Liontrust
Investing in a low carbon future
Mike Appleby, Investment Manager at Liontrust
The science is telling us that we need to accelerate the pace of decarbonisation. Current progress and ambition both fall considerably short of meeting internationally agreed goals to limit average global temperature rises to less than two degrees centigrade – and ideally to 1.5C in line with the Paris Accord.
But significant sums of money are being allocated towards carbon reduction schemes, by both governments and financial institutions. Through the effective deployment of capital in companies and technologies that make our world cleaner, healthier and safer, we remain optimistic that much can be done to mitigate and adapt to the climate crisis facing society. And COP 28 (Conference of the Parties to the UN Framework Convention on Climate Change) begins at the end of November.
Last year, the US made headlines with the introduction of the US Inflation Reduction Act, which earmarked $370 billion to fight climate change by reducing carbon emissions. The EU ‘Fit for 55’ target of reducing net greenhouse gas emissions by at least 55% by 2030 will double the share of renewables. Even China has stated its target of being carbon neutral before 2060 and to phase down coal post-2025.
Although the US is noted in certain areas for general scepticism around ESG investing – with the debate becoming undoubtedly politicised in some areas – when there is an economic rationale, such as saving money following the rising costs of energy, the US can and often does move big and fast.
As an example, Texas generates more renewable energy than any other US state – despite opposition in many parts of Texas to climate change initiatives. In 2022 alone, Texas generated 136,118 gigawatt-hours of energy from wind and utility-scale solar. A staggering 40% of its energy came from carbon-free sources – 22% from renewables (predominantly wind) and 18% from nuclear (source: US Energy Information Administration).
Also, new regulations governing the disclosure of climate-related risks and opportunities, and sustainability-related information, are expected to be adopted this year by the US Securities and Exchange Commission (SEC). These should ensure that investors have far more data and information about companies’ ESG standards and performance than is currently the case.
Looking at the private sector, large amounts of capital are being committed to financing the renewable energy growth. In 2022, there was extremely strong progress in this area, with key banks committing £3 trillion of finance to clean energy projects.
To put this into perspective, if 1MW of renewables is roughly £1 million, then this amount could fund 3000GW, which is equivalent to the entire capacity of US electric generation.
This gives an idea of the quantum of capital that is being targeted towards renewables, and the critical importance of banks being prepared to finance these projects.
Focusing on renewables
When we as societies look to resolve the energy trilemma of being affordable, secure and clean, there is little that can compete with renewables. The cost of generating electricity from solar and onshore/offshore wind has continued to fall over the past 10 years. In addition, the competitive position of renewables versus fossil fuels has improved dramatically following volatile price spikes in fossil fuels.
The displacement of carbon-intensive electricity generated from burning fossil fuels by ultra-low carbon renewables is a vital ingredient, but it is by no means the whole picture. We believe there will be profound impacts across the whole economy and look for companies whose products and services can accelerate decarbonisation.
The areas we have identified as playing an important role are:
Infrastructure needed to decarbonise – this includes upgrading our antiquated electricity grid systems, as well as providing infrastructure needed in many areas of the economy that will be decarbonised by using electricity.
Energy efficiency is a great way to reduce the amount of energy wasted and has the benefit of cutting users’ energy bills and emissions. This is applicable to the whole economy and includes buildings, transport, industry as well as fast growing areas such as computing power used in digitisation.
Business strategy to ensure businesses are set up to thrive in the ultra-low carbon economy. We discuss this and challenge businesses we are invested in to innovate and use this as a differentiator to gain a competitive advantage over their less proactive peers.
Investing in companies that help to reduce emissions will, we believe, also benefit investors as these are the businesses likely to see significant growth. The drivers of the energy transition continue to strengthen and support long-term economic growth.
Key risks
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term. Investment in funds managed by the Sustainable Future team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates.
Disclaimer
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. This should not be construed as advice for investment. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) that have not been verified.
