Investors should be carefully considering rapid climate-based divestments, with point-in-time decisions causing unintended consequences for portfolio diversification down the line.
AXA IM has found that listed equity companies are globally responsible for an estimated 18 gigatonnes of direct emissions from owned or controlled sources and would need to reduce their emissions by almost 50 per cent to meet the baseline scenario of a 2 degree increase in global temperatures by 2030.
But when considering divesting from top polluters, investors need to think about the impact on the portfolio diversification.
“Many asset owners and investors are divesting from the largest polluters to reduce the carbon footprint of their portfolios,” said Kathryn McDonald, head of sustainable investing at AXA IM Rosenberg Equities.
“But a divestment-led approach can pose unintended problems for core equity investors in the form of increased active risk, and also means they have less leverage to use with respect to engagement with the goal of encouraging a transition towards greener and more sustainable products, technologies or activities.”
AXA IM believes investors should take a holistic measure of a company using multiple data inputs to generate a multidimensional view of its environmental commitments – what AXA calls the “E” score.
“Using our ‘E’ scores instead of carbon intensity to ‘decarbonise’ a basket of stocks is just one way we can identify the companies that have done more to improve emissions by beginning to transition before others in their respective industries”, Ms McDonald said.
“We can, for example, find electric utilities that have shown a higher propensity to invest in renewable energy and storage solutions and divest from thermal coal. In addition to E score, other data on company products and services, as well as transition behaviour is necessary in order to develop a full picture of ‘footpath’.”
While the divestment-led approach is effective, it’s a blunt tool that might not be sophisticated enough for such a complex issue, AXA says.
“Instead of leading with divestment, we need to incorporate several types of information to form a more holistic view of a company’s behaviour towards tackling the need to reduce global carbon emissions and protect the environment so that we can more concretely anticipate their pathway towards transition,” Ms McDonald said.