Under most current scientific projections around climate change, it is anticipated that global carbon emissions will peak around 2030, at a level that is around 16% higher than it is today, as the growth of emerging markets outstrips the reductions in emissions made by developed markets. This path is at odds with what most scientists agree is needed if we are to limit the worst effects of rising global temperatures.
On a historical and cumulative basis, we are well aware that the modernisation of the western world has caused the majority of emissions, but from a forward-looking perspective, the population and wealth growth in emerging markets is where much of the future concern lies.
As wealth increases, people buy increasing amounts of energy-hungry items – from fridges to cars. While some of the energy required to support those goods will come increasingly from renewables, we expect that the bulk will continue to be derived from fossil fuels, at least over the next 10-20 years.
The International Energy Agency (IEA) recently released a ‘net zero scenario’ which sets out some of the necessary (and quite radical) milestones it believes will be integral to achieving net zero in the most cost-effective way. Several key points stand out:
- No new oil and gas fields or coal mines to be approved
- Electric vehicles (EVs) to make up 60% of the global market by 2030
- Net-zero electricity to be achieved globally by 2040
The present-day reality is somewhat different: EVs currently represent around 9% of new car sales and clean energy supplies around 35% of the grid globally, but these areas are at least seeing meaningful progress; we know that in areas such as cement, shipping, long-distance aviation and trucking, many of the technologies required to produce effective, affordable and scalable solutions don’t yet exist.
The transition to a low-carbon energy scenario also requires significant investment. The world currently spends around $2 trillion per year on its energy system, and economists estimate that it will require an annual $4 trillion to achieve net zero, significantly more than current levels of investment.
At Newton, we are trying to play our part. We have joined the Net Zero Asset Managers initiative, and have aligned ourselves with an independent methodology produced by the Science Based Targets initiative (SBTi). Through the latter, we are committing to having 50% of the financed emissions of the companies we invest in on behalf of our clients tied to credible net-zero plans by 2030, with the aim of reaching 100% by 2040.
We will seek to meet these headline targets via a range of transparent measures around investments in climate ‘solution providers’, engagement with fossil-fuel companies to support their energy transition, and active stewardship activities.
While the 2030 and 2040 milestone targets might still seem some way off, we are making investment decisions today that we believe will aid our progress along the way. First, we are stepping away from areas we deem to be unacceptably risky, such as new coal mines, new coal-fired power stations, and speculative or high-cost oil projects. These are also areas carrying the highest regulatory risk, as well as being at greater near to mid-term risk of substitution by cleaner energy sources.
We are also focusing on selective, well-managed opportunities around energy-transition metals like copper, EV infrastructure and supply chains, and clean energy.
Just because something is ‘green’ does not necessarily make it a good investment, but we expect to see a growing number of investment opportunities in the energy-transition area over the coming months and years. If a company is well managed, executes well and operates in a stable regulatory environment, we think it is more likely to offer greater green-growth opportunities in the future.
As climate change continues to move up the investment agenda, defined contribution schemes will need to demonstrate what actions they are taking to tackle carbon emissions and consider whether they have appropriate exposure to investment strategies that both align with their net-zero approach and seek to capture the associated opportunity set.
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Compared to more established economies, the value of investments in emerging markets may be subject to greater volatility, owing to differences in generally accepted accounting principles or from economic, political instability or less developed market practices. Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
Issued by Newton Investment Management Limited. ‘Newton’ and/or ‘Newton Investment Management’ is a corporate brand which refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIMNA was established in 2021 and is comprised of the equity and multi-asset teams from an affiliate, Mellon Investments Corporation. In the United Kingdom, NIM is authorised and regulated by the Financial Conduct Authority (‘FCA’), 12 Endeavour Square, London, E20 1JN, in the conduct of investment business. Registered in England no. 01371973. NIM and NIMNA are both registered as investment advisors with the Securities & Exchange Commission (‘SEC’) to offer investment advisory services in the United States. NIM’s investment business in the United States is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. Both firms are indirect subsidiaries of The Bank of New York Mellon Corporation (‘BNY Mellon’).