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For today’s Soundbites, we speak with Garrett Norman, executive director and investment specialist with J.P. Morgan Asset Management, about the global transition away from carbon. We talked about the developing carbon market and investment risks.

And we started by asking how investment can play a role in the climate-change solution.

Garrett Norman (GN): So, the impact of climate change is certainly becoming more and more visible, and the challenge is enormous. As a planet, we’re currently emitting 50 billion tons of greenhouse gas emissions every year, which is about 40% higher than it was just in 1990. We need to bring this down to zero by 2050, just to limit global warming. I think it’s clear that we’re not going to get to net zero by simply consuming less energy. We need to find ways to meet energy demand in a cleaner, more sustainable way. And this is where the investment comes in. Estimates are for as much as $140 trillion in aggregate investment by 2050 to as much as $275 trillion. And regardless of which estimate winds up being most accurate, it is trillions of dollars each and every year.

Investment risks and opportunities.

GN: Industries reliant on fossil fuels certainly face risks whether it be the potential for stranded assets, regulatory headwinds or higher cost. But that’s only half the story. Costs to some companies will be revenues to others. So, if you think of the opportunity at hand, investing in the likes of Microsoft or Apple or Samsung at the beginning of the tech revolution, we see similar opportunities now in the climate space.

The growth of the carbon market.

GN: Zeroing out emissions by replacing fossil fuels with clean-energy technology or improving energy efficiency will not be enough to halt and reverse climate change. So, we will need carbon removal, and this has been prompting an expansion of the carbon market in which offset credits are created. While the percentage of global emissions covered by carbon pricing initiatives was only 5% in 2010, it’s up to 25% and we do expect there to be an increase in the percentage of emissions covered, and a continued development of the carbon market’s overall growth.

On data disclosure.

GN: The data and disclosure side of things is evolving quickly. When we launched our carbon transition U.S. strategy, under 40% of companies in the Russell 1000 were disclosing their greenhouse-gas emissions. That was just a few years ago. Disclosure has improved markedly with now over two-thirds of companies in the Russell 1000 disclosing greenhouse gas emissions. But I don’t want to stop with just emissions data. We don’t think it’s the whole picture. And it is inherently backward looking. We’re looking to complement company disclosed data with that which we can construct through our own machine-learning capabilities. We use natural-language processing to evaluate tens of millions of data points, including company profiles, research reports, regulatory filings and news articles. And we’ll work with external data vendors as well, to form as holistic and as forward-looking a picture as possible.

Industries and regions most affected by carbon capture.

GN: The carbon transition will not impact all sectors and industries equally. According to the U.N., one in five stocks could be impacted by at least 10% in either direction, and inter-sector deviation could be over 100%. The effects will span different segments of the market, different sectors and different industries, as will the investment opportunities. From a country perspective, the impacts will also be quite dispersed in nature. Countries that have a highly carbon-intensive domestic economy or countries that are currently large net exporters of fossil fuels, or home to large energy companies — the likes of Russia, India, South Africa, Canada, Australia and Brazil — will experience a more difficult transition. Australia and Canada have the fiscal headroom to alleviate the short-term pain by taking on more debt, whereas Brazil, Russia, South Africa or India do not.

And finally, what’s the bottom line on investing in the transition away from carbon?

GN: I think it’s really important to acknowledge that there are both risks and opportunities associated with the transition to a low-carbon economy. It’s important to invest in a manner that considers both. We also think it is important to be forward-looking in assessing companies, acknowledging the reality that companies themselves are evolving, as are the regulatory frameworks across the globe. But first and foremost, investors need clarity on the objectives of a strategy and what they’re looking to achieve. Is it to reduce the carbon footprint of their own portfolio, or that of the whole global economy? We see value in both types of approaches, but need different methodologies to solve them. So, level-setting on the objective of a carbon-transition strategy is an important part of investing in this paradigm.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Garrett Norman of J.P. Morgan Asset Management.

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