Enhancing sustainable opportunities using carbon transition strategies

Canada Life's new enhancements are designed to help meet investors' demands for responsible investment solutions

Enhancing sustainable opportunities using carbon transition strategies

This article was provided by Canada Life.

We know that a sound investing approach requires the flexibility to evolve in response to the responsible investment realities, opportunities, trends, regulations, and risks of today and those of tomorrow.

Based on extensive research and portfolio modeling by our sub-advisor J.P Morgan Asset Management (JPMAM) and Canada Life’s Investment Management Research Team we’ve added The Canada Life U.S. Carbon Transition Equity Fund to the Canada Life Sustainable Portfolios. The thematic fund is designed to help investors capture investment opportunities or avoid certain risks that arise because of the fight against climate change, and the resulting transition to a low carbon economy. The fund aims to do this by evaluating companies on their emissions, resource management and carbon related risks, and overweighting those companies deemed to be making meaningful progress in these areas while underweighting those most at risk.

The Opportunity

Carbon emissions and their role in climate change

Human induced climate change is a critical and urgent issue. We’re seeing impacts from more intense extreme weather events like heavy precipitation events, floods, heat waves, droughts, and wildfires. One of the major contributors to climate change is carbon dioxide, or CO2, in the atmosphere it’s the primary GHG emitted through human activities, making up 79% of all U.S. GHG in 2020’. By reducing greenhouse gas emissions, we can make a greater impact and begin to mitigate the effects of climate change.

Greenhouse gases – such as carbon dioxide, methane, nitrous oxide, and others – make up a small percentage of Earth’s atmosphere but play a significant role in regulating the temperature of the planet. Because of their chemical make-up, these gases absorb heat radiated from Earth up towards space, trapping it in the atmosphere, and warming the planet.  Greenhouse gas emissions are typically quoted in CO2 equivalent metrics – or “carbon emissions.”

You may have seen or heard of different organizations discussing their impact on climate change and adopting initiatives to go carbon neutral by carbon transitioning.  Companies can put a carbon transition plan is place by using  lower or more efficient energy consumption, lower levels of pollution and  building renewable energy technologies. This could include using renewable energy, designing products with minimal waste and investing in renewable-energy projects.

Why it’s important to consider carbon transition as part of an investment strategy:

  1. Future proofing investment portfolios: Decarbonization is a long-term structural trend that transcends sectors, geographies, and economic cycles. There’s strong consensus from the business, governmental and consumer community that it cannot be ignored, avoided, or delayed. Investing in companies that are showcasing a strong strategic commitment to carbon-transition investors are essentially considering the ‘new normal’ of the economy and seeking ways to future proof their portfolio.
  2. Direct resources towards solutions: Carbon-transition strategies typically look for companies that are effectively managing their carbon-footprint and/or those companies actively pursuing solutions to climate related challenges. For investor portfolios, this can mean direct or indirect exposure to opportunities in renewable energy technology, carbon capture and storage, sustainable agriculture, green buildings and infrastructure, sustainable transport, water management, waste management and land management among other areas. This allows investors to harness their resources towards relevant solutions to help combat the urgent but long-term problem of climate change.

Avoid potential risks

A growing number of governments around the world are committing to ambitious decarbonization goals. The pace is picking up - demonstrated through increasing climate related policies and regulation. Companies not keeping up will be at risk of greater scrutiny, intervention and forced action by governments. Furthermore, companies also face other climate related risks such as the financial impacts of severe weather events, stranded assets, consumer boycotts etc. As momentum continues on all these fronts, the question that remains pivotal is: are companies ready, willing and enroute to transitioning their business models? Or will they be at risk of losing value through inaction. A carbon transition fund asks this very question of the companies in which it invests. While the energy transition will not happen overnight, it’s important for investors to recognize that the financial impacts of climate risk and transition risk will reverberate across all industries and global markets, affecting long-term investor returns. Companies that seek to mitigate risks and capture opportunities will be in a stronger position to drive long-term value

“Regulatory action on carbon emissions is likely to intensify over the coming years, and companies that are actively addressing these risks could have a competitive advantage in the future.”

Meera Pandit, Global Market Strategist, JPMAM

JPMAMs carbon transition investment approach

JPMAM’s investment approach involves identifying those companies best positioned to benefit from the transition to a low carbon economy. As part of this analysis JPMAM will evaluate companies on the following criteria:

  • Emissions – how effectively the company is managing greenhouse gas emissions, including through its own reduction in the burning of fossil fuels and in providing products and services reflecting a shift in consumer demands for lower emissions.
  • Resource management – how effectively the company is managing the resources which it consumes, such as electricity, water and waste.
  • Risk management – how effectively the company is managing physical and reputational risks.

Help investors take a socially conscious approach but not at the expense of their fund’s performance.

In 2018, Bank of America Merrill Lynch found that firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt.  We know investors want their fund selections to evolve to deliver better risk, return and sustainability outcomes. Access to more sustainable opportunities like the addition of the Canada Life U.S. Carbon Transition Equity Fund aligns with investor values and greater diversification of the portfolios.

Reach out to your Canada Life wealth wholesaling team for more information on Canada Life Sustainable Portfolios and this enhancement.

J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. JP Morgan Asset Management (Canada) Inc. is the sub-advisor to the funds mentioned herein. J.P. Morgan Asset Management is not affiliated with Canada Life. 

Canada Life Sustainable Portfolios are available through a segregated funds policy issued by The Canada Life Assurance Company or as a mutual fund managed by Canada Life Investment Management Ltd. offered exclusively through Quadrus Investment Services Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. A description of the key features of the segregated fund policy is contained in the information folder. Any amount allocated to a segregated fund is invested at the risk of the policyowner and may increase or decrease in value.

1  Responsible Investment Association (RIA) Canada. (2021). 2021 Canadian RI Investor Opinion Survey. RIA. 2021 RIA Investor Opinion Survey - Responsible Investment Association (riacanada.ca)

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