Tough climate-change sectors that may be good opportunities

Renewable energy and battery-powered cars grab attention in the climate change debate. But tougher, “hard-to-abate” sectors may be more important for sustainable investors. Pendal’s RAJINDER SINGH explains

• Challenging or “hard-to-abate” sectors offer opportunity for sustainable investors
• These include agriculture, airlines, steel and cement
• Climate change “not just about fossil fuels”

YOU’VE probaby heard sustainable investment experts describe some industries as “hard to abate”.

Abatement means reducing the intensity of something unpleasant.

Climate-change experts refer to sectors such as cement, steel, air travel and agriculture as “hard to abate” because they lack obvious, cost-effective carbon-reduction solutions.

That’s a problem since these sectors make up more than a third of the world’s carbon emissions. Finding solutions in “hard-to-abate” sectors is critical to meeting net zero commitments — which makes them interesting to investors.

The fact they are largely overlooked in government policy and public debate may indicate there are opportunities for investors seeking to help create a better planet.

“Tackling climate change is not just about fossil fuels,” says Rajinder Singh, who manages several Pendal sustainable funds.

“There are some really difficult things we need to solve — things like airlines, cement, steel, agriculture and a wide range of industrial processes are significant carbon emitters.

“They are going to exist in 2050 and beyond and they are going to take time to solve.”

Singh says solutions for some of the trickiest questions about greenhouse gas emissions in these sectors are only beginning to emerge and sustainable investment success requires working with companies to solve these hard-to-abate sectors.

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“It demonstrates the value of active ownership,” says Singh. Unlike most ETF or passive fund managers, active investment managers such as Pendal are run by managers who engage with companies to influence positive change.

“As a sustainable investor, you can’t just buy an ETF that owns all the good stocks and excludes the bad stocks. You have to work with companies and help with the transition.”

Solving the air travel problem

Airlines are one of the industries at the early stages of solving for net zero.

Batteries are unlikely to provide a solution for long-haul travel because of their weight, though short-haul electric airplane trips are feasible.

As a result, airlines are experimenting with biofuels — jet fuel made from renewable sources like plants or waste.

“But it has to be done sustainably,” says Singh. “You can’t divert agricultural products that would ordinarily be used for food,” says Singh.

In the meantime, the opportunity for airlines is in improving fuel efficiency by optimising routes and investing in more efficient planes.

Green cement

Another hard-to-abate sector that investors are seeking answers for is the cement used to make concrete.

“It’s in the basic chemistry — heating the raw materials releases CO₂. That’s how concrete has been made for thousands of years,” says Singh.

Investments in technology solutions are showing promise. Trials are underway to capture carbon emissions in the concrete itself, trapping it and preventing it entering the atmosphere.

Fly ash — ironically a waste product from burning coal — is used to replace cement in concrete, dramatically reducing carbon emissions.

Other hard-to-abate areas include industrial processes that require high heat such as steel production or making bricks in a kiln.

Hydrogen offers a potential solution here although there is a long road of capital investment and trials ahead.

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Risks and opportunities

These are important issues for investors to understand, says Singh.

“There is a cost in terms of capital that needs to be invested — over and above the regular business-as-usual investment.

“Steel companies need to spend tens or hundreds of millions of dollars investigating technologies and implementing in existing operations.

“If they’re going to spend shareholders money, we want to have a return based on that.

“Some of that return may be a green premium — but it may also simply be that you need to spend the money just to stay in business.”

Singh says investors seeking to create a sustainable investment portfolio — and genuinely impact the future — need to stay close to companies at the cutting edge of change in these hard-to-abate areas and resist the temptation to just divest.

“How can you own a mining company in a sustainable fund? Well, if you think about what a sustainable company fund is trying to do, it is investing in a society that is better.

“If you want to have electric vehicles, solar panels and a green electricity grid, you’re going to need metals like steel, copper and lithium.

“So, you want to invest in those companies that are providing those materials in the most sustainable way — what are the emissions, but also, what does workplace health and safety look like and how are they treating indigenous land holders?

“Mining is not bad. We just want sustainable mining.”

About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team. He has more than 18 years of experience in Australian equities.

Rajinder manages Pendal sustainable and ethical funds including Pendal Sustainable Australian Share Fund.

Pendal offers a range of responsible investing strategies including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Responsible investing leader Regnan is part of Pendal Group.

Contact a Pendal key account manager here