Partner Insight: Targeting net zero - 5 reasons to rethink portfolio decarbonisation

Partner Insight: Targeting net zero - 5 reasons to rethink portfolio decarbonisation

clock • 6 min read

Why should investors consider rethinking their approach to aligning to net zero? Because in our view many current solutions, which focus on today’s low-carbon companies, have real flaws.

Without a genuine forward-looking focus, they fail to identify companies across the economy - even in high-carbon sectors - whose credible, Paris Agreement-aligned progress on decarbonisation might not be recognised by the market. In addition, some purportedly low-carbon strategies do not assess scope 3 emissions, which are especially material for sectors like financial services and real estate. By not recognising the full scope of companies' emissions while withholding capital from transitioning firms, they slow progress towards achieving net zero.

Highlights

With policy, corporate and financial-market action on decarbonisation increasing, we provide 5 reasons to rethink portfolio alignment to net zero:

  1. Invest in ice, not fire
  2. Accelerating policy momentum
  3. A carbon footprint is only the first step
  4. High-carbon exclusions are flawed
  5. To manage climate risk to 2050, look forward

Invest in ice, not fire

Some of the best net-zero investment opportunities, in our view, exist among companies whose current high emission volumes contrast with genuine climate action. It follows that polluting firms with no ambition to decarbonise are the most salient risks to be avoided.

Ice cubes and burning logs

In many hard-to-abate sectors that are vital to economic activity, like construction and shipping, cuts in emissions are most needed to reach a net-zero future. In these industries, some companies currently have large carbon footprints today, but are pursuing science-based decarbonisation targets that are aligned with the Paris Agreement and credible plans to achieve them. We call these companies ‘ice cubes' because they contribute significantly to cooling the economy.

For investors, they are important exposures in efforts to align portfolios to net zero. And they can also be potential opportunities for generating long-term returns, in our view.

By decarbonising, ice cubes are aligning with the regulatory momentum and anticipated market shifts resulting from the transition. In our view, such proactive management of climate-related risks, which improves their ability to operate strongly in a world aligning to net zero, could be underpriced by the market at present, only to be realised in the future.

In direct contrast are high-emitting companies showing no evidence of targets or plans to decarbonise. We call them ‘burning logs' because in climate terms, they are essentially on fire, heating the economy. These companies are likely to be adversely exposed to climate-related risks as policymakers seek disclosure on emissions and markets evolve to favour low-carbon products and services.

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Cool analysis  

To identify ice cubes, we apply our proprietary ITR methodology to assign a company a forward-looking temperature score. This measures how effective the firm will be in helping to decarbonise its sector, and the economy more broadly, in the future - and whether it will keep to the 1.5°C -2°C warming threshold set by the Paris Agreement.

ITR is key to our TargetNetZero investment solutions in equity, fixed-income and convertible bond markets. It enables us to align portfolios to Paris Agreement, seek returns and provide diversification. This is the outcome of seeking what we believe are financially robust, decarbonising companies across the economy - even in hard-to-abate sectors.

We believe our forward-looking approach helps identify opportunities that the market might not currently recognise, while also benefitting portfolio diversification and providing capital to decarbonising companies. The core aims of our TargetNetZero solutions are to deliver performance, provide diversification and help drive the transition.

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important information

For professional investors only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the "FCA"), and entered on the FCA register with registration number 515393. This document is approved at the date of publication.

Lombard Odier Investment Managers ("LOIM") is a trade name.

This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.

UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation scheme does not apply in respect of any investment or services provided by an overseas person. A summary of investor rights and information on the integration of sustainability risks are available at: https://am.lombardodier.com/home/asset-management-regulatory-disc.html.

Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA. ©2023 Lombard Odier IM. All rights reserved.

 

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