Co-Portfolio Manager, Global Environment StrategyNinety One
Deirdre Cooper on Ninety One’s Approach to Sustainable Investing and Decarbonization
Decarbonization remains an urgent issue as the latest research warns that climate change will hit humanity “harder, wider and sooner than previously believed”. Many institutional investors in Canada and around the globe are committed to addressing global climate change. However, questions remain on how to reconcile this effort with fiduciary duties, and structural approaches towards investing in carbon reduction.
Deirdre Cooper, Portfolio Manager of the Strategy at Ninety One (formerly Investec Asset Management), answers questions about Ninety One’s approach to investing in the energy transition.
(Ninety One is an independent, active global asset manager dedicated to delivering compelling outcomes for its clients. Ninety One’s Global Environment Strategy invests in companies enabling the transition to a low-carbon world, seeking structural growth driven by decarbonisation.)
How can investors contribute to addressing climate change?
The world is investing just US$500 billion of the US$2-3 trillion needed annually to decarbonise the global economy in a way that meets the 1.5C tolerable global warming scenario. We need listed companies to spend much more on tackling climate change, because governments and private equity funds can’t make up the shortfall by themselves. The valuable role that investors play is to engage with listed businesses, as shareholders, to encourage them to accelerate spending on transitioning the global economy to a lower-carbon model.
But it’s important investors are clear about their impact and do not overstate it. For example, within our portfolio, we analyse and report carbon impact for each company, which means we can measure progress. This includes analysing companies’ emissions profiles, carbon avoided, and initiatives to align business strategies with the Paris Agreement climate goals. We report on the companies that are doing well, and call out those that are not moving as quickly as we believe they should.
Most are familiar with Scope 1, 2 and 3 measurement. Can you explain ‘carbon avoided’?
It’s a measure of the extent to which a company’s products or services have a lower carbon footprint than the alternative. It’s not a very well-known concept now, but it is becoming adopted more widely. We are working with companies to encourage them to record and report it. We think it is the best measure of how a company’s products and services contribute to decarbonisation.
What are the environmental themes which contribute to decarbonization that you look for in your sustainable portfolio?
The key environmental themes which contribute to sustainable decarbonization that we look for in our portfolio are threefold:
- Renewable: Complete change in how we generate electricity, moving away from fossil fuels towards renewable energy, mainly wind and solar
- Electrification: Increased electrification, including our overhaul of ground transportation making the fleet more autonomous, efficient and ultimately moving away from internal combustion engines to self-driving electric vehicles powered by renewable energy
- Resource Efficiency: More efficient use of resources, including achieving higher standards of efficiency in many domestic and industrial processes and in buildings and appliances
These are not mutually exclusive in the sense there are some companies whose activities transcend more than one of these themes.
What impact is COVID-19 pandemic having on sustainable investing?
At first it seemed the pandemic might delay decarbonisation. Now, it appears we’ll see an acceleration.
There are three main drivers of decarbonisation: regulation, technology and consumer behaviour. In some places, there has been a big acceleration of the regulatory driver, especially in the European Union, which is focusing its recovery plan on the low-carbon transition. We’re seeing no let-up in the technology driver, for example in terms of the falling cost of renewable energy and in the number of sustainable product launches, including electric vehicles and energy-efficiency solutions.
As for consumer behaviour, the jury’s out as it’s probably too early to say. But there is encouraging evidence that people are thinking much more about their carbon footprints. All in all, we think that companies exposed to decarbonisation are very well positioned for above-market growth as we come out of this crisis.
How can investors reconcile investing sustainably with their fiduciary goals?
This is a really important question, because I believe it’s a misunderstanding that there need be a trade-off between them. We strongly believe you have a higher probability of outperforming if you understand a company in the context of all of its stakeholders – which is what a fundamental investment approach that incorporates sustainable investing helps you to do. Sustainability data provides additional insights into a company’s business model and culture, including whether it has a competitive market position, which in turn helps you build better forecasts for revenue growth and returns.
Simply put, to fulfil your fiduciary duty to provide long-term returns to investors, I think you absolutely have to understand a company’s sustainability performance.
How should investors approach investing sustainably in Chinese and other emerging market stocks?
It’s a good question, because sustainability data is generally less available in emerging markets. As an active manger, the way to overcome that is to visit companies. We spend a lot of time with management teams in both emerging and developed countries, to try and understand companies from both a financial and a sustainability perspective.
That’s worth doing, because a significant amount of the growth potential linked to decarbonisation resides in emerging markets, especially in China. The country supplies more of the world’s solar panels and lithium-ion batteries than anyone else, and it is a leader in several of the technologies that are key to decarbonisation. Consequently, Chinese companies proliferate throughout the supply chains of all the sectors that will enable a lower-carbon future, from renewable energy to electrification to energy efficiency.
Interestingly, the companies in our decarbonisation universe exposed to the domestic Chinese market have not benefited in the way that those exposed to the stimulus in Europe and elsewhere have. So we think there are currently some interesting value opportunities among Chinese companies within our sector.
How are investors allocating to Global Environment strategies within their broader portfolios?
From our observation, investors have various needs and motivations. One group is looking for exposure to an area of long-term structural growth in an otherwise cyclically toppy backdrop for equities, which we think decarbonisation provides. A second group is realising that the climate risk in their portfolios is much greater than they thought and impacting companies across sectors. So they want to allocate to businesses with the potential to outperform in a decarbonisation scenario that could be negative for many other parts of their portfolios.
In terms of blending Global Environment strategies into a broader portfolio, I think many investors find it helpful that the strategy is neutral from a style perspective – i.e., it doesn’t have a growth or quality bias. And because it’s very concentrated, there is little overlap with broad indices or other active strategies. The 25 stocks in our portfolio at present are very underrepresented in traditional active equity approaches, including Ninety One’s other equity strategies. As a result, investors have been able to benefit from an uncorrelated and diverse alpha stream leveraged to the long term structural growth trend of decarbonization together with measurable impact such as “carbon avoided”.