As growth investors with long-term time horizons, we look for the trends, technologies and innovations that are changing the world and the companies that are at the vanguard of that change.
One of the most important trends we see today is the gathering response to climate change, as the physical risk from climate change and transition risks to companies on the path to a net zero emissions economy become more tangible. As the response to climate change accelerates, we will endeavour to incorporate climate risk management into our activities to better understand the resilience and stability of our investments.
The report released in August 2021 by the United Nation’s International Panel on Climate Change (IPCC) noted: “It is unequivocal that human influence has warmed the atmosphere, ocean and land. Widespread and rapid changes in the atmosphere, ocean, cryosphere and biosphere have occurred.” i
The IPCC’s Sixth Assessment Report makes clear that human activities, particularly the emission of greenhouse gases (GHG) and, especially, of CO2, have caused an increase in temperature that has no precedent in the past 2000 years. Further, the report confirms the direct “near-linear relationship” between cumulative CO2 emissions and global temperature increases. It presents five possible future climate scenarios based on different GHG emission paths.
These climate scenarios, like other major climate scenarios, are developed around the objective laid out in the 2015 Paris Agreement: limiting global warming to 1.5 Celsius degrees above pre-industrial levels to reduce the negative effects of climate change. ii Only some of the scenarios present a path that will meet the goals of Paris Agreement.
Climate goals are increasingly being addressed through carbon pricing and carbon budgets. These policies aim at raising the cost and driving down the volume of global CO2 emissions, in pursuit of an economy with net zero emissions.
The rising cost to emitters of CO2 creates transition risks and opportunities for companies, depending on their net carbon exposure, their mitigation solutions, and the degrees of freedom they have to act in the face of rapidly tightening carbon budgets. To assess and compare these risks, investors require accurate standardized data on carbon exposure and other climate-related risks.
While climate data disclosure and reporting protocols are still developing, the climate science underlying them is clear. The IPCC’s Sixth Assessment Report is the best evidence available. It presents the reductions in CO2 emissions necessary to achieve different climate futures. Policy makers tasked with reducing further climate-related damage and cost are already using targeted CO2 paths to direct the transition to a net zero emissions global economy by 2050.iii
Pembroke is aligning its portfolio risk management framework with frameworks being used by global policymakers, the UN Principles for Responsible Investment (PRI) and the Task Force on Climate-related Financial Disclosures (TCFD). These frameworks support the goals of the Paris Agreement, which was adopted by 196 parties (most nations of the world) in 2015.iv
Pembroke supports the Paris Agreement and its objectives of responding to the threat of climate change by trying to limit global warming to 1.5 Celsius degrees above pre-industrial levels.
i IPCC, 2021: Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis.
Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Masson-Delmotte, V., P. Zhai, A. Pirani, S. L. Connors, C. Péan, S. Berger, N. Caud, Y. Chen, L.
Goldfarb, M. I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. Matthews, T. K. Maycock, T. Waterfield, O.Yelekçi, R. Yu and B. Zhou (eds.)]. Cambridge University Press. In Press.
iii https://ukcop26.org/cop26-goals/ See COP26 Goals #1: “Secure global net zero by mid-century and keep 1.5 degrees within reach. Countries are being asked to come forward with ambitious 2030 emission reduction targets that align with reaching net zero by the middle of the century.”
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This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.