Sustainability | 20 June 2023
Investing in change and
the global transition to net zero
Our investments are made with environmental, social and governance (ESG) criteria in mind. Here we explain the economic case for this and how it supports the global transition to net zero.
There’s been plenty written about ESG and how investing can support the achievement of net zero carbon emissions by 2050. One phrase that crops up in this context is ‘greenwashing’, or the suggestion that some asset managers only talk about ESG to appear environmentally conscious or ‘green’.
Greenwashing doesn’t only have the potential to damage the reputation of sustainable investing but can undermine the purpose of prudent asset management, which is to invest in a sustainable future for greater global prosperity.
Here, we want to explain why this matters for investment returns and point to the growing economic gravity of the worldwide transition to net zero.
For several years now Coutts has been part of an evolving shift to ESG investing[i]. This has been overseen and advocated through our membership of a number of key global bodies and agreements, notably:
- B Corp
- The United Nations Principles for Responsible Investment (UNPRI)
- UK Stewardship Code
- The Task Force on Climate-Related Financial Disclosures (TCFD)
In addition to this, we are also a member of a number of collaborative initiatives:
- Climate Action 100+
- The Institutional Investors Group on Climate Change (IIGCC)
- The Sustainable Markets Initiative
- UK Sustainable Investment and Finance Association (UKSIF)
- The Net Zero Asset Managers Initiative (NZAM)
Some these bodies focus on encouraging and supporting investments in businesses transitioning to net zero. For example, as of December 2022, NZAM has 301 asset managers and investment houses as signatories. Collectively, they’re working to put $59 trillion worth of assets into achieving net zero (Source: Net Zero Asset Managers’ Initiative).
Such a figure would never be achievable if the business case for sustainable investing wasn’t clear. What is crucial today is how markets are becoming orientated around sustainability[ii]. That momentum has the potential to drive global change as, according to a report by the IEA, the declining costs of clean energy technologies and new policies have shaved around 1 °C from projected 2100 warming compared to the pre‐Paris baseline (Source: IEA April 2023).
Investing in change
Historically, being able to identify long-term trends and technologies and investing in these accordingly could pay off for investors.
With the impacts of climate change becoming more visible across the world, we believe there’s a clear need to build climate risk into investment analysis. By improving our ability to assess how certain countries, sectors and companies are exposed to financially material climate risks, we are getting a clearer picture of which investments could thrive, and which ones could suffer.
There are a number of reasons for this:
- New opportunities – The value of new technologies supporting the transition to net zero could reach $5 trillion by 2025 (Global Policy Institute, 2022). There’s growing understanding in markets that the most investable companies will be those working toward decarbonisation. We have worked with BlackRock, the world’s biggest asset manager, to design and implement bespoke co-manufactured funds. Larry Fink, BlackRock’s CEO, wrote in his annual letter last year that “the next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators – startups that help the world decarbonize and make the energy transition affordable for all consumers.”
- Transition – Large legacy companies are not excluded from the transition. One hydrocarbon giant has already committed to being net zero by 2050. This means one of the world’s largest companies has committed to using its profits to fund research and action net zero. However, it’s critical that commitments like this aren’t just taken at face value. Shareholders play an important role in holding large companies like this accountable by tracking progress against targets and validating the ambition of those targets. Shareholders and investors also engage with companies to identify areas of improvement. Large companies will need to transform to become net zero, and by continuing to invest in them, we can support and encourage them to deliver credible transition plans.
- Divestment – Investing responsibly also means identifying those assets and business models that’ll struggle in a world transitioning to net zero, and so cease to be profitable[iii]. Unsustainable assets may become ‘stranded’, meaning they lose some or all of their financial value before the end of their lifecycle – for example certain mining ventures such as coal may have a limited profitability timeline as the market moves to decarbonise. Activities such as mining could see their profitability fall drastically, potentially causing a sharp reduction in the value of the company shares for investors. Therefore, incorporating data on stranded assets into our investment process could help us protect the value of our funds and portfolios.
What is Coutts doing?
- Our investment process is aligned with our ESG principles. We also work with our stewardship provider EOS at Federated Hermes to vote as equity shareholders for improved sustainability and governance provisions. This applies to the majority of the companies in which we invest, which are held through Coutts ESG Insights Funds, Coutts Actively Managed UK Equity Fund and the Coutts Actively Managed US Equity Fund.
- Our goal is to make all our assets under management (AUM) net zero by 2050 in line with the Paris Agreement of 2015 which has a stated target of limiting global warming to 1.5 °C.
- We currently consider 89% of our AUM to be working toward net zero (Source: Coutts B Corp Impact Report July 2022).
- We aim to reduce the weighted average carbon intensity of our equity and corporate fixed income holdings by 50% by 2030.
- We aim to align 50% of holdings within our managed funds and core discretionary portfolios with a net zero pathway by 2025, increasing this to 70% by 2030.
- We also operate with an ESG Exclusions Policy above set thresholds. This applies to where we invest in shareholder equity through the Coutts ESG Insights Funds, Coutts Actively Managed UK Equity Fund and the Coutts Actively Managed US Equity Fund. We do not invest in certain business activities that we view as being unsustainable for example tar sands, thermal coal energy or thermal coal extraction.
- We support some small- and medium-sized enterprises in driving the transition to a sustainable economy through our Investment Opportunity Service and through our UK Enterprise Fund (in partnership with growth fund BGF).
- For businesses, our parent group NatWest have launched Carbon Planner to help companies evaluate and plan their carbon reduction goals.
As with all investments, we know assets supporting the global transition to net zero will be exposed to some volatility over time – something we saw in markets in 2022. However, as need for investing sustainably continues to grow, we believe a world moving towards net zero will reward investors supporting this transition.
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The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
ESG Investing raises some particular issues you should consider, please see our Cautionary Note About Climate Related Data Metrics and Information.
[i] Coutts & Company signed the UN Principles on Responsible Investing on 16 October 2018
[ii] According to the PwC report ‘Exponential Expectations for ESG’ (2022)
[iii] According to the PwC Global Investor ESG Survey (2021)
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