Russia’s invasion of Ukraine, a tragic humanitarian crisis in its own right, has clearly exacerbated global geopolitical tensions and economic uncertainty. The market impact has been most severe within the energy sector, driving price spikes and raising questions surrounding the impact on long-term climate goals. This near-term shift in sentiment is taking place alongside the structural transition to a low-carbon economy – adding a layer of complexity for investors to navigate.
As systematic investors, we leverage sustainable insights to better understand how these evolving market dynamics may influence businesses and society on the path to a low-carbon world. We’re faced with a multidimensional challenge that requires deeper analysis to understand the impact of several forces on economic activity and long-term company performance. Better data and forward-looking analysis help us to uncover tomorrow’s investment opportunities amid today’s increasingly challenging environment.
Steps to align with a lower carbon footprint
The transition to a low-carbon economy (while undoubtedly complex) is well underway, with a common understanding: tomorrow’s economy will look different than it does today. Traditional approaches to ESG investing often focus on achieving a lower carbon footprint relative to broad indices that mirror today’s economy, not tomorrow’s. This can lead to excluding entire sectors like energy based on a narrow view of current emissions without considering the role that they play in the broader economy.
Our framework for aligning with the future economy begins with analyzing the full scope of emissions1 associated with end-use consumption categories. Focusing our analysis on final consumption allows us to capture the carbon footprint of the entire value chain. This includes both direct emissions owned and controlled by companies (i.e., emissions from company facilities) and the remaining indirect emissions that a company emits across its value chain (i.e., processing of goods; transportation and distribution). We then factor in expected future climate policy directives to understand which sectors and businesses are positioned to succeed in a low-carbon world. This process provides a forward-looking, non-exclusionary sustainability framework that helps us capture opportunities by reorienting with the changing economy.