Performance in a low carbon policy environment
We know that some industries are simply incompatible with a sustainable future. To help drive down consumer demand for unsustainable products and to steer the economy towards a low carbon system, we support effective carbon pricing mechanisms. We expect this to be the main instrument governments will use to act on the climate crisis and draw down carbon emissions to within safe levels. This is known as the 'inevitable policy response'.
We used the Paris Agreement Capital Transition Assessment (PACTA) tool to better understand the fund’s potential climate-related risks and outcomes. This is a free, first-of-its-kind software that analyses the alignment of equity, bond, and lending portfolios with various climate scenarios. Given the fund’s robust positive inclusion and strict negative exclusion criteria, the PACTA output indicated that the portfolio would have limited downside risk in a policy scenario where climate action is largely driven by carbon pricing. This is due to the fund’s zero exposure to the highest emitting industries (i.e., companies that will be hit the hardest by a carbon tax).
Alternatively, the fund has significant exposure to companies that solve sustainability challenges and that are fit to operate in a low carbon economy. In a climate action scenario led by carbon pricing, the portfolio’s underlying companies may experience an increased demand for their products and services, which will, ultimately, lead to outperformance opportunities for the fund.
Science Based Targets Initiative (SBTi)
The SBTi provides companies with a clearly defined pathway to future-proof growth by specifying how much and how quickly they need to reduce their greenhouse gas emissions. The 2015 Paris Agreement saw 195 of the world’s governments commit to prevent dangerous climate change by limiting global warming to well below 2°C. This signaled an acceleration in the transition to a low carbon economy.
Targets adopted by companies to reduce greenhouse gas (GHG) emissions are considered science-based if they are in line with what the latest climate science says is necessary to meet the goals of the Paris Climate Agreement – to limit global warming to well-below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C. The data below indicates the transition preparedness of our portfolio companies versus the benchmark.
Alignment with the Science Based Targets Initiative