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UK equities: and now for something completely different
UK equities present distinct and attractive opportunities for both domestic and global investors. Discover why they shouldn't be overlooked.
There has been a boom in sustainable investing, however priorities amongst climate stakeholders (governments, customers and investors) have now begun to differ meaning the 'bubble' may have burst.
Approaches to sustainable investing may have more longevity if they are pragmatic. We need to focus on the biggest questions.
A Transition mindset is the acceptance that greener pastures can only be reached by first wading through the shades of brown. Our Transition approach is built on engaging with the largest emitters and a focus on a like-for-like absolute emission reduction.
We welcome the European Securities and Markets Authority’s (ESMA) recently announced guidelines for funds using sustainability-related terms in their mandates. We believe it to be a clear signal that the next chapter of the sustainable investing has started.
When we launched our Sustainable Eurozone fund in Spring 2023, we did so with a Transition mindset; focusing on a companies’ ability to reduce absolute emissions each year rather than looking for companies that are already clean. Following changes to the sustainable investment backdrop, including a more supportive regulator, we see Transition finally getting a full seat at the sustainable investment table.
There are three key climate stakeholders that impact corporate activity; governments, customers and investors. Whilst all three stakeholders were swimming in the same direction at maximum speed this created the boom in sustainable investing.
However, these stakeholders have started swimming in different directions and arguably with different strokes.
The sustainable bubble has therefore burst, but despite this more complicated backdrop, the need for sustainable investing remains. Climate change and energy security solutions still need to be funded and capital needs to be allocated effectively. Thus, we ask, what next for the sustainable investment community?
We think the boom and bust will force sustainable investors to think differently. A more pragmatic approach to the entire topic of sustainability would be more effective and have more longevity.
We’ve seen destructive dogmatism restricting the roll out of bridge technologies. New solutions get pushback if not perfect. For example, we see electric vehicles (EVs) criticised for the emissions linked to the mining of battery minerals. If we focus on the limitations of near-term climate solutions we’re at risk of ignoring the bigger questions e.g. how much lower are EV’s lifecycle emissions vs internal combustion engine vehicles and therefore how much capital should flow towards funding this specific transition.
Now capital is no longer ‘free’ we see even greater need for pragmatic capital allocation by governments and corporates. This is being facilitated by a more practical regulatory setting.
The first wave of sustainable investing matched the first regulatory frameworks. They adopted a ‘best in class approach’ thus invoking ‘the stick’– i.e. higher cost of equity placed on high emitters. Regulators are now offering ‘a carrot’ to promote change – i.e. reducing the cost of equity for high emitters that can transition to a low carbon business model. It is important to combine the ‘carrot’ with the ‘stick’ to facilitate change.
Paris Aligned Benchmark typical exclusions (PAB) | ||||||
Climate Transition Benchmark typical exclusions (CTB) | ||||||
Coal
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Gas | Oil | Electricity generation | Controversal Weapons | UNGC Violations | Tobacco |
Terms used in funds names | Exclusionary criteria | |||||
"Sustainable" related term | PAB + mainly investing in sustainable investments | |||||
"Environmental" related term e.g. ESG or SRI | PAB + mainly investing in sustainable investments | |||||
"Impact" related term | PAB + mainly investing in sustainable investments | |||||
"Social" related term | Climate Transition Benchmark (CTB) | |||||
"Governance" related term | Climate Transition Benchmark (CTB) | |||||
"Transition" related term | Climate Transition Benchmark (CTB) |
The formal adoption of the word ‘Transition’ by regulators will be important. It will make a clear delineation between those sustainable investment strategies that invest in already clean businesses and those who want to facilitate the decarbonisation journeys of high emitting companies.
A Transition mindset is the acceptance that greener pastures can only be reached by first wading through the shades of brown. Transition investing is managing a portfolio that is helping change the status quo.
Our Transition approach is built on engaging with the largest emitters and a focus on like-for-like absolute emission reduction. We do not believe the equity market should be rewarding divestments or putting too much emphasis on carbon intensity KPIs.
The biggest obstacle to Transition investing has been data quality.
Scope 1 and 2 emission disclosures have improved considerably in recent years. The laggard has been Scope 3. Fortunately, as we’ve been getting into the weeds when building our bottom-up emissions models, we’ve seen progress accelerate.
Better input data allows corporates to give more granular disclosures. We’ve seen the first instance of a company giving guidance on current year emissions. As data and disclosure improves, more emphasis will be put on forecasting future emissions.
There are no third-party data providers offering forward looking emission estimates yet. We believe this is therefore a key differentiator in our process. We have annual estimates out to 2030 for 30 high emitters, 18 of which we own. In aggregate, they account for 76% of the benchmark’s emissions.
Modelling the large emitters helps us assess their ability to deliver on their decarbonisation targets. We can compare our estimates to the company targets, as seen in the example below.
With more pragmatism, backing of the regulator and improving emissions data, we have the right ingredients for Transition investing to grow and plug the gap left by the first generation of sustainable funds. In doing so, Transition investing will accelerate our journey towards a low carbon society. It is up to active managers to embrace engagement and really push corporates on their medium term decarbonisation plans, not just their long term, or net zero, targets but more importantly the route in which they get there.
UK equities: and now for something completely different
UK equities present distinct and attractive opportunities for both domestic and global investors. Discover why they shouldn't be overlooked.
Finding investment opportunities in global equities
Investing in global equities gives investors a simple way to build a diversified stock portfolio that can perform in different market conditions. Find out more.
Global equity exposure without the concentration risk
The brief stock market correction in July highlighted how quickly market sentiment can change. Although economic fears have since eased, investors are still seeking optimal portfolio strategies. An equal weight version of the MSCI World Index could offer broad global equity exposure while reducing concentration risk compared to a standard market-cap-weighted approach. Read our latest article to find out more.
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
All data as of July 18, 2024, unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
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