Decarbonization is the reduction in the carbon intensity of worldwide energy use. In line with this development, investment portfolios can also be decarbonized.
The 21st United Nations Conference of the Parties (COP21), held in Paris in December 2015, came up with concrete targets to limit further global warming. Reducing global warming means cutting the world’s reliance on fossil fuels. This will require some large companies such as the oil majors and utilities to fundamentally change their business models. However, moving towards a global energy system based on renewable sources creates another problem: stranded assets. These are the vast reserves of coal and oil that probably cannot be used if the world is to limit global warming to 2°C or lower.
In line with this decarbonization trend, investors are also adjusting their portfolios. The simplest way to do this would appear to be by divesting fossil fuel companies from portfolios. However, as there is a buyer on the other side of every sell transaction, this would simply mean displacing the problem. An effective alternative is to engage with carbon-intensive companies to try to cut emissions at source. Another way to reduce the carbon footprint of the portfolios is by impact investing. This can be achieved by, for example, underweighting the industry groups that account for over 80% of the global environmental footprint, i.e. energy, materials, utilities and transportation.
The Carbon Disclosure Project (CDP) encourages companies to disclose their greenhouse emissions and climate change strategies in order to set reduction targets and improve their environmental impact.
Climate investing: from urgency to solutions
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