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Global Equity Observer
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June 22, 2021

Low Carbon Ambition

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June 22, 2021

Low Carbon Ambition


Global Equity Observer

Low Carbon Ambition

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June 22, 2021

 
 

Earth Day on April 22nd, with its theme of restoration, gave rise to a collection of new environmental pledges on the global stage.

 
 

President Biden, seeking to reclaim global leadership in the fight against global warming, unveiled the U.S. goal of cutting emissions 50% from 2005 levels by 2030. Prime Minister Yoshihide Suga raised Japan's target for cutting emissions to 46% by 2030, up from 26%, while Prime Minster Justin Trudeau raised Canada’s goal to a cut of 40-45% by 2030 below 2005 levels, up from 30%. The recently agreed European Union (EU) Climate Law aims to reduce EU carbon emissions by at least 55% by 2030 compared with 1990 levels. Biden’s move followed President Xi Jinping’s emissions goal set last September with China seeking to achieve net zero emissions by 2060. There is hope that this will spur the next biggest emitters, India and Russia, towards improved pledges at COP26, the United Nations (UN) Climate Change Conference in November this year. Closer to home, Morgan Stanley has pledged1 to mobilise $1 trillion in sustainable solutions globally that include helping prevent and mitigate climate change.

 
 
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Companies’ Scope 1 and 2 emissions are just first steps towards solving climate change
 
 
 

Within our team’s portfolios, our companies have been busy too, encouraging consumers—their customers—to live more sustainably. There is growing recognition that companies’ Scope 1 (direct or controlled) emissions and Scope 2 emissions (indirect emissions from purchase of energy) are just first steps towards solving climate change. Greater focus on Scope 3 (everything beyond 1 and 2, including energy customers consume when using a product) has begun to work its way not only into the consciousness of CEOs but also their advertising campaigns. Household companies see a revenue opportunity in identifying for consumers which small changes at home can make big changes for the planet. Consulting firms argue that the pandemic has intensified interest in “conscious consumption”. A U.S. multinational consumer goods corporation estimates that avoided emissions from low-energy laundry cycles since 2015 equals 15 million tons of CO2 or the equivalent of 3 million cars off the road. For context, in 2020 this company’s scope 1 and 2 emissions were 2.6 million tons.

Personal care companies now offer comprehensive sustainability programmes. Looking to accelerate already steady progress in its carbon footprint, the world's largest cosmetics company aims to reduce its carbon footprint by 50%, ensure 95% of its ingredients are from circular sourcing and invest €100 million in regenerating ecosystems. A German chemical and consumer goods company has launched a carbon footprint calculator to help consumers understand their personal CO2 footprint and contribute to sustainability through personal lifestyle choices. The scale of the Scope 3 challenge suggests there is work to do. It aims to save its consumers, customers and suppliers 100 million tons of CO2 cumulatively between 2016 and 2025. To date it has saved 50 million tons. Its 2020 Scope 1 and 2 emissions were 0.535 million tons.

 
 
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The scale of the Scope 3 challenge suggests there is work to do
 
 
 

One of the world’s largest software companies takes the prize for ambition, pledging to go carbon negative by 2030 and to remove, by 2050, the entire historical carbon emissions of the company since it was founded in 1975. A global payments company has announced its commitment to reach net zero by 2040 and celebrated carbon neutrality achieved in its operations in 2020. This company signing up to the Climate Pledge and Climate Business Network offers further examples of companies recognising the importance of not only solving but also being seen to be part of the global solution to climate change.

 
 
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Earth Day’s announcements indicated an extension of consultants and IT companies seeking solutions to empower companies to decarbonise their supply chain
 
 
 

Some companies, including a leading software and business solutions company, are seeking to spearhead the move towards a circular economy and a low carbon future with technology facilitating responsible design, sourcing, production, consumption, recovery and reuse. Consultants, already embedded in companies around the world, will play a key role in enabling other companies in the low carbon and energy transition. One consultant predicts (in “The Green Behind the Cloud”) that migrations to the public cloud can reduce global carbon emissions by as much as 59 million tons of C02 annually. Earth Day’s announcements indicated an extension of consultants and IT companies seeking to co-innovate and co-develop solutions for responsible production and design, empowering companies to decarbonise their supply chain and capture share in the circular economy. This follows similar consultant and IT company alliances of last year, joining with the UN Global Compact, to launch Sustainable Development Goals (SDG) Ambition Guidance, an SDG achievement accelerator.

We in the International Equity Team applaud these ambitions and actions, while recognising the challenges of achieving them, and we thought it would be helpful to articulate some of the steps we are taking in our team to accelerate positive change.

1.      We recently enhanced the suitability criteria for our Global Sustain strategy. The Portfolio will seek to achieve attractive returns with significantly lower carbon emissions than the universe. We are working with our clients to join us in this objective where they see fit.

2.      In order to achieve this objective for our Global Sustain strategy, we have introduced an explicit carbon screen to identify and filter out the highest carbon emitters in the universe.

3.      Finally, we have introduced and have been executing for some months on a systematic engagement programme to question the companies we own on their sustainability initiatives, and how they intend to meet the goals they are setting.  

Clients of our other strategies also benefit from this additional engagement with our investee companies given meaningful overlap in holdings across our strategies. Such conversations also offer insights to management quality, corporate agility and capital allocation in the face of new risks.

ESG integration today requires a facility not only with price and quality but with the third dimension of sustainability. We are conscious that there is always more to learn, but we believe our access and experience do give us an advantage in encouraging company managements towards a low carbon future. In this, as in everything we do, we remain ambitious.

 
 

1 See: www.morganstanley.com/ideas/low-carbon-finance-1-trillion-dollar-pledge

To reach the $1 trillion target, MS will work with corporations, governments and individuals to provide clean tech and renewable energy finance, green bonds and other transactions.


 
 

Risk Considerations

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

 
william.lock
Head of International Equity Team
International Equity Team
 
laura.bottega
Managing Director
 
 
Featured Funds
 
 
 
 
 

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