Hamilton van Breda, Group Liaison Officer at M&G Investments

Climate change is no longer a distant threat but an immediate and pressing challenge that affects every facet of our lives. Before looking at investment opportunities, it’s important to understand the framework, the Paris Agreement, in which the world is seeking to combat climate change.

What is the Paris Agreement?

Adopted by 194 parties on December 12, 2015, and effective from November 4, 2016, the Paris Agreement represents a global commitment to address climate change. The primary objective is to limit global temperature rise to well below 2°C above pre-industrial levels and pursue efforts to restrict the increase to 1.5°C above pre-industrial levels, since this would significantly reduce risks and the impacts of climate change.

Achieving these targets requires substantial reductions in greenhouse gas emissions and a transition towards a more sustainable economy.

Governments worldwide, including South Africa, are increasingly committing to these goals. They are implementing policies and regulations to enforce decarbonisation and achieve net-zero emissions by 2050. As global leaders work towards the ambitious targets set by the Paris Agreement, investors have a crucial role to play in driving the transition to a low-carbon economy. This creates a fertile ground for investors to align their strategies with these global efforts while potentially reaping financial rewards. For South African investors, this presents both opportunities and risks that must be carefully navigated.

Unpacking Paris-aligned investing

Paris-aligned investing involves directing capital towards companies and sectors that are in line with the goals of the Paris Agreement. This approach not only supports the global climate objectives but also manages investment risks associated with climate change.

Here’s how Paris-aligned investing works:

• Carbon footprint reduction

Investors focus on companies with a lower carbon footprint or those that are committed to reducing their emissions. This involves identifying businesses that are making significant strides towards minimising their environmental impact. By investing in these companies, investors mitigate exposure to carbon-intensive industries and support sustainable practices.

• Fossil fuel exclusion

A critical component of Paris-aligned investing is avoiding companies involved in fossil fuel extraction, production, or distribution. This strategy aligns with the global shift towards cleaner energy sources and reduces the risk associated with investments in industries that are likely to face increasing regulatory and market pressures.

• Renewable energy investment

Investing in renewable energy sources such as wind, solar, and hydro power is central to a Paris-aligned strategy. These sectors are vital for transitioning to a low-carbon economy and offer significant growth potential as the world moves away from fossil fuels.

• Climate risk assessment

Investors evaluate the potential risks and opportunities related to climate change when making investment decisions. This involves assessing how climate-related risks, such as extreme weather events or regulatory changes, could impact a company’s performance and integrating this analysis into the investment process.

• Sustainable Development Goals (SDGs) Alignment

Paris-aligned investing often intersects with the UN’s Sustainable Development Goals (SDGs). Investors target companies that contribute to goals such as affordable and clean energy, sustainable cities, and climate action. This alignment ensures that investments not only address climate change but also support broader social and environmental objectives.

• Active Ownership

Active ownership involves engaging with companies to promote climate-friendly practices and improve transparency in environmental impact reporting. Investors, such as M&G Investments, use their influence to encourage companies to adopt more sustainable practices and achieve their climate goals.

Conclusion

Paris-aligned investing offers South African investors a way to support global climate goals while potentially enhancing portfolio performance. By focusing on companies that are committed to reducing their carbon footprint, excluding fossil fuels, and investing in renewable energy, investors can align their portfolios with the Paris Agreement’s targets.

By focusing on real-world outcomes, engaging deeply with companies, and supporting their decarbonisation journeys, active investors can drive meaningful progress towards climate goals. For investors committed to making a real-world impact while achieving sustainable returns, an active approach is key for navigating the path to a net-zero future.

ENDS