Climate investing

Challenge

Tackling climate change is not easy. It means upending the status quo, inventing new technologies, and reducing the emissions causing global warming. In short, it means working together, for the same vital cause of trying to reach net zero carbon by 2050. If we fail, then so does the planet.

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41%

of investors think Paris target of limiting warming to 2 degrees by 2100 is no longer achievable, up from 30% in 2023. Only 30% think it’s still achievable.

49%

of investors think that collectively, not enough is being done to meet the Paris goals, while 29% expect a disorderly transition. Only 15% expect an orderly move to net zero.

14%

of investors expect to divest from oil and gas companies in the next two years, down from 23% in 2023, while 15% expect to continue to invest if they provide good returns.

Investors face challenges when seeking to decarbonize portfolios

Investors face challenges when seeking to decarbonize portfolios

Decarbonization

There was however more encouraging news in the 2024 climate survey. Challenges around getting enough reliable data have diminished since 2023, along with challenges over accessing expertise and finding suitable products and strategies.

The number of investors citing a lack of data, reporting and ratings as the main obstacle to implementing decarbonization in investment portfolios has dropped to 42% globally in 2024, down from 52% in 2023 and 61% in 2022.

Concern about greenwashing has, though, remained fairly constant at around one in three of global investors, while a significantly lower 39% complained of a lack of clear reporting standards and disclosures, compared with 46% in 2023.

Climate investing is more than just the next big thing

Lucian Peppelenbos (Climate Strategist) and Carola van Lamoen (Head of Sustainable Investing) look at climate change and climate investing from all angles. Listen to the trailer or to the full 25-minute podcast.

The data dilemma in tackling climate change

Curbing global warming means cutting emissions – but getting the right data is not so simple.

Our research teams have produced several white papers explaining the problem of getting hold of data, particularly that which is forward looking.

One of the biggest issues is in finding data for Scope 3 emissions. Scope 1 emissions are generated by the company, and scope 2 accrue from the energy needed to make the product or provide the service. Both are fairly easy to measure. Scope 3 emissions come from the entire value chain of a product and can be generated years into the future.

For example, manufacturing a petrol-driven vehicle means Scope 1 emissions are generated by the car factory and Scope 2 from the power needed. Scope 3 emissions are generated while driving the car, and could be variable or unknowable for decades. This data dilemma is discussed more fully here.

The data dilemma in tackling climate change

The caveats, considerations and challenges of decarbonizing investment portfolios

Climate change is the problem, net zero is the goal, and decarbonization is the means. But are there obstacles blocking the road ahead? Masja Zandbergen, Robeco’s Head of Sustainability Integration, explains the caveats and challenges that may trip up investors in their quest to decarbonize portfolios and contribute to the net zero transition.

What exactly does it mean to decarbonize a portfolio?

“Put simply, it is reducing the carbon intensity of the portfolio by including companies with low emissions or which have made credible commitments to reduce their emissions. Similar to a portfolio’s financial performance, progress in this area requires continuous measurement against a reference point. Otherwise, the informational value of reported emissions is low. That reference could be the overall market, such as the emissions performance of a global index, or an internal standard such as a point in time from which a portfolio’s year-on-year progress is measured. The emissions amount is irrelevant; what matters is that you start to measure.”

Wouldn’t it be easier to simply divest from heavy emitters?

“It would be if company-reported data were complete, but the bulk of emissions generated is excluded from this, so true emissions performance is underestimated. Currently, companies report and investors measure emissions from production processes (Scope 1) and the electricity used to power those processes (Scope 2). But they don’t report emissions generated further along in the supply chain by a product’s consumers. Oil and gas producers have a high carbon footprint in the production phase, but that’s still only 20% of total emissions. The other 80% is generated when the oil is burned by customers (Scope 3).”

“Oil and gas companies aren’t alone; economy-wide scope 3 emissions are underestimated. Many food companies, for example, have comparatively low operational footprints upstream, yet hefty unaccounted emissions from things such as deforestation and fertilizers in other parts of their supply chains. Comprehensive supply chain data is not yet calculated, publicly disclosed or considered by most investors.”

How is this affecting efforts to decarbonize investor portfolios?

“It can lead to the emissions of some companies and sectors being underestimated or overestimated. Many ‘green and clean’ solution providers have paradoxically high carbon emissions if you only take backward-looking emissions into account. For example, wind turbine operators, electric vehicle makers and hydrogen producers, are all clean technologies but their carbon-reducing benefits lie in the consumer use phase further down the supply chain.

Given they may need steel for parts or use electricity from a carbon-intensive regional power grid, their Scope 1 and 2 emissions may still be high. That means their decarbonization potential is not being fully realized in portfolios. Predictive power is needed to combat this effect.”

What is Robeco doing to address this dilemma?

“Our most advanced decarbonization strategies take Scope 3 emissions into account. For other strategies, we use proprietary estimation techniques and third-party modelling to derive best case estimates of future emissions. This involves mapping out net zero transition pathways for sectors based on available or near-term technologies. Besides Scope 3 emissions, we incorporate other types of forward-looking data to help predict companies’ climate preparedness and future climate-adjusted performance. Which companies have strategic plans that incentivize a shift to low-carbon technologies and business models?

How are they expected to benefit and profit from the net zero transition? Which are financially strong enough to make the capital investments needed to transition?”

“The ultimate goal is to ensure client portfolios are climate proof by reducing their exposure to carbon risk and ensuring they are climate-ready. This is a much more complex responsibility, involving many more considerations than how a portfolio measures up against a benchmark in terms of emission reductions.”

How is decarbonizing a portfolio different from ESG integration?

“ESG integration brings more information across a wide range of risk factors; social, economic, governance and environmental. This can be combined with financial analysis to more accurately assess future risks, evaluate financial performance and make better-informed investment decisions.”

“Decarbonization, on the other hand, is often done to reduce climate risks as well as to combat climate change. An investor’s decision to decarbonize their portfolio is not always based on purely financial objectives. Often, it is motivated by a desire to invest in companies that are making positive impact by not contributing to climate change and environmental damage.”

How does decarbonizing a portfolio fit into the bigger context of decarbonizing economies?

“The economy grows where capital flows, so channeling capital towards companies with strong carbon reduction momentum and away from laggers accelerates the transition to a carbon-free global economy. That said, selling the securities of a high carbon emitting company has no immediate effect on the real economy. Real world impact requires large pools of investors to ‘vote with their feet’ by refusing to own securities of heavy polluters. This will ultimately raise their financing costs and expedite change.”

“However, there are caveats to this approach. For one, denying financing will hurt many companies that want to transition but need capital to do it. In addition, some heavy polluters are so cash-flow rich, they don’t need new capital. In the latter case, financing boycotts may have little effect. But even cash-rich companies care about their reputations, so if investors position their portfolios away from these companies, it sends an amplified, high-alert message to company management.”

How does decarbonizing a portfolio fit into the bigger context of decarbonizing economies?

“Investors must also use active engagement and voting as a tool to exert their influence over company management. Given that carbon emissions are spread across entire economies and require major structural changes, engagement needs to take place not just with the company but also at the country level.

Robeco has recently started engaging with country leaders to help them understand the aggregate effects of conflicting carbon policies at the national level. It is counterproductive to force some industries to decarbonize while allowing others to cut down forests or to offer protective subsidies to heavy carbon polluters. Country leaders must also understand that national decarbonization policies will impact their ability to attract global businesses, foreign investments and financing via sovereign bonds.”