Carbon avoidance drives growth

Deirdre Cooper, Graeme Baker September 21, 2022 10:16

Over the past decade, the impact of environmental, social and governance (ESG) factors on investments has become widely considered by asset managers and investors. At the same time, there is an encouraging trend of funds adopting positive impact targets, including carbon avoidance metric.

Apart from carbon risk, another key measurement metric is carbon impact such as the assessment of whether companies are genuinely contributing to decarbonisation. From a portfolio construction perspective, we believe it is important to evaluate whether companies have quantifiable and positive carbon impact. As a measurement, the concept of "carbon avoided” measurement metric examines whether a company’s products or services are better in terms of their carbon footprint than the alternative would be.

Carbon-avoided figures can be volatile over time, and we need to monitor the narrative behind the data as well as the data itself. For example, as the percentage of energy-efficient devices in the overall mix increases, the baseline will tend to improve, suggesting that the figure of carbon avoided diminishes even as more products are sold. In other words, in an ideal world where 100% of electricity generated is renewable, new installations generating renewable energy will no longer help contribute to carbon avoidance.

At the broadest level, there are decarbonisation opportunities across three pathways to a low-carbon future, namely renewable energy, electrification and resource efficiency. To drive the global economy to decarbonisation down these pathways, it is essential to have a diverse group of companies from multiple sectors and regions, and across a spread of market capitalisations, but generally involving those with higher than-average growth rates. An application of screening factors in environmental revenue and carbon avoidance has resulted in a list of 1,500 companies with a combined market capitalisation of over US$14 trillion.

The list of companies should be refreshed on an annual basis to account for new companies meeting the requirements of >50% environmental revenues and quantifiable carbon avoided, and to include new areas that we believe are impacted by the transition to a decarbonised global system. This year we have identified new factors including decarbonising buildings, home-building and building-products methodologies, material-handling machinery for first time.

Over the last two decades, the CDP, (formerly Carbon Disclosure Project), an international non-profit organisation, has been supporting companies and other entities in disclosing their environmental impact. Its system has resulted in unparalleled information and engagement on climate and other environmental issues worldwide. With the support of CDP, more companies are reporting detailed carbon footprint data- not just direct and indirect emissions from the generation of purchased energy (Scope 1 & 2 carbon), but also indirect emissions for their supply chains and from their products and services post-sale (Scope 3 carbon).

The last 12 months have seen significant challenges to the movement towards sustainable investing, in terms of performance as well as accusations of greenwashing. We need to think about investing in the context of keeping all stakeholders in mind. It is crucial to ask the right questions and conduct the research, as well as reaching a conclusion on how sustainable a business is. As investors, we do not seek to appear ‘green’ by minimising our carbon footprint or maximising our ESG ratings. Rather, we adopt an externalities-based approach to research, through which we ensure that analysts examine all the nonfinancial as well as financial data and information and assess each company’s performance in relation to all its stakeholders.

Deep research is needed on products and services that are helping to avoid carbon. For example, when analysing natural capital, it is important to consider a company’s net zero plan and water data, and to evaluate its suppliers’ impact on biodiversity as well as its own.

We believe, over the long-term, companies offering products and services that address the world’s biggest negative externality, namely carbon, will grow faster and deliver higher returns and achieve better performance.

Copyright: Project Syndicate
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Deirdre Cooper, Graeme Baker

Deirdre Cooper is Head of Sustainable Equity, Ninety One; Graeme Baker is Portfolio Manager, Ninety One.