Thematic investing: focusing on the many facets of climate change
Decarbonising the global economy is an enormous challenge, as the COP29 climate summit in Baku has shown. But it also presents opportunities for investors, especially as private capital is urgently needed. Thematic investments offer a variety of approaches.
Author: René Nicolodi
The fight against climate change and its financing are the focus of the United Nations Climate Change Conference COP29 in Baku, Azerbaijan. The summit, which runs until 22 November, will discuss, among other things, a massive increase in support for developing countries of up to USD 1,000 billion per year. And there is still the ambition of the Paris Agreement to significantly reduce greenhouse gas emissions and limit the global temperature increase (see chart below) to a maximum of 1.5 degrees Celsius.
All of this points to the importance of decarbonisation and the related investment theme of energy transition. This, in turn, can act as a catalyst for investment and thus as a driver of long-term structural growth.
Strategic advantage
Companies that focus their products and services on these challenges at an early stage can benefit from these drivers. In our view, these players have a strategic advantage and should benefit from strong demand as a result of their contribution to solutions. In this way, thematic investing should also achieve its primary objective of generating a financially attractive return and thereby creating value for investors.
Trend in greenhouse gas emissions and temperatures is pointing upwards
Beyond the climate issue
In this context, the sustainable theme funds managed by the Asset Management of Zürcher Kantonalbank under the Swisscanto product brand focus on selected companies that contribute a significant proportion of their turnover to the United Nations' Sustainable Development Goals (SDGs). It turns out that the fight against global warming and for an energy revolution is not limited to the topic of climate investments. Action can be taken on several fronts.
This is evident, for example, in the water investment theme, where the scarcity of water linked to global warming calls for urgent solutions. Another obvious focus is the shift towards a circular economy, which could lead to a more prudent use of resources and thus help protect biodiversity and natural capital.
An integral part of environmental initiatives
But that's not all. The circular economy offers an alternative to the linear economy that dominates our throwaway society today. At its core, it is about keeping resources in the material cycle for as long as possible. This not only reduces the consumption of primary raw materials, but also generates less waste - and fewer greenhouse gases.
This can be seen, for example, in the recycling of aluminium. According to the association Climate Action, recycled aluminium releases up to 40 times less CO2 than is emitted when it is first extracted. The shift to a circular economy also offers hope for reducing plastic waste, as well as reducing the need for arable land and mining, which could also have a positive impact on the climate.
It is no coincidence that efforts to achieve a circular economy are an integral part of government climate and environmental initiatives, such as the EU's Green Deal and Net Zero Action Plan. This public support is proving to be an important driver that should also benefit the investment theme.
How do we calculate CO2e intensity?
The CO2e intensity can be used to compare the greenhouse gas emissions of small, medium and large companies in different sectors. The CO2e emissions (from Scope 1 and 2) of companies are expressed as a ratio of turnover, and those of countries as a ratio of gross domestic product. The environmental pollution per unit of turnover then serves as a measure and comparative value.
Sensors warn of hazardous pollutants
The importance of the digital economy for decarbonisation is something that investors tend to see at second glance. For example, this theme includes technologies that can enable the transition to clean and renewable energy, thereby reducing greenhouse gas emissions. This is the case, for example, with environmental solutions, which are available to investors as a sub-segment of the digital economy.
In this area, digital sensors and devices from the Internet of Things (IoT) can now measure almost anything - the composition of air or water quality, for example. Leaks in water systems or dangerous levels of pollutants can be detected in real time. Specialised software then analyses the sensor data and provides insights that, in addition to their monitoring function, can form the basis for corporate and government sustainability initiatives. The digital economy has the potential to address climate change, conserve resources and improve public health.
Different universes
The fight against climate change is therefore a determining factor in a wide range of thematic investments. If an investment also has a climate change objective, a differentiated approach makes sense. This is not least due to the different investment universes.
The water, climate and circular economy investment themes, for example, focus on sectors and companies whose products and services have a relatively high CO2e intensity according to the Scope 1 & 2 approaches. These could be utilities or industrial companies (see chart below). The situation is different for the digital economy investment theme: companies in this investment universe - such as IT or telecoms - are significantly less CO2e intensive relative to the market as a whole and therefore have a smaller 'greenhouse gas footprint'.
CO2e intensity of sectors in the MSCI World Equity Index by Scope 1 & 2
Continuous reduction
In order to nevertheless set a binding parenthesis, the existing and newly launched Swisscanto sustainable theme funds are subject to a climate target of <2 degrees Celsius, to which the portfolio must adhere. Specifically, this target requires a continuous absolute reduction of the CO2e emissions of the respective portfolio by at least 4% per year.
In addition, all thematic investments of Swisscanto theme funds fulfil the criteria for sustainable investment funds according to Article 9 SFDR (Sustainable Finance Disclosure Regulation, an EU disclosure regulation). Financial products classified in this way are also known as dark green funds and are considered to be particularly sustainable.
