Climate in 3D

For investors wanting to do more than just park up on the right side of the energy transition - to be actual positive participants - it helps to think about the climate in 3D.

The first dimension is the physical reality: our climate is changing fast – unfortunately, the proof points now roll in every year. This is impacting the lives we can lead, our infrastructure and the resilience of global supply chains. It needs to be understood and managed by our companies. Then come the actions we are taking to try and slow or mitigate this physical crisis. Together these efforts form the collective that is the energy transition.

 

This gives us the other two dimensions. Both are critical – but their relative importance is different for different countries, different companies and different investors. Given the immediate focus of policymakers, let’s allocate the second dimension to the management of risk. This is about identifying sources of emission and trying to reduce them as effectively as possible. That makes the third dimension about the other, yet more creative, act of innovation: generating and scaling the solutions that we need to run a low carbon world. 

 

With time running ever short, we need to see the climate challenge in full, ultra-high-definition, super 3D. People and planet need all aspects working together and reinforcing each other.

 

Inevitably, reality is complicated. To increase our understanding, the natural response has been to lean on data; to find some facts and try to manage accordingly. Quite quickly, however, that which can be measured easily starts to dominate over that which, in all the uncertainty about the future, is hard to quantify. And right now, the only good facts that we actually have are about emissions: what did I emit today, what did I emit yesterday?

 

While it’s right that every company should report and manage its emissions, that’s a very one-dimensional approach. It tells you nothing about exposure to the physical changes to come, little about potential shifts in industry value chains, and nothing about the vast array of technologies we need to make and enable a net-zero future.

 

To date, we’ve tried at Baillie Gifford to keep our 3D glasses on by looking at each of our companies bottom-up. We’ve asked questions and sought information from academics and consultants. This has led us to innovators and scale-builders alike. But, we know we don’t know enough. We’d like to know more, and we’d like the tools and the information to be available for all of us in the investment industry to see in 3D – to allocate for innovation, as well as to better manage the full range of risks.

 

We are, therefore, delighted to be partners in the just-announced UK Centre for Greening Finance and Investment (CGFI). This aims to create a research and innovation centre that will develop and coordinate best-in-class climate and environmental analytics. Supported by the UK government it is part of the UK COP26 strategy for green finance. It has the explicit goal of positively enabling the transition, stating upfront that: reallocating capital will help to close the gap in investment required for successful climate mitigation and adaptation”.

 

CGFI is being led by the University of Oxford Smith School but brings together a range of research institutions, finance regulators and investor initiatives. We are one of a number of asset managers that will participate to ensure that the output is solutions focused: high-quality, accessible and impactful. The centre is up and running from April, and we look forward to incorporating its tools in our work – and sharing them as we go along.

Caroline Cook

Senior analyst

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