH INFO

Group B

Bayern Munich v Tottenham, midnight (Thursday)

MATCH INFO

Uefa Champions League semi-final, second leg result:

Ajax 2-3 Tottenham

Tottenham advance on away goals rule after tie ends 3-3 on aggregate

Final: June 1, Madrid

BeIN Sports currently has the rights to show

- Champions League

- English Premier League

- Spanish Primera Liga 

- Italian, French and Scottish leagues

- Wimbledon and other tennis majors

- Formula One

- Rugby Union - Six Nations and European Cups

 

The burning issue

The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE.

Part three: an affection for classic cars lives on

Read part two: how climate change drove the race for an alternative 

Read part one: how cars came to the UAE

GAC GS8 Specs

Engine: 2.0-litre 4cyl turbo

Power: 248hp at 5,200rpm

Torque: 400Nm at 1,750-4,000rpm

Transmission: 8-speed auto

Fuel consumption: 9.1L/100km

On sale: Now

Price: From Dh149,900

Lexus LX700h specs

Engine: 3.4-litre twin-turbo V6 plus supplementary electric motor

Power: 464hp at 5,200rpm

Torque: 790Nm from 2,000-3,600rpm

Transmission: 10-speed auto

Fuel consumption: 11.7L/100km

On sale: Now

Price: From Dh590,000

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Nepotism is the name of the game

Salman Khan’s father, Salim Khan, is one of Bollywood’s most legendary screenwriters. Through his partnership with co-writer Javed Akhtar, Salim is credited with having paved the path for the Indian film industry’s blockbuster format in the 1970s. Something his son now rules the roost of. More importantly, the Salim-Javed duo also created the persona of the “angry young man” for Bollywood megastar Amitabh Bachchan in the 1970s, reflecting the angst of the average Indian. In choosing to be the ordinary man’s “hero” as opposed to a thespian in new Bollywood, Salman Khan remains tightly linked to his father’s oeuvre. Thanks dad. 

Bharat

Director: Ali Abbas Zafar

Starring: Salman Khan, Katrina Kaif, Sunil Grover

Rating: 2.5 out of 5 stars

Iftar programme at the Sheikh Mohammed Centre for Cultural Understanding

Established in 1998, the Sheikh Mohammed Centre for Cultural Understanding was created with a vision to teach residents about the traditions and customs of the UAE. Its motto is ‘open doors, open minds’. All year-round, visitors can sign up for a traditional Emirati breakfast, lunch or dinner meal, as well as a range of walking tours, including ones to sites such as the Jumeirah Mosque or Al Fahidi Historical Neighbourhood.

Every year during Ramadan, an iftar programme is rolled out. This allows guests to break their fast with the centre’s presenters, visit a nearby mosque and observe their guides while they pray. These events last for about two hours and are open to the public, or can be booked for a private event.

Until the end of Ramadan, the iftar events take place from 7pm until 9pm, from Saturday to Thursday. Advanced booking is required.

For more details, email openminds@cultures.ae or visit www.cultures.ae

 

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Updated: November 22, 2022, 4:00 AM`