How 7IM views climate change and the impact on investing
At 7IM we view climate change as the key risk to human society and hence to all investors in the long run.
It’s increasingly being recognised as a global threat and is a fundamental issue that’s facing asset managers everywhere.
Scientists agree that the Earth is warming all too fast. And modern civilisation has done it, largely by emitting 1500 billion tons of carbon dioxide into the atmosphere since 1850. Carbon dioxide and other greenhouse gases trap heat in the atmosphere like the glass roof of a greenhouse. The more we burn fossil fuels in power stations, cars and factories, the more carbon spews into the air and the hotter our world becomes. This is a particular concern for tropical countries like India and Indonesia, which will become intolerably hot for parts of the year if current global warming trends continue.
The Paris Agreement of 2015 was designed to govern the world’s greenhouse gas emissions from 2020 on, with a view to lowering future warming to well below 2ºC, and preferably to below 1.5ºC. To achieve the Paris goals, humanity will have to slash its emissions, requiring many trillions of dollars of investments in clean energy, power grids, electric cars and buses, the electrification of industry, more efficient buildings, and so on.
Investors will have to play their part in the transition to a low-carbon economy. As noted by Nikhil Rathi, CEO of the Financial Conduct Authority, in November 2020, “We want green and sustainable finance to be at the heart of the continued growth of London as a global financial centre.”
The Covid-19 pandemic has reminded investors and ordinary people that human life is short and frail, and that we need to think about the planet we will be leaving to our grandchildren. This has already led to a surge in ESG investing, which we expect to continue for many years. Likewise, Covid-19 was a reminder that global action may be required to deal with global problems. Governments and regulatory authorities look set to take action on the global climate even more seriously than before.
Climate change will entail risks and opportunities for investors. Many of the physical risks are obvious, like extreme weather, rising ocean levels and political disruption. Measures to deal with climate change will raise carbon prices and may lead to the gradual demise of emission-intensive firms and activities. Some energy companies, for example, will be left with near-worthless stranded assets if the world takes the Paris carbon emissions goals seriously. Dirty industries, companies and markets are likely to be poor investments.
On the positive side, buying decarbonising firms and underweighting dirty activities may be a winning long-term strategy, and is closely linked to 7IM’s environmental commitments. Through 2020 we began a research programme aimed at decarbonising the 7IM Strategic Asset Allocations and reducing the emission-intensity of all portfolios, as described later.
We are also exploring overweighting global warming solutions in portfolios, including areas like clean energy (solar, wind), electrification (led by transport) and ways of using resources more efficiently (heating/cooling, recycling). This project is likely to be finished in 2021.