Is your decarbonisation strategy future-proof?

investment viewpoints

Is your decarbonisation strategy future-proof?

Maxime Perrin - Head of Sustainable Investment

Maxime Perrin

Head of Sustainable Investment

As the race to net-zero carbon emissions accelerates, is your decarbonisation strategy future-proof?

Reaching net zero is one of the greatest economic challenges of all time. To limit global warming to 1.5°C, net emissions must fall 50% by 2030 and be eliminated by 2050. Disrupting entire industries and impacting all sectors of the global economy, these targets pose a crucial investment question: can a company be profitable as the economy decarbonises, and reaches, net zero?

Investors need to act urgently.

 

How existing solutions fall short

For us, net zero means investing in the transition, not merely today’s low-carbon companies. Our approach goes beyond methods such as simple exclusions, carbon offsets or tracking a climate benchmark. These other approaches focus on current carbon footprints and lack a forward-looking analysis of decarbonisation pathways. They miss fast-transitioning companies in vital economic sectors with credible plans to decarbonise. Excluding such companies can increase concentration risk and miss transition opportunities.

Decarbonising necessarily involves capturing an accurate picture of all emissions. Other approaches give investors poor emissions visibility because they focus only on a company’s direct (Scope 1) emissions, which creates a fundamentally incorrect carbon footprint. By analysing Scope 1, 2 and 3 emissions1, we aim to assess more accurately a company’s carbon footprint at all levels, leading to a stronger, forward-looking assessment of climate impact.

 

Prioritising carbon reduction in the real economy

We are rethinking net zero because only economy-wide decarbonisation can achieve an emissions-free future. Our approach is different because it invests in the transition across all sectors, and prioritises carbon reductions in the real economy. This enables investors to:

  • invest in companies that are cutting their carbon footprint

  • accelerate the climate transition

  • maintain portfolio diversification, and

  • target climate growth opportunities

 

Climate Value Impact for champions and casualties

We have developed a proprietary approach that analyses the financial impact of climate change and the transition to net zero. Called Climate Value Impact (CVI), it captures both the preparedness of companies for the climate transition ahead, as well as the financial impact on risk and return. Taking into account transition risks, adaptation risks and the evolution of emissions, we use CVI to identify if a company is a transition champion or a casualty.

 

Figure 1. Climate Value Impact to analyse the financial impact of the transition

Target-NetZero-future-proof_EN.png

Source: LOIM analysis. For illustrative purposes only.

 

LOIM’s approach to carbon assessment and net zero has been developed in partnership with Oxford University and SystemIQ. The Portfolio Alignment Team of the TCFD cited LOIM’s process as one of seven leading methodologies, and one of only two developed by asset managers.

 

Future-proof strategies designed to step up decarbonisation

Driven by investment and sustainability expertise, our range of TargetNetZero solutions aims to decarbonise, diversify and drive the transition. In both fixed income and equities, we adopt an economy-wide approach that:

  • maintains diversification

  • reduces sector biases, and

  • avoids excessive risk2

Our team of 20 sustainability experts works closely with experienced portfolio managers to apply science-based, academically verified and globally recognised carbon analysis to identify companies most able to contribute to a zero-carbon portfolio in the long term. The portfolio emissions of our strategies are at least 30% below their benchmarks’ carbon footprint at inception. They target a 50% reduction by 2030 and net zero emissions by 2050.

Aligned with both climate goals and investor interests, our strategies aim to equip portfolios for a net-zero future.

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sources

The Greenhouse Gas Protocol defines Scope 1 emissions as direct emissions from company facilities and vehicles; Scope 2 emissions as indirect emissions related to purchased electricity, steam, heating and cooling used in company activities; and Scope 3 emissions as indirect emissions resulting from a company’s supply chain.
Target performance/risk represents a portfolio construction goal. It does not represent past performance/risk and may not be representative of actual future performance/risk.

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