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How to invest in companies tackling climate change

Climate change is one of the most important issues we face today. There are many companies developing exciting new solutions to help mitigate the impact of global warming. Investors can capitalise on this megatrend by investing in the right thematic exchange traded funds (ETFs).

How to invest in companies tackling climate change

Consensus says we must act now to combat climate change

The Paris Agreement came into force in 2016 with the target of limiting increases in global average temperatures to no more than 2°C above pre-industrial levels, preferably to just 1.5°C.

Since then, assessments of climate change risks and impacts on business operations have continued to gain traction. Important to this shift was the recent decision by newly-inaugurated United States President Joe Biden to bring the US back inside the Paris Agreement, reversing the Trump administration’s withdrawal from the 2016 accord.

More and more companies are therefore set to adopt more sustainable practices and will need to provide improved insight for investors. For example, the Task Force on Climate Related Financial Disclosure (backed by the Bank of England) and the United Nations Net Zero Alliance have helped accelerate the transition to low carbon, rewarding companies’ emissions reduction actions and increasing data transparency in the financial industry.

However, research carried out by the Grantham Research Institute showed that only 18% of companies in their study group, who represent 40% of global emissions, were found to be reducing their emissions at the rate necessary to meet the 2°C target of the Paris Agreement. This calls for increased efforts towards a net zero decarbonisation path, but also shows that more action and new approaches are needed.

A 2019 UN Environment Programme Emissions Gap Report found that total emissions must decline at a rate of 7.6% per year to meet the Paris Agreement 1.5°C goal. Without taking action now, the report said 'every day we delay, the steeper and more difficult it becomes. By just 2025 the cut needed would be 15.5 % each year'.

The 7.6% annual emission reduction is a clear target. But we need a specific figure to measure our achievements against. One suggestion is using carbon dioxide equivalent (CO2e) avoidance. 'Avoided emissions' are emission reductions that occur as a result of a solution, product or service that provides the same or similar function as existing products but with significantly less GHG emissions.

Companies will need to consistently develop new solutions to reach climate change targets

An annual 7.6% reduction in global emissions is required to meet the Paris Agreement’s goal by 2030. This means that we need recurring avoidance but, more importantly, also need to consistently find new carbon avoidance solutions in order to meet this annual carbon reduction target.

Companies will therefore need to deliver innovative and disruptive solutions that will help bring significant changes in societal behaviour and overall reduction in emissions.

It will also require new robust ways to measure climate impact which is not possible with the static and backward-looking carbon footprint methodology that the majority are using today. This is the gap in the market that a company called iClima Earth aims to fill. iClima focuses on 'climate champions': the companies that look to provide real solutions to climate change and have a significant impact measured by Greenhouse gas (GHG) emissions avoided as a result of their use.

iClima Earth believe that measuring CO2e avoidance will provide a quantitative measurement of the climate impact, or decarbonisation potential, of these 'climate champion' companies.

Spotlight will turn on the suppliers of carbon reduction solutions

As the pressure on companies to decarbonise intensifies, solutions for cutting emissions across all parts of a company’s operations will see increased demand.

An obvious way that a company can reduce their indirect emissions from energy consumption is by using electricity from 100% renewable energy companies that generate energy from solar, onshore wind or offshore wind projects.

Other steps businesses can take to reduce their carbon footprint include the use of electric vehicles to simply providing plant-based meals in their cafeterias.

But companies such as Google and Microsoft who may adopt such measures are the users of climate change solutions. iClima Earth focuses on the other side of the coin – the suppliers of these solutions.

Their approach helps to identify companies who are 'doing more good' rather than who is 'doing less bad'. These 'climate champions' are the ones that will attract capital to invest in research and development (R&D) and innovate to develop the much needed solutions of tomorrow.

How iClima Earth identifies companies providing climate change solutions

iClima Earth has developed a fact-based, data driven methodology to vet the companies that have potential to contribute towards the goal of decarbonising the planet.

They believing that the best way to reduce CO2e in the atmosphere is by not emitting in the first place, which will be driven by the products and services that can enable CO2 avoidance.

In its approach, iClima Earth looked at the 100 most substantive, technologically viable solutions that can decarbonise the planet. It also uses a series of negative screening rules to avoid including companies that also enable unacceptable levels of harmful solutions as part of the benchmark (for example, electric vehicle companies in iClima’s universe cannot also have material sales derived from vehicles powered by diesel or gasoline).

No equity benchmark index with a similar approach exists, so they created the iClima Global Decarbonisation Enablers Index, which is managed by the benchmark provider Solactive.

The index includes companies who provide solutions that are transient, such a plant-based Beyond Meat burger or a telepresence call on Zoom, to those that are based on products with long useful lives, such as a Siemens Gamesa wind turbine, or a Tesla electric vehicle.

The iClima Global Decarbonisation Enablers Index

The iClima Global Decarbonisation Enablers Index is currently comprised of 151 companies. The products and services they represent fall within five different categories (green energy, green transportation, sustainable products, enabling solutions and water & waste improvements, these are further broken-down into 28 subsegments).

These companies are suppliers of relevant climate change solutions. Using the California goldrush analogy, they are the companies supplying the shovels. We see tail winds supporting the positive trends for these 'climate champions' coming from global agreements and targets combined with green stimulus and policies and a positive shift in consumer behaviour.

The total return of the index was +78% in USD terms in 2020 compared to 16.5% from the MSCI World Index. Remember, past performance is no guarantee of future performance.

How to invest in the decarbonisation megatrend

There are a growing number of thematic ETFs such as the iClima Global Decarbonisation Enablers UCITS ETF available that investors can use to invest in this megatrend.

The table below shows a collection of ETFs that track a basket of companies in some of the industries that benefit from the global effort to transition the planet to low carbon economies. All returns are in GBP terms.

Exchange traded fund Ticker Annual fund fee Holdings 2020 performance
iClima Global Decarbonisation Enablers UCITS ETF CLMP 0.65% 151 77.93%*
Invesco Solar ETF (US) TAN 0.70% 26 224.45%
iShares Global Clean Energy ETF INRG 0.46% 30 134.75%


* Underlying index returns, gross of fees. CLMP was launched on 8 December 2020

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Publication date : 2021-01-26T09:07:12+0000

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