Investors using forward-looking ESG metrics and data believe the energy transition has not yet been fully priced in by the market and are seeing value in companies from polluting sectors that have credible plans in place to curb emissions.
"High-emitting companies that are actually very well aligned or are putting in place all the right decarbonisation strategies haven't yet been repriced by the market,” said Thomas Hohne-Sparborth, head of sustainability research at Lombard Odier Investment Managers.
All high-emitting companies are currently tarred with the same brush as relatively few investors can look past the cost and risk of reducing emissions, but this is changing and leaders in each high-emitting sector could start to see an uplift as they are identified.
"This repricing will happen when more of the market gets access to forward-looking metrics. Once we reach that tipping point, I think we'll see a pretty quick readjustment," Hohne-Sparborth said.
Forward-looking temperature alignment metrics were initially developed by a handful of investors but are quickly gaining currency. The Task Force on Climate-Related Financial Disclosures issued guidance on transition plans last October that include climate-related targets and metrics.
Tools are now being rolled out by large data firms. MSCI’s Implied Temperature Rise tool aims to show the alignment of companies, portfolios and funds with global temperature goals and can be used by investors to set decarbonisation targets and engage with companies.
Such tools can also identify sector leaders. HeidelbergCement is the world’s fourth-largest cement company and is currently tracking to 3.28 degrees of global warming, according to MSCI. That is misaligned with the goals of the Paris Agreement to limit global warming to two degrees or less but nonetheless makes the company a leader in the construction materials industry.
MSCI says the world’s largest cement company, Switzerland-headquartered Holcim, is tracking for 3.59 degrees of warming and is "average" for the sector. China’s Anhui Conch Cement and China National Building Material, the second and third-largest cement companies globally, are both described as "laggards".
While some repricing has already taken place in the most obvious sectors, like the power and automotive sectors, which have clearer pathways to net zero involving renewable energy and electric vehicles, there is more to come as forward-thinking high-emitters with less obvious solutions start to decarbonise.
“We'll probably see that same repricing in all sorts of sectors – in steel, in chemicals, in cement – when the market realises that there's more to this than the fact that these companies are high emitting today," Hohne-Sparborth said. “Of course if you are going to decarbonise in these high-emitting industries, you're going to have to invest quite a bit of capital to do so. But in doing so, you're also unlocking a massive green competitive advantage."
AI giving an edge
Artificial intelligence is powering the new forward-looking tools that allow investors to navigate and compare the complex and confusing web of companies’ net-zero pledges, ESG commitments and disclosure requirements as the transition accelerates.
Companies such as data investment research and asset manager Arabesque and artificial intelligence data analysis engine SEVVA say they give investors information and data they need to do their own work and analysis, as traditional ESG metrics give a less accurate read of the transition ahead.
London-based Marsham Investment Management is using SEVVA (which reads thousands of documents almost instantly) to identify investments for its two Transitional Issuers Fixed-Income Funds in US dollars and euros, which it says are the first fixed-income funds to target what is expected to become a crowded space as thematic investing in transitional issuers takes off.
Marsham uses its research to identify industrial companies that have the ambition, means and strategy to become ESG leaders and offer upside as the companies improve their ESG performance. The asset manager says it is targeting annual returns of 5%–5.5% over base rates in three currencies and reports achieving up to 7.6% in absolute terms by investing in ESG-labelled and conventional bonds.
“We’re being paid by our investors to make money and this is our primary goal. With that in mind, we have identified transition issuers as the next area where we can make money,” said Maria Lozovik, one of Marsham’s founders and a portfolio manager of its fixed-income funds. “The real innovation needs to happen in the boring old industrials.”