Investing in businesses that strive for a better climate through decarbonization doesn’t necessarily assume a lower bar for performance. Just the opposite. Besides contributing to a healthier environment, low-carbon equity investing can also offer attractive return potential.
Myriad forces are driving a shift toward low-carbon investing, with governments, corporations and investors all contributing. As a global community bands to combat the problem, more capital flows toward efforts to address climate change. All this creates opportunities for investors to play their part, while doing it well within scope of their long-term financial goals. Investors may no longer need to choose between a better environment or competitive returns, because it’s increasingly possible to have both.
Governments Set the Tone, Companies Step Up
Sharper demand for low-carbon investing is partially linked to intensifying government efforts toward climate improvement. Nations are especially fixed on decarbonizing their economies, and nearly 200 of them support the Paris Agreement, designed to help manage global warming by 2050. Specifically, the accord’s central aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius and limiting the temperature increase even further to 1.5 degrees Celsius.
While governments stress urgency, many companies are already way ahead at shrinking their carbon-emissions output. From finance and fossil fuels to transportation and technology, forward-looking businesses see higher value in a lower carbon footprint. And it’s starting to make a difference.
For example, Nestlé now sources core agricultural items like cocoa and sugar from regions less impacted by climate change. Likewise, Home Depot maintains a 24/7 command center to keep customers supplied during hurricanes and other extreme weather.
Low-carbon investing also works hand-in-glove with growth initiatives. For example, miner Rio Tinto is developing technology to produce carbon-neutral aluminum that meets the needs of important clients like Apple and Alcoa. Even some airlines are trailblazing, with Qantas Airways creating new and smarter travel routes and schedules that burn less fuel.
Whether among the highest emitters, like Royal Dutch Shell, or lower-emitting businesses such as Microsoft, low-carbon strategies are improving bottom lines and fundamentally changing how companies do business up and down their supply chains.
Strong Demand for Low Carbon Is Prevalent Among Large Investors
Portfolios that target low-carbon companies are gaining popularity as investors become increasingly climate aware. Demand is particularly strong among institutional asset owners, with many sharing best practices and comparing notes as the investment approach shifts from niche to mainstream. The Net-Zero Asset Owner Alliance, formed at the UN’s 2019 Climate Summit, will be a touchstone for standards and accountability for decades. Founding members Zurich, Allianz, CalPERS and SwissRe, with others, already account for the greatest share—some $2 trillion—of assets under management that target net-zero emissions by 2050 (Display left).
