Portfolio decarbonization is now investment strategy chic

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For those who identify the term “decarbonization” as being anti-business, anti-growth and, well, frankly, depressive, think again. The amount of capital now available for “decarbonization” initiatives is significant, growing fast and global. 

While the Covid-19 pandemic may be slowing this, the reality of the speed with which the economy must transition to carbon neutrality on the way to “zero” and, indeed, beyond is pressing on the necks of corporate boards everywhere.

Sustainable Digital Infrastructure companies seeking to develop rapid carbon-reduction initiatives ought to find plenty of potential for investment-grade opportunities (or at least we hope so very soon). 

BlackRock’s CEO rang the bell

BlackRock CEO Larry Fink’s 2020 Letter to CEOs sounded the warning that CEOs and boards of directors would be held accountable if their companies did not show marked progress in climate change-related awareness and action. 

Portfolio decarbonization is the term of art for investors and their investment bankers to begin to de-risk themselves of companies seen as being on the wrong side of carbon.

What is clear is the climate change is now a real concern of investors and how they structure and manage portfolios. Once seen as “risky” is now understood to be a sound strategy. Once (and until very recently) carbon wasn’t even on the table as a factor in investing. 

Today it’s reached the point where in the EU countries (not so much the US yet, but hold your hat…) institutional investors when analyzing competitors in a market, often now favor those with clear lowest reported carbon footprint and aggressive decarbonization strategies. 

Investors interested in climate-change related investment opportunities within the EU countries appear to benefit from strong regulatory and reporting requirements. This appears to be markedly less so In the US, where there is no discernible governmental policy for carbon-reduction regulation or reporting, and the US is in the process of withdrawing from the Paris COP21 Agreement, completing the leaving in November this year. 

Every year, climate-change related weather events increasingly occur and with both increasing unpredictability and severity. So, whether the US Federal Government acts or not, the private sector will pick up at least some of the slack in recognizing this as both a risk factor and as an investment direction opportunity. 

Clarity thru the smog

Here are some clear signals to investors and funds: 

The number three pension fund in the US is the New York State Common Retirement fund. 

Two years ago it increased its investment in low carbon emissions companies by 100% to $4B.  

Two years previous to that, the California State Teachers’ Retirement System earmarked $2.5B to GHG reducing opportunities in 2016. Then, in October last year, the fund implemented what it calls a low carbon work plan. And in its press release it said in part: 

“The Teachers’ Retirement Board initiated the implementation of a Low-Carbon Transition Work Plan at its October meeting. The transition plan builds on more than 15 years of work in climate-risk mitigation strategies. The plan will guide CalSTRS in managing climate-related risk and identifying opportunities to invest in climate-related solutions across asset classes. 

“ ‘There is no debate that climate change poses risks to the CalSTRS investment portfolio, and if unchecked, greenhouse gas emissions will have devastating impacts on society and the economy,’ said Investment Committee Chair Harry Keiley. ‘CalSTRS is methodically and prudently examining how to prepare the fund to meet the retirement obligations of our members, while also adjusting to a low-carbon future.’ “

Decarbonization and low-to-zero carbon Investment strategies in the developed economies vary widely. In some cases, investors drill down on specific companies, while others look at full sectors and cherry-pick those with lowest carbon track records and business strategies. They avoid high-comparative-carbon firms in that sector. 

Now to the Sustainable Digital Infrastructure sector — energy, telecom and data center: This investment trend ought to mean developers committed to low-to-zero carbon ought to be in line for increasingly more favorable attention from investors.

This means not only what these developments mean in terms of their own embodied and operational carbon footprint over the lifecycle of the asset, but also in terms of what they indirectly contribute in effective digitalization of customer businesses.

If a data center developer can demonstrate that it is actively offsetting power carbon with RECs, etc., ought it not ought to be favored over another developer who does not?

Should a developer who intends to develop low/no-carbon primary power on/near prem receive more favorable investment treatment than one who does not? 

And, finally, should a developer who is committed to digital transformation, Industry 4.0 position itself for, and market to, customers who are developing their businesses in an aligned compatible way? 

I think so, and I will report back with findings.

Additional sources:

UN Environment Program Initiative’s Portfolio Decarbonization Coalition

Morgan Stanley Institute for Sustainable Investing 

Morgan Stanley related article 

Allianz France

Daimler: Investors are Speeding-up Decarbonization

McKinsey: How Industry Can Move to  Low Carbon Future

Harvard Business School: Decarbonization Factors

___________________________

Bruce’s e-mail is: bruce@digitalinfranetwork.com

 

 

    

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