Peter Michaelis

WHILE the popularity of so-called green and environmental funds has waxed and waned among investors – with the last two years being especially tough – ensuring we create a sustainable world for the future through investment is more relevant and critical than ever.

New data shows that March this year was the hottest March on record and the tenth month in a row of record high temperatures. Meanwhile, the World Meteorological Organisation (WMO) confirmed that 2023 was the warmest year on record, with the surface temperature averaging 1.45C (+/-0.12C) above pre-industrial levels.

“The WMO community is sounding a red alert to the world,” said Celeste Saulo, WMO secretary general. Among many unwelcome records, the warming of oceans stood out, “shattering” the previous record. The warming is the direct result of the increase in greenhouse gases with, for instance, CO2 concentrations 50% higher now than they were in the pre-industrial era.

There is no doubt we are changing the climate of our planet. The consequences are predicted to be severely negative – with the added possibility of tipping points taking us into a completely new state of climate.

'Significant milestone' as green sector hits record

What can we as investors do to reverse these alarming trends? Invest in companies which are helping to reduce our dependence on fossil fuels – through energy efficiency and renewable energy solutions.

Businesses can help to develop and distribute innovative products. The profit motive is a critical incentive to doing this rapidly. We have seen the fruits of this in the fantastic reduction in price of renewable energies, allowing countries like the UK to adopt wind and solar for over 35% of electricity generation in 2023.

This would not have happened without the scaling up of production by profit-generating, competing industries. Businesses that stand out are those such as Vestas, a leading manufacturer of wind turbines, and TopBuild, a distributor of thermal insulation for buildings across the US.

Avoid investing in companies extracting fossil fuels or which depend on the growth of this type of energy system. A reduction in greenhouse gas emissions from human activities is essential. We then need to move to eventually bring the concentration of these in the atmosphere back down. Simplistically we must stop burning fuel to produce energy and associated services – heat, light, mobility etc – and replace the 80% of our primary energy system which is linked to fossil fuels.

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The longer-term picture for coal, oil and gas companies is challenging and likely to deliver poor long-term returns. Many commentators and leaders of these companies do not share this view and while they talk about “transition”, the industry continues to invest for growth in oil production in the decades to come. We believe oil companies underestimate the change under way and ignore historical precedents of how rapidly one era replaces the next.

Encourage companies you invest in to reduce their own greenhouse gas emissions. Many investors may feel they have little ability to affect the actions of companies when it comes to issues such as reducing greenhouse gas emissions (GHG), yet this is not the case. Studies suggest that investor engagement can be more effective in reducing emissions than if investors simply withdraw from investing in publicly-traded companies with high GHG emissions.

This is not least because the shares may then be in the hands of investors who have no interest in ensuring firms bring down GHG emissions or who don’t care about the environmental profile of their investments.

As an alternative, some investors may consider setting a net-zero target in terms of the companies they invest in, although this risks limiting the range of investments open to them and potentially reducing diversification to a risky level. It could also mean missing out on investing in areas where firms are conscious of their environmental footprint and actively working towards reducing emissions, such as renewable energy infrastructure.

Humanity faces an enormous challenge to stabilise the climate. While we will almost certainly exceed 1.5C in warming in the coming years, every 0.1C of warming we can avoid is critical. We firmly believe investors can have significant influence in the future of our planet by channelling capital into those industries that offer solutions to the considerable climate challenges we face and away from those that are culpable for them.

Peter Michaelis is head of the Liontrust Sustainable Investment team