Climate change is shifting investor priorities and driving wider adoption of sustainable business models, which seek to “meet the needs of the present without compromising the ability of future generations to meet their own needs”.
Investors are increasingly looking to integrate climate risk into their asset allocation and reduce the carbon footprint of their portfolios
Despite growth in renewable infrastructure, global warming continues, and legacy issues will continue to hamper progress
Energy storage will drive disruption across several industries and will be a central theme in the ongoing evolution of renewable energy
It is clear that climate change can no longer be ignored. This summer Europe has faced another unprecedented heatwave while the US has experienced extreme weather events such as drought, wildfire, and flooding.
Globally 20 of the past 22 years have been the warmest on record.
As the frequency and magnitude of weather shocks are only expected to amplify, years of political inertia are finally being addressed. This is highlighted by over 1951 countries signing the UN’s Paris Agreement in a bid to limit temperature increases to 1.5 degrees Celsius. Many of these countries are also starting to implement domestic policy to reduce carbon emissions.
Our own client base is showing a change in attitudes towards ESG2 (environmental, social & governance) issues as investors actively seek to integrate climate risk into their asset allocation, and reduce the carbon footprint of their investment portfolios.
Global surface temperature anomalies, 1910-2018
The average temperature anomaly per decade, compared to a baseline of 1951-1980. Data: NASA Goddard Institute for Space Studies Surface Temperature Analysis
The global drive towards decarbonisation is
predominantly focussed on the production and
consumption of energy – through reducing carbon
intensity and improving energy efficiency. Traditionally
energy has been produced through the combustion of
carbon-heavy fossil fuels such as oil and coal. The move
towards clean energy has led to a shift towards new
sources of production, like wind, solar, hydropower
(energy converted from flowing water), or biomass
(harnessing energy from animal and plant material).
2018 was the fifth consecutive year where more than
USD 300 billion3 was invested in clean energy globally.
Much of this increased investment is derived from asset
finance, via dedicated fund vehicles, as investors seeks to
implement impact strategies into their asset allocation.
We believe there will continue to be a plethora of
opportunities across the entire supply chain as business
models look for alternatives to raw materials, and as
new technologies emerge.
Sustainable business models have further to go
However, the implementation of renewable infrastructure
has so far not offset the rise in global warming. Many of
the factories, vehicles and home appliances currently in
operation still have a long lifespan remaining.
Companies will soon need to address early “retirement”
for such infrastructure if they are to avoid holding
expensive “stranded assets”4 as legislation, regulation
and market forces change. The resulting increased share
of renewable resources in energy generation will disrupt
the entire value chain – from production through to asset
retirement – and should create permanent change.
Solar and wind power are likely to be the most
prominent energy producers. Historically the uptake of
renewable energy has been limited by issues around cost
and energy storage. However, increased construction of
renewable energy farms has seen costs diminish
dramatically. And technological innovations have addressed storage issues; energy can now be stored
whenever production outweighs consumption, and
distributed later, whenever demand surges.
Previously, energy production typically centred on the
use of oil, which meant the pace of innovation was often
reactive to the oil price. For example, the 1979 oil crisis
caused years of price disruptions, forcing consumers to
change their consumption patterns, and industries to
design more energy-efficient products. The UK looked for
more cost- and energy-efficient methods of insulating
homes; the upshot was that the use of double glazing –
which increases thermal efficiency – skyrocketed.
The energy transition resulting from the evolution of grid
storage and battery-powered technology will likely
disrupt a broad spectrum of industries, from transport
and electric vehicles to refrigerators on shipping
containers. Despite homes being better insulated, over
36% of global energy is still consumed by buildings, so
construction is another area of potential disruption.
Urbanisation is intrinsically linked to climate change and
the development of smart cities should help improve
energy efficiency, as technology and hard infrastructure
connect houses and other buildings to localised microgrids.
Improved insulation, heating and cooling
efficiency, lighting and appliances are also fundamental
in tackling the challenge of energy delivery and
Despite an increase in private investment, funding
storage technology has not been a priority for
governments, contributing to slow progress and
uncertainty. Corporates now face tougher environmental
policies and regulatory reform, yet governments have
not stipulated an end-goal or a framework to follow.
Subsequently many businesses are likely to incur
unquantifiable risks and costs in the transition to
decarbonisation. There is no silver bullet to resolve this
issue, and solutions may be industry-specific. Highemission
industries, such as aviation for example, may be
willing to reduce their carbon footprint but will struggle
to create an immediate impact.
Solutions such as carbon offsetting – allowing industry
time to research and develop long-term potential
solutions – may be a better method and will create more
impact within specific industries. Accordingly, the private
sector needs to work with governments to drive the
transition forward and determine what a global pathway
should look like. This could lead to a substantial
investment opportunity for those willing to engage.
Energy storage offers possibilities for evolution
As energy production, storage and utilisation evolve, we
believe decarbonisation will remain a mainstream
investment theme. We expect more regulations to drive
down carbon emissions and promote energy-efficient
At Allianz Global Investors, we believe we have a duty to
our clients to offer investment capabilities which seek to
positively contribute to energy transition. As active
investors we look to capture the intentions of companies
and determine whether they are willing to change.
Screening companies and excluding those with poor ESG
ratings from the investment universe is a common
approach to climate investing. But the active
engagement that underpins our stewardship approach
instead allows investors to access those companies that
are demonstrably addressing any issues, whether by
reducing emissions, or developing potential solutions to
help generate a positive impact by contributing to
Energy transition is a good example of how disruption is
not limited to technological change, but is also driven by
demographic shifts and changing attitudes. For those
companies willing to change and tilt their products
towards the priorities of the emerging “Millennial” and
“Generation Z” consumers, there is great opportunity.
We believe that incumbent firms who focus on
“sustaining” rather than “evolving”, will face increased
reputational risks, as many established products will be
Climate risks must also be fought on social and moral
grounds. As investors, this means a change in behaviour
towards investee companies. Selectivity will become even more important as investors seek out the “winners”
of the future and those who are willing to develop
longer-term, low carbon solutions. If successful,
decarbonisation should not only contribute to arresting
climate change, but may also create attractive economic
benefits and help reshape industries and financial
1. https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-d&chapter=27&lang=en 2. Environmental, Social and Governance (ESG) strategies consider factors beyond traditional financial information to select securities or eliminate
exposure which could result in relative investment performance deviating from other strategies or broad market benchmarks. 3. Including Wind, Solar and other renewable sources of energy. Source: BloombergNEF, January 2019; https://about.bnef.com/blog/clean-energyinvestment-
exceeded-300-billion-2018/ 4. An investment is referred as a “stranded asset” if it becomes unlikely to earn a viable economic return before the end of its economic life. This tends to
be as a result of changes due to the transition to a low carbon economy.
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Ms Rowton is a London-based Investment Strategist with Allianz Global Investors, which she joined in 2011. She works alongside the Global Strategist and regional strategists to provide retail and institutional clients with investment insights, and to shape the global “house view”. Ms Rowton is also a member of the Allianz Global Fundamental Strategy portfolio-management team. Before joining the Global Economics and Strategy team, she worked in Institutional Sales focusing on UK corporate pension plans and charity endowment funds. Stephanie has a B.A. (Hons) from the University of Manchester and has completed both her graduate diploma in law (GDL) and her legal practice course (LPC).
ESG factors have historically been more commonly associated with equity investments, but the past year has seen a significant change with fixed-income investors pushing for ESG factors to be appropriately and demonstrably integrated into investment analysis and risk decisions.
Integrated ESG means the inclusion of environmental, social and governance factors in all investment process and risk decisions
The ESG focus relating to fixed-income investments has mostly concentrated on downside mitigation, but there is an opportunity to generate positive alpha from companies with improving and transitioning ESG profiles
A fully integrated ESG process draws on individual and collaborative expertise from diverse research teams covering ESG, equity and fixed income
The market has yet to adopt a common approach, with a debate around the merits of exclusion strategies compared with integrated ESG’s ability to invest and engage with issuers on a transitional path