We believe that companies in these spaces that can effectively and credibly commit to and implement a decarbonization strategy represent attractive business investment opportunities.
Investors should be on the lookout for companies that have the will and ability to truly decarbonize, and those that don’t. This requires focusing on the next generation of climate analytics. For example, while carbon footprinting relates to a given company’s historical emissions, a more forward-looking measure can determine which ones are on track.
To do this, we analyze scope 1 emissions (emissions directly under the control of a company), scope 2 emissions (from the production of electricity, heat, steam and cold that a company buys ) and scope 3 emissions (emissions related to the broader value chain, including the upstream supply chains and the downstream life cycle of its products and services, use, distribution and end processes of life).
We then assess the credibility of the decarbonization targets that companies set for themselves against the rate of emissions reduction needed for their respective industries to reach net zero. By plotting their decarbonization trajectories against what is essentially a sector-specific net-zero emissions benchmark, we develop a forward-looking perspective of their future emissions trajectories.
However, a truly comprehensive view of a portfolio’s emissions requires investors to go further in their analysis. Consider the following scenarios:
A premium sports car has higher exhaust emissions than a conventional sedan. Consequently, the former seem at first sight to be more emitters than the latter and more likely to be subject to potentially punitive regulations. But there are other considerations to take into account. It can be argued that a sports car is likely to be used less than a family vehicle and has a longer lifespan, which could skew the interpretation of cumulative emissions over a longer time horizon. .
Another potential blind spot in emissions data is deforestation. The loss of forests contributes up to 10% of CO2 emissions caused by human activity, and is therefore an important consideration when assessing the impact of chocolate manufacturers, for example, given that the cocoa is one of the main commodities linked to this activity.
The financial sector is often considered a low-carbon sector. However, once funded shows are factored in, it can paint a very different picture.
An analysis of Lombard Odier Investment Managers’ commercial loan portfolios found instances of financial firms holding fossil fuel exploration companies on their balance sheets, for example, which would suggest this assumption should be reassessed.
Identify transition leaders
The transition to a net zero economy will require unprecedented public and private investment. The forces driving the transition are unstoppable and encompass policymakers, investors, market forces and consumers. At Lombard Odier, we expect some sectors to decarbonize at a slightly slower or delayed pace, but these “hard to reduce” sectors represent important pillars of our global economy and are key to reaching net zero.
Michael Urban is Deputy Head of Sustainability Research at Lombard Odier, a Swiss-based global investment firm