Swiss sustainable investment house responsAbility is cooperating with ESG Asset Management (ESG-AM), the Zurich-based credit focused investment boutique, to capture opportunities offered by the global transition to a low-carbon economy, the largest single economic transformation underway. The cooperation will leverage responsAbility’s cutting-edge expertise to deliver deep climate impact and will draw on ESGAM’s know-how to achieve an outperformance in investing in global credit. Building on responsAbility’s science-based approach, new strategies are being designed which will capture high-carbon emitters on the most robust decarbonisation path. This is going beyond existing approaches which focus often on low carbon emitters.

Climate Change

The clock is ticking. Confronted with unequivocal evidence of human activity’s impact on climate change, there are nine years to halve CO2 emissions and be on track for achieving net zero emissions by 2050. This urgency to act has been driving action to speed up the transition to a low-carbon economy – by governments, by corporations, and consumers. A successful transition demands a deep economic transformation, requiring the mobilization of finance on a large scale, writes the International Monetary Fund (IMF) in its newly published Global Financial Stability Report. It estimates that additional investments of up to USD 20 trillion will be required by 2050 to achieve the goal of reducing worldwide carbon emissions to net zero by the middle of this century. About 70 percent of this additional funding is expected to come from private sector sources.

The global financial sector can play a crucial role in catalysing investment and accelerating the transition. Investment management is currently experiencing a paradigm shift toward the integration of sustainability considerations, particularly climate change mitigation, into investment decisions. At the current juncture, specialised investment funds are still limited in size and scope to have a major impact, as is seen in surveys of asset managers which suggest that a lack of adequate data is a key obstacle to implementing sustainable investment strategies.

Cooperation

The cooperation between responsAbility and ESG-AM targets investing in corporate credit with credible decarbonization strategies focused on a long-term net-zero pathway which provide substantial CO2 emissions reductions. It combines responsAbility’s proprietary, data-informed, scalable, climate-mitigating methodology to enable measurable impact and ESG-AM’s expertise of investing in global credit.

The need to address climate risk has heightened over the last few years, and many fixed income investors respond by adopting low-carbon strategies: excluding sectors and companies with high emissions, while focusing on issuers with low carbon emissions. And new academic research suggests that such low carbon approaches slow and may not even contribute to the transition to Net Zero. Moreover, there is no evidence that excluding greenhouse gas (GHG) intense sectors has a meaningful impact on the growth trajectory of these sectors. Thus, rather than excluding sectors which are at the heart of the transition to a cleaner economy and have the highest decarbonisation potential (such as steel, cement, plastic, aviation and shipping) climate-concerned investors need to engage with these specific issuers in these sectors, as it is their progress in creating credible Net Zero strategies which will be indispensable to achieving Net Zero as a whole.

Taking Action

Florian Heeb, researcher at the Center for Sustainable Finance & Private Wealth, University of Zürich, and Board Member of ESG-AM: “The urgency to decarbonize requires investors to take credible action now. The current and most prevalent approach – low carbon strategies focusing on excluding of high carbon emitters in liquid markets – may not solve any problems other than making people feel good. Such strategies, which exclude high carbon emitters categorically and redirects capital to low emitting corporates, are suboptimal as they ignore reality – high emitting sectors like cement will not disappear any time soon – they increase portfolio concentration risk. At the same time, investors have a crucial role to play in the climate transition by actively encouraging companies to improve their climate performance. To limit global warming to 2°C, we need to set incentives for all companies to adopt and implement ambitious decarbonization strategies – particularly the companies that currently cause most greenhouse gas emissions. Excluding these companies from the start forgoes the opportunities created by the climate transition, both from an impact perspective and from a financial perspective.”

Stephanie Bilo, Chief Client & Investment Solutions Officer, responsAbility: “We’ve been leading the way in climate finance for many years, with climate scientists and energy specialists in-house who have created bespoke tools to measure CO2 savings in our funds. And with the demand from clients for products that deliver on Net Zero targets at scale, we are well positioned and highly motivated to drive this particular strategy forward and create impact where it is needed most.”

Philipp Good, CEO ESG-AM: “We chose this cooperation because responsAbility grounds their strategy in climate science and evidenced-based methodology to assess climaterelated risks. Combining with our profound knowledge in global credit, responsAbility was the top-tier partner to delivering on this subject.”