The outlook for responsible investing and climate change in 2021

As the world emerges from the COVID-19 pandemic, one area that may not have garnered as much attention amid the pandemic, yet remains one of the most salient areas of investing, is responsible investing.

Domestically, we recently saw the first draft of the Climate Change Commission report, outlining the path to net zero carbon emissions and significantly reduced methane emissions by 2050, which the Commission said in its draft would result in a “thriving, climate-resilient and low emissions Aotearoa”.

Internationally, the election of US President Joe Biden has universally been seen as a net-positive for climate policy. On day one, President Biden announced the US would be re-joining the Paris Agreement, the global agreement to address climate change.

Elsewhere, Europe continues to be the leader in the climate policy sphere. Recently, the continent pledged to reduce its greenhouse-gas emissions by at least 55% from its 1990 levels by 2030.  

And perhaps the most surprising move of late came in 2020 when Chinese President, Xi Jinping committed China to achieving carbon neutrality by 2060. 

With the need for action on climate policy increasing by the day, driven in part by the growing social movement for change and the economic imperative towards accessing cheaper renewable energy, 2021 is looking like a busy year for climate initiatives.

Beginning in New Zealand, the final Climate Change Commission’s report is scheduled to be released before the end of May, where it will be presented to Parliament who will begin discussion and crafting of legislation to meet targets that New Zealand has committed to.

Given the limited reductions that can be made in carbon emissions in the agricultural sector, the heavy lifting needs to come in the other areas of highest emission – transport and energy. Most notably, the widespread adoption of electric vehicles will be atop the agenda, given 40% of long-lived gas emissions in NZ are from transport and the bulk of them from cars and light vehicles.

Elsewhere, in November, the 2021 United Nations Climate Change Conference, also known as COP26, is scheduled to be held in Glasgow. This meeting could be a watershed moment for climate policy as nations attempt to accelerate the commitments made under the Paris Agreement.

The UN member countries will reveal where they stand on the climate policy, with the US being a big player given it will be the first time it has been involved in multilateral climate discussion in around five years. We can expect significant commitments, not just from governments, but from the private sector given the heightened regulatory environment.

At ANZ Investments, we continue to develop our approach to managing the risks of climate change and the changing regulatory environment.

Climate change risks can be divided into two categories: physical and transition risks. Physical risk is the potential impact of climate change on a company’s fixed assets, which include plants, buildings, factories and other infrastructure caused by the increasing regularity of destructive weather events, changes to precipitation patterns, global warming, wildfire and rising sea levels.

Transition risks arise from the changing social and economic movement towards sustainability and responsible investing. These risks include regulation and legislation, carbon pricing, the risk of holding “stranded” assets, new technology uptake and changing customer behaviour and preferences.

It is also interesting to note that in our main international equities fund the exposure to carbon emissions (measured as carbon intensity) has been consistently around half of that of our equity market index (see chart).

Early in 2020, we excluded from portfolios companies that generated more than 10% of their revenue from a range of the highest carbon-emitting sectors within fossil fuel production: companies that mine thermal coal and companies that use “fracking” and similar technologies to force carbon-based fuels to the surface.

“Scientific research continues to warn of the risks associated with climate change and the business-as-usual costless practice of expelling greenhouse gases into our atmosphere. We continue to consider the implications of this practice and the effect of the policies to reduce these risks on investment returns. At ANZ Investments we manage our portfolios actively and ensure that environmental, social and governance (ESG) factors are taken into account.

We welcome the Climate Change Commission’s report and look forward to the Government’s policy response to ensure the country can achieve its lower carbon emission targets.”

See our responsible investing page to learn more about our approach, strategy and the principles that guide our decision making.