white papers
Investing in the leaders of the climate transition
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Transitioning companies present opportunities
Investors need to be enabled to recognise which companies are best positioned for the regulatory, technological and market changes ahead, to effectively capture investment opportunities and reduce risks. Transitioning companies in hard-to-abate sectors represent emerging opportunities.
The Climate Transition strategy focuses on three sets of opportunities when selecting companies using thematic, activity-driven filtering with a high purity threshold. Among these are transitioning companies in hard-to-abate sectors - such as steel, cement, transport, chemicals, power generation, and real estate - that are required for future economic growth but urgently need to decarbonise.
The strategy differentiates itself by investing in carbon-intensive companies that have understood the need to transition and the market advantages in doing so, and where their progress, as monitored by our implied temperature rise (ITR) metrics, is aligned with a Paris trajectory. Over the past year, our active stewardship across the market has targeted many such candidates. With climate-related solutions moving higher up regulatory and investment agendas, taking responsibility for corporate decarbonisation goals is key, both to mitigate reputational, financial and transition risks and to identify investment opportunities. With our own active stewardship, the strategy captures such emerging opportunities and supports their development.
Transition opportunities
‘Ice cubes’ are companies that exist in high-carbon industries but that are fast decarbonising and aligning with the Paris agreement. We define these transition opportunities as ice cubes because their progress on reducing emissions is helping to cool the economy.
Fig 1: Ice cubes, burning logs, low-and-lower carbon, and low-carbon laggards
Source: LOIM. For illustrative purposes only
Burning logs, by contrast, are high-emitting companies that are not currently on a credible path to decarbonisation, meaning that they are potentially contributing significantly to global warming. We do not exclude companies classified as burning logs, and instead assess whether their activities and services are supporting other companies and segment in their decarbonisation efforts. Our analysis may also determine companies that appear to fit this classification are actually performing better than the metrics imply.
Our methodology also recognises low-and-lower carbon companies, which are generally in industries that are already low-emitting and are reducing emissions further, as well as low carbon laggards, which are generally in low-emitting industries but face increasing emissions.
Companies that have established themselves ‘transition leaders’ comprise around 35% of the Climate Transition Strategy. Notable examples of ‘ice cubes’ in the portfolio include:
Cummins designs, manufactures, and distributes engines, filtration, and power generation products. Overall, scope 3 downstream emissions, specifically the use of Cummins’s products, is what drives the temperature alignment of this company. However, thanks to Cummins’s good disclosure of data to CDP, we can identify that on average its scope 3 downstream emissions have been reduced at a steady rate in recent years. Cummins has set a goal to reduce scope 3 absolute lifetime GHG emissions from newly sold products by 25% by 2030.1
Further to this, Cummins has also quantified a science-based target (SBTi) to reduce emissions from scope 1, scope 2, and scope 3 downstream use of sold products. From both the company’s recent decarbonisation performance and forward-looking ambition, Cummins’s net-zero strategy reflects good alignment to the Paris Agreement. 1
Norsk Hydro is one of the world’s largest aluminium manufacturers. Our analysis reveals that the company’s emissions intensity (tCO2e/USD revenue) is around 30% lower than its peers. 1
They’ve also announced a net zero by 2050 target for direct (scope 1 and scope 2) emissions. Although this target is not SBTi, it is encouraging to see that Norsk Hydro also indicated intermediary decarbonisation targets for 2025 and 2030. This shows that the company’s cumulative emissions up to 2050 will be well managed and that the pathway to net zero is clear and quantified. 1
Metso Oyj produces technology for mining, oil and gas, recycling, and pulp and paper companies, amongst others. Like Cummins, this company’s main source of emissions is from the downstream use of products. Metso has announced an ambitious target specific to this category. They plan to reduce 20% of emissions from the use of sold products (and transportation) by 2025 from a 2019 base year.1
The credibility of this target is high, as it has been verified and approved as a scientifically viable target by SBTi. This strengthens our conviction that Metso’s pace of transition is well in line with net zero.1
Stepping beyond carbon footprints
Investing in the climate transition requires stepping beyond carbon-footprint analyses and gaining a clear sight of companies’ decarbonisation trajectories. By doing so, investors can judge whether businesses are transition opportunities to be captured or risks to be avoided.
With this forward-looking view, we believe that some of the best net-zero opportunities exist among companies whose current emissions would exclude them from low-carbon strategies but, due to their action on achieving carbon-reduction targets, indicate that they are on viable decarbonisation pathways. Their potential to thrive in a world aligning to – and achieving – net zero could be underpriced by the market.
Sources
[1] Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document
important information.
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