Climate change - Identifying opportunity

IncomeClimateChangeAbstract

The effects of increased temperatures are already manifesting themselves in a web of interconnected risks that are impacting individuals, governments and businesses alike

A multi-decade trajectory

Whether we like it or not, every investment decision we now make needs to account for the effects of climate-related change. For long-term investors such as ourselves, modelling climate-related impact becomes even more relevant considering the multi-decade trajectory of global warming.

Widespread scientific consensus acknowledges that within the next 30 years global temperatures will be higher than human beings have ever experienced. Meanwhile, CO2 concentrations are at levels last seen over three million years ago and it is currently possible that by the end of the century the world will be 4°C warmer than pre-industrial levels.

The effects of increased temperatures are already manifesting themselves in a web of interconnected risks that are impacting individuals, governments and businesses alike, from extreme weather, natural catastrophes and water crises to increased macroeconomic and geopolitical risks from involuntary migration and climate-related conflict. These risks will undoubtedly increase in magnitude over the coming decades.

Risk and opportunity

From an investment perspective we need to understand the most material systemic and idiosyncratic risks which are likely to affect a company’s operating model, as well as the climate-related strategies they have in place to ensure the sustainability of their business, now and long into the future.

However, we also see the necessary change towards a lower-carbon environment as enabling opportunity for many businesses. The response to climate change, either through the need to mitigate the emissions of greenhouse gases (GHG) or simply the adaptation to the increasing consequences of a warmer planet are providing innovate companies the scope for future development. From an investment perspective we view this as an area of significant structural growth.

Cleaner cows

For instance, take the research work DSM (held within our portfolio) are carrying out on animal feeds. Livestock accounts for between 14.5% and 18% of human-induced greenhouse gas emissions. Staggeringly, if cattle were a country, they would rank third behind China and the United States as the world’s largest greenhouse gas emitters1.

In response to this problem, the Dutch nutritional company has developed a feed additive which aims to reduce methane created through the digestive process of cattle. The product, called ‘Clean Cow’ is currently in registration phase and testing in New Zealand, and could create a market worth €1–3 billion2. The potential for uptake here is significant. Not only are more subsidies becoming available for farmers to reduce their GHG emissions, DSM also believes its methane-blocking product should boost efficiency and reduce costs, as less energy is used during the digestion process requiring less outlay on feed.

Positioning for lower-carbon use

Elsewhere, companies that can manage the transition risk of their operations towards lower-carbon use better than their competitors are likely to maintain a much stronger competitive position long into the future. In an emissions-intensive industry, aeronautics firm Airbus (also held in the portfolio) has made significant commitments in this area. It launched its Sustainable Aviation Engagement Programme in 2015 to optimise the environmental performance of its aircraft – by among other things, reducing fuel burn and utilising sustainable energy sources. The company has also invested heavily in research efforts to develop electric and hybrid-electric propulsion technologies. What we believe this means, is that the company is well placed to deal with increased climate-related regulation at an industry and national level, as well as offering a more palatable brand image to an increasingly environmentally conscious customer base.

In a similar vein, global logistics firm Deutsche Post (not held within the portfolio) has stated that it is targeting zero logistics-related emissions by 2050. While we believe this will be a necessary requirement against a backdrop of growing legal and regulatory pressure, the opportunity here involves the quantum and speed of change.

IncomeClimateChangeAbstract2

If Deutsche Post can use its current market position to establish a greener proposition along the value chain it will be able to meet a growing demand from customers needing to manage their own sustainability targets. We see globalisation continuing despite recent protectionism and therefore a strong growth path for the industry. So, for the company that can best manage the transition to sustainable logistics, the rewards are potentially significant.



1Source: World Resources Institute This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of the license, visit http://creativecommons.org/licenses/by/4.0/
2Source: FactSet and Martin Currie, from company meeting.


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