Climate change : a challenge for equities ?

Nearly 80 % of greenhouse gas emissions are concentrated in 3 main sectors, accounting for around 20% of the market capitalization of major equity indices. Managing the exposure to this risk by divesting from these 3 sectors of the investment universe would be unsatisfactory for a responsible investor in search of a more active approach and favoring dialogue with companies. It would also deny the fact that these 3 sectors and their associated products are likely to be part of our economy for many years. Lastly, it would ignore the complexity of the financial risks related to past, present and future emissions (i.e. litigation, regulation, license to operate, and obsolescence of certain business models).

If COP21 held in Paris late 2015 seems to have echoed in the reflections of the financial industry, measuring and reducing the carbon footprint now appears to be the predominant approach implemented by investors. Although this approach is a first step in understanding the issues and risks inherent to the transition to a low carbon economy, it reflects business performance to a (past) point in time on a scope for now often limited to direct emissions (scope 1) and indirect emissions from the purchased energy (scope 2), because of a lack of reliable data covering the entire value chain (including scope3).

Nevertheless, this approach does not cover certain critical aspects of the transition to a low carbon economy. In particular, the best-positioned companies to reduce human impacts on the ozone layer or to offer solutions to contain global warming within the 2°C limit are thus missed. These companies are yet the most resilient to the above-mentioned risks and therefore should be part of the future economy.

What solutions to implement?

Based on this observation and convinced that it is possible to better integrate the concept of impact investing, AllianzGI has worked together with French supplementary public sector pension scheme actively involved in SRI, Ircantec, to find an appropriate investment solution The objective was to develop an equity investment solution that accompanies the environmental and energy transition to a low carbon economy.

Thus, AllianzGI, a long-time leader in the SRI market, has designed a "climate transition" approach that is both dynamic and scalable. The objective of this approach is twofold: first, mitigating the risk exposure induced by climate change and second, taking advantage of the various opportunities related to the climate transition.

More specifically, no sector has been excluded because we think the most carbon-intensive sectors should be incentivized to improve and adopt best practices. That being said, certain practices deemed too risky or in direct contradiction with the climate transition path, are excluded from our ‘investment universe’. This is for example the case of companies deriving more than 30% of their energy production from coal – a principle which is fully in line with the commitment of our parent company, Allianz SE.

The opportunities offered by the transition to a low carbon economy?

The climate transition will generate multiple investment opportunities and these represent the most important part of our strategy. According to the International Energy Agency, between 700 and 1 000 billion (euros?) of investments will be required in the energy and clean technology sectors each year until 2050 in order to achieve the 2 °C goal. Reaching this objective will be challenging for sure but it will also create plenty of opportunities for investors who wish to accompany the companies on the path to a low carbon economy.

An active stock selection is therefore at the heart of our investment process. Beyond the fundamental and financial assessment of a company, AllianzGI takes 3 specific dimensions into account in order to identify the most promising and the most resilient companies in the transition to a low carbon economy.

1. The climate performance of a company in order to identify the best-positioned firms within the constraints and challenges of their respective industry. To do so, our assessment is based on sector-specific indicators; we use for example the carbon emissions by GWH generated for utility companies, therby favoring cleaner energy mix, here called «best performers».

2. The change in this climate performance overtime in order to favor the so-called “best efforts” companies which show a significant improvement in their emission profile. In fact, we are convinced that the companies that will be first in line with the 2°C scenario will also be the most resilient from a financial perspective.

3. The last dimension called « best solutions » in our investment process consists in looking for the companies that will offer the best products or services to their customers for them to reduce their GHG emissions.

This approach is now being implemented in an "pilot" equity portfolio dedicated to Ircantec. It is also available in an open-ended vehicle: Allianz Europe Equity Climate Transition, the latest in our range of European Equity Conviction SRI funds.

As an active investor, offering high-conviction and long-term oriented investments, we believe that an integrated approach around the multiple climate change issues can be a real source of value for investors. Just as SRI 15 years ago , this discipline is relatively new and will surely be refined in the coming years to better integrate the ongoing transformation of the economic environment.

The funding needs required to contain global warming are such that all asset classes may offer pragmatic solutions. Thus, AllianzGI’s Euro Credit team has recently launched a new fund investing in so-called green bonds – Allianz Green Bond – and our Infrastructure Debt team has launched a new strategy focusing on renewable energies.