How can clients invest in the climate transition?

To mitigate the impacts of climate change, Canada is working to achieve net-zero emissions by 2050. And the investment industry has a huge role to play to drive the transition.

But how can clients invest in the climate transition?

“As investors, there are three strategies we can put in place to contribute to the fight against climate change and working toward net-zero targets,” says Deborah Debas, Responsible Investment Specialist with Desjardins Group. “We can divest to minimize exposure to climate-related risks. We can invest in companies creating solution to decarbonize of the economy. And we can engage with the companies we have in our portfolios to influence them to set net-zero targets.”

While divesting from high green-house gas (GHG) emitters can make an investor feel good about avoiding “bad companies” and protecting their portfolio from some climate-related risks, it does little to actually mitigate those risks in the real world, she says. Investing and engaging are much stronger levers to bring about change in the real world.

And there are many investment opportunities in energy transition. Typically, clients will link the reduction of GHG emissions to renewable electricity. “There is a range of diversified investment opportunities, for example, in energy efficiency, transportation and agriculture,” notes Debas.

In fact, despite the inflation and supply chain disruptions, there was a 31% increase in investment toward many sectors related to energy transition in 2022, according to Bloomberg, tying the $1 trillion green energy investment with that of fossil fuels.

On top of that, government incentives are also fueling the energy transition, and creating tailwinds for many sectors. For instance, there are federal tax incentives in Canada for installing battery storage solutions, or solar or wind power sources at home or at the office.

“These solutions are paying for themselves,” she says. “Heat pumps, efficient motors or software that help optimize product design make business operations more cost-efficient in the long run, especially with the higher energy costs we’ve seen in 2022. Tax incentives also contribute to the growing demand. Companies that market solutions to global issues are just the types of businesses your clients want to invest in.”

Debas notes that Desjardins Investments is also putting a strong emphasis on engagement to achieve real emissions reductions as part of their support for the Net Zero Asset Managers initiative (NZAMI).

“What this means for our portfolios is that we aim to reduce our financed emissions as close to zero as possible by 2050, in line with global efforts to limit warming to 1.5°C above pre-industrial levels,” she says. “Engaging with portfolio companies to influence them towards setting their own Net Zero target and making the necessary investments to meet those targets will be crucial, as most companies must reduce emissions by more than 90%.”

She adds, “Our initial NZAMI implementation scope will be all of the SocieTerra fund lineup, and both the core and thematic funds will play a part.”

Desjardins is currently establishing interim targets to ensure progress is being made toward the long-term ambition, she notes.

Debas reminds advisors that clients who want to be part of the solution can benefit from the tailwinds that are being created by the global transition toward a more sustainable economy.

“Companies that are well positioned to thrive in this new environment may offer attractive investment opportunities,” she says.

Learn more about how to systemize your responsible investment approach at Desjardins’ webcast on Oct. 24, 2023.