How to take into account climate issues in your investments?

The climate issue has been one of the most talked about topics in recent months, and the health crisis we are experiencing has made the sustainability of our production and consumption patterns even more critical. While governments have led the way in this transition, companies and investors also play an important role.

Greenhouse gases⁽³⁾ (GHG) play an essential role in climate regulation. Without them, the average temperature on Earth would be -18°C instead of +15°C (see diagram below). However, since the 19th century, human activity has significantly increased the amount of GHG in the atmosphere. This has resulted in a change in the natural climatic balance that is reflected in a general warming of the earth's surface and the oceans. The global average temperature has increased by 1.2°C since the pre-industrial period (1850-1900) according to the World Meteorological Organization^(4).

How does GHG work? GHG retain some of the heat. The solar radiation partly passes through the atmosphere. The Earth warms up and radiates in its turn. Main GHG: carbon dioxide (CO2) / methane / nitrous oxide (N2O) Source : https://www.conventioncitoyennepourleclimat.fr/2019/12/04/quest-ce-que-leffet-de-serre/

The effects of this warming can be seen all over the planet: fires, periods of drought, extreme weather events, etc. Scientists have long since highlighted the risks to our social and economic equilibrium and the urgent need to promote an economy that emits less GHG. Economic agents are therefore exposed to physical risks, but also transition risks (changes in regulations, impact on the valuation of assets, etc.) that are important to take into account when talking about investments.

Claire Douchy: Petra, as a portfolio manager, how do you integrate these issues?

Petra Besson Fencikova: While governments are making commitments in the fight against climate change, through the signing of agreements such as the COP (Conference of the Parties), businesses play an essential role. To achieve the objectives of the Paris Agreement⁽⁵⁾, all economic sectors must begin to change, starting with the sectors that account for 90% of global GHG emissions: energy, industry and transport⁽⁶⁾. These adaptations to decarbonize industrial processes, transportation and agriculture require massive investments. There are therefore many opportunities for investors. I am thinking, for example, of companies that are developing energy efficiency technologies or that are positioned in the energy renovation of buildings, with the use of efficient systems to produce heat and limit energy consumption. Companies involved in the renewable energy value chain also benefit from new investment flows, as the share of these energies should significantly increase in the energy mix. The food sector, too, which must meet the challenge of feeding the world's population while preserving the climate and biodiversity, also offers investment opportunities. For example, with the development of new sources of sustainable nutrition such as meat protein substitutes, or the optimization of farms through digital technology. Finally, waste management contributes to climate change mitigation. Companies specializing in this activity are implementing breakthrough innovations in recycling and promoting the circular economy.

Claire Douchy: On the renewable energy sector more specifically, what is your opinion as manager Edouard?

Edouard Bouteau: This is a sector that holds a lot of opportunities because it is growing rapidly: the demand for electricity will continue to increase strongly because it allows the use of fossil fuels to be replaced in many areas; but this electricity must be created from decarbonized sources. To reach the Paris Agreement target, global GHG emissions must fall by 25% by 2030 and 65% by 2050 compared to current levels⁽⁷⁾, this is considerable and a source of growth and innovation: renewable and hydroelectric energy are one of the solutions. In 2019, they represented 11% of the world's primary energy consumption, as shown in the graph below.

World consumption of primary energy in 2019: 583,90EJ Coal: 27.0% Nuclear: 4.3% Hydroelecrticity: 6.4% Renewables (excluding hydroelectricity): 5.0% Oil: 33.1% Natural Gas: 24.2%

According to the International Energy Agency⁽⁸⁾ , to reach a sustainable scenario compatible with the Paris Agreement, this rate would have to rise to 35%, which is a considerable annual growth in this sector. In terms of innovations, I am thinking of hydrogen or renewable natural gas, but also of companies that are developing electricity storage or energy efficiency solutions.

Claire Douchy: Petra, what do you say to those who would like to integrate climate issues at the heart of their investments and do not know where to start?

Petra Besson Fencikova: I tell them that climate issues are already taken into account in multi-sector responsible investment solutions that cover all economic sectors. of the company and its products, the management of natural capital, the opportunities for developing environmental solutions or even waste management. And then, if they wish, I would invite them to study the more specialized funds on strategies specifically oriented towards the climate, with the awareness that these strategies do not cover all economic sectors, but only those that provide real solutions to the fight against or the adaptation to climate change.ons, I am thinking of hydrogen or renewable natural gas, but also of companies that are developing electricity storage or energy efficiency solutions.

Your Private Banker is at your disposal to learn more about the sustainable investment solutions offered by Société Générale Private Banking.

⁽¹⁾SGPWM is a public limited company (société anonyme) under Luxembourg law, registered in the Luxembourg Trade and Companies Register under number B 60.963, having its registered office at 11 Avenue Emile Reuter, L- 2420 Luxembourg, Grand Duchy of Luxembourg and having VAT number LU23479311.(https://sgpwm.societegenerale.com/fr/tools/informations-legales/)

⁽²⁾ Approved by the AMF in 2006, SG 29 Haussmann, a subsidiary of Société Générale, is the asset management company dedicated to the management of private client assets. SG 29 Haussmann manages over 7.9 billion assets as of December 31, 2020. The management team is composed of around 20 experienced managers. It relies on the global network of Societe Generale Private Banking, composed of 350 investment professionals located around the world. (https://sg29haussmann.societegenerale.fr/fr/informations-legales/)

⁽³⁾See the site notre environnement.gouv.fr

⁽⁴⁾Climate change in 2020: increasingly alarming indicators and effects, April 19, 2021 : public.wmo.int/fr/medias/communiqu%C3%A9s-de-presse/changement-climatique-en-2020-des-indicateurs-et-des-effets-de-plus-en.

⁽⁵⁾The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris on December 12, 2015 and entered into force on November 4, 2016.- https://unfccc.int/fr/processus-et-reunions/l-accord-de-paris/l-accord-de-paris#:~:text=L'accord de Paris est,contraignant sur les changements climatiques.&text=Son objectif est de limiter,par rapport au niveau préindustriel

⁽⁶⁾Source: https://www.statistiques.developpement-durable.gouv.fr/edition-numerique/chiffres-cles-du-climat/7-repartition-sectorielle-des-emissions-de

⁽⁷⁾According to the European Union's Global Energy and Climate Outlook 2018.

⁽⁸⁾Source: www.iea.org/reports/key-world-energy-statistics-2021/outlook

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