Global Climate Change
Schroders Global Climate Change seeks to provide capital growth primarily through investment in equities securities of worldwide issuers which will benefit from efforts to accommodate or limit the impact of global climate change.
We do not define a specific performance target but we believe that over time, companies well-positioned with regard to climate change will significantly outperform broad world indices.
Schroders Global Climate Change Equity is an actively managed, thematic strategy capturing opportunities around the world by investing in companies we believe will be positively impacted by efforts to transition to a low carbon economy. The impact of global warming on the economy and companies will be far reaching and profound. We believe that companies that recognize the threats and embrace the challenges early, or that form part of the solution to the problems linked to climate change, will ultimately outperform the broader market. The strategy will typically invest in 40-70 stocks of companies exposed to five key sub-themes: Energy efficiency, sustainable transport, clean energy, environmental resources and low carbon leaders.
The Global Climate Change Team is led by Simon Webber. Simon is directly responsible for all decisions made within the strategy and has a detailed knowledge of all companies in which investments are made. He is supported by dedicated Global Sector Specialists, Climate Change Specialists, as well as the broader Global Equities investment team. In addition, the Global Climate Change Team is able to leverage the research output of over 100 experienced investors located globally, consisting of locally-based equity analysts, and specialist teams of small cap, energy, commodities and agriculture investors.
Underpinning the Global Climate Change strategy is a belief that the impact of global warming on the global economy and on individual companies will be far reaching and profound. Because of the timescales over which these changes will become apparent and given the scale of the necessary shift away from carbon-based fuel dependence, we believe that ‘Climate Change’ will be one of the most significant investment themes over the next 20 years. We believe that companies that recognise the threats and embrace the challenges early, or that form part of the solution to the problems linked to climate change, will ultimately outperform the broader market. The Global Climate Change strategy seeks to identify and hold these companies.
What is distinctive about our philosophy is our appreciation that climate change will have huge consequences for companies across a broad range of industries and affect a great many more companies than those purely involved in renewable energy, energy efficiency and environmental resources.
We believe that stocks which deliver positive earnings surprises will produce strong and consistent outperformance over time. We believe in-depth fundamental research is the most reliable means of identifying such companies and appraising future earnings growth potential relative to market expectations. Within the climate change investment universe, the team seeks to identify companies with a positive “growth gap” (i.e. stocks we expect to deliver forward earnings growth that will exceed the market’s expectations) and that screen well according to their view of the most relevant valuation metrics for each sector.
Our Global Climate Change strategy utilizes a bottom-up, fundamental research driven approach. Stock selection is the primary driver of performance, with proprietary company research key to our investment process.
The below chart summarizes our investment process.
Our first task in the process of stock selection is to determine a universe of companies from the global investment universe whose long-term business outlook, in our opinion, is significantly impacted by efforts to mitigate or adapt to climate change. We have built a team process and supporting systems that draw on a range of inputs to identify companies where climate change is a significant positive to the business outlook.
Given rapidly changing business impacts, it is not possible to have simple percentage rules for the amount that a company is positively or negatively impacted by climate change. Therefore, the team assesses relevance based on the factors below. The overarching principle is that climate change must have a significant impact on the long-term business outlook for a stock to be included. A company’s management and strategy is assessed on the following basis.
- If the company has significant direct industry exposure to climate change trends (mitigation - reducing greenhouse gas (GHG) emissions through energy efficiency, renewable power, and cleaner vehicles or adaptation - those that are preparing for the impacts of climate change, for example water stress, coastal flooding, community health issues, or supply chain disruptions, among other issues)
- The proportion of business segments that are potentially exposed to climate change trends
- If the company has significant investment and R&D spending related to the transition to a lower carbon economy
- A product portfolio that takes into account the physical and transition risks posed by climate change
When assessing the significance of climate change on the long-term business-outlook for a company, we consider the impact of all these factors on expected revenue growth, operating margin and capital intensity of the company. Stocks in the universe are then classified as beneficiaries of either adaptation to, or mitigation of, the effects of climate change.
From the global climate change database, existing best ideas from the Global Sector Specialists and regional Small Cap team are automatically selected as best ideas for the strategy. Additional stock ideas, either generated by the team or by other sector strategies, are researched from the universe by the portfolio manager. This produces a pool of 50 - 100 best ideas from which the portfolio is constructed. The Global Climate Change strategy’s investment criteria and philosophy are then applied and used to filter the best ideas list, resulting in a high conviction portfolio of 40 – 70 stocks. The portfolio is constructed without strict regard to any benchmark weights, with position sizes reflecting the teams’ risk adjusted return expectations and fundamental conviction levels. Stocks with a higher relative upside, lower fundamental risk profile and higher liquidity will receive higher active weights in the portfolio.
Buy and sell discipline
Purchase decisions are the responsibility of the portfolio manager. Within the climate change investment universe, the team focuses on identifying companies with a positive “growth gap”, (i.e. stocks they expect to deliver forward earnings growth that will exceed the market’s expectations) and that screen well according to their view of the most relevant valuation metrics for each sector. The competition for capital within this relatively concentrated strategy ensures that only the highest conviction investment ideas are considered for inclusion within the portfolio. The position sizes will reflect the teams’ risk adjusted return expectations and fundamental conviction level. Stocks with a higher relative upside, lower fundamental risk profile and higher liquidity will receive higher active weights in the portfolio.
Sell decisions occur when climate change ceases to be a significant driver for the business outlook, the fundamental investment case deteriorates and our view changes, the growth gap turns negative (i.e. our earnings estimates move below consensus), the team identifies opportunities often offering better risk adjusted returns or the growth gap has closed and valuation is no longer compelling. Any of these factors could precipitate a sell decision, but for this strategy the only mandatory trigger to sell is if climate change ceases to be a driver of the business outlook.
Looking beyond the obvious
We're not your typical climate change fund. Climate change is going to impact every company, so we look for opportunities across a global and diverse opportunity set rather than limit ourselves to particular sectors. This way we are able to construct for you a well-diversified portfolio of different companies across sectors, all linked to climate change. We do, however, exclude companies which generate significant revenues from fossil fuels.
We don’t believe in relying solely on traditional measures like carbon footprint. We use proprietary tools and analysis to build a more detailed and accurate picture of how companies and industries will evolve and adapt. We’re looking for how climate change will affect revenue, margins, running costs, valuations and the impact on the entire value chain. This gives us the best opportunity to pick those companies that will flourish as part of a low-carbon economy and, ultimately, potentially deliver better returns for you.
A team of climate change specialists
Climate change investing is complex but we do the hard work for you through our large team of experienced professionals. Our team has investment experience in sectors like technology, energy, utilities, materials and automotive – exactly the ones set to be affected by climate change. We also have a dedicated sustainability team who understand the science of climate change and how it links to economic trends as well as data scientists to provide us with unique insights that others may not be able to spot.
We've been doing this a long time
Climate change investing is not something we’ve recently jumped into. Schroder ISF Global Climate Change Equity has been successfully running since 2007 and was among the first in its field. Over this time, our philosophy and method haven’t wavered.