Lauren Juliff and Henrik Wold Nilsen

Double whammy:

Decarbonisation and de-risking in developing economies

By  Storebrand Asset Management

Equity and the principle of “common but differentiated responsibilities.., in the light of different national circumstances” for developing economies was fundamental to the signing of the Paris Agreement.

Yet, corporate strategies for Paris compliance have not differentiated sufficiently between developed and developing countries. In practice, strategies such as the EU Paris Aligned Benchmarks and Climate Transition Benchmarks (PABs and CTBs) do not distinguish between regions – meaning emerging markets PABs must decarbonise at the same 7 percent p.a. rate as developed market PABs. This can lead to unintended consequences for investors focused on total portfolio decarbonisation and we argue it does not represent genuine Paris aligned investment.

The Paris agreement also calls for “making finance flows consistent with a pathway towards low GHG emissions and climate resilient investment”. A large proportion of the clean technology growth required in net zero scenarios will come from emerging markets; but climate solutions exposure in developed and ACWI based climate index strategies is often limited.

China is leading progress on many transition technologies, such as batteries, it is both dominant and firmly embedded in the global clean tech value chain. However, Chinese companies are under-represented in index based investment strategies due to what we describe as the “China Fudge Factor”.

The Storebrand Plus Fund aims to overcome these issues by seeking exposure to ‘climate beta’ and by systematically identifying as many climate solutions companies as possible, in all regions 
globally. Most sizeable climate solutions investment opportunities in our resulting global opportunity set are listed in emerging markets. In contrast, we find the opportunity for ‘passive’ investors in ‘Paris Aligned’ or climate indices to tilt towards green revenues and climate solutions in a diversified manner is limited. Our approach is to diversify the exposure, increasing the positive climate beta tilt but via more companies. Interestingly, despite the greater exposure to climate solutions and greater 
climate tilt/active share than these climate indices, our expected tracking error is lower vs the market cap index than most climate index strategies in our sample.

We believe our sample to be representative of the broad market of climate index strategies, which we monitor regularly via Morningstar and Bloomberg.

Read the full paper here:

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