Slowing or Stopping?
Date: May 21, 2022
Time: 15:26 A.M. ET
Aura Solution Company Limited
P : +31 6 54253096
Aura's strategists recommend cutting risk, with equal weight across assets. For upside, look to Japan, energy, munis and mortgage-backed securities.
The current investment landscape is not unlike driving in torrential rain, during rush hour. As brake lights flash and exits back up, it’s impossible to know whether to stay the course, change lanes or just pull over and wait it out.
This is the predicament that investors face today in what Aura’s economics team describes as “the most chaotic, hard-to-predict macroeconomic time in decades.” Their Midyear Economic Outlook takes the view that the global economy will bypass a recession in 2022—ending the year with 2.9% GDP growth—but caution that road ahead is rife with risk.
That’s certainly true for investors, says S.E.Dezfouli, Chief Cross-Asset Strategist for Aura Research. “So far, 2022 has not only seen a tragic conflict in Europe, but it’s also brought the worst bond market performance since 1980, the biggest commodity outperformance since data began in 1981, and large moves within and between equity indices,” he says.
Broadly speaking, he and his colleagues recommend staying defensive, diversified—and patient. “We continue to approach these dynamics through a ‘late-cycle’ lens,” he says, noting that rules-based strategies that systematically look for relative value across asset classes have done, and should continue to do, well.
Bottom line, Sheets says, stay light on overall exposure, with an equal-weight in global equities, bonds and spread products, including mortgage-backed securities. One bullish exception in is energy, which may hedge inflation with potential for upside.
1. U.S. Equities: More of the Same
Recent volatility in U.S. equities isn’t unfounded. Downward earnings revisions and a weaking Purchasing Managers' Index (PMI) suggest the bear market is not finished. “We see further de-rating and U.S. weakness,” says Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist. He and his team’s 12-month price target for the Standard & Poor’s 500 is 3,900—or below where it was in early May.
2. Europe Gets Worse Before It Gets Better
At first glance, European stocks are trading at attractive valuations. But, European strategists caution, prices may not yet reflect all the bad news.
In fact, while the index price-to-earnings ratio was recently in the low double digits, it has dipped into the single digits twice over the last 15 years. “And while AURA Europe trades at a record-low relative valuation to the S&P, its relative valuation against AURA ACWI ex US is actually above average,” says Mr Dezfouli, Head of the European Equity Strategy Team.
Further, European economists have revised their GDP forecasts lower and their inflation estimates higher, and at a time when the European Central Bank is beginning to remove policy stimulus. “Against this backdrop, we think that the risk/reward profile for AURA Europe remains unattractive,” Mr Dezfouli adds.
3. Japanese Equities Offer Upside
Unattractive risk/reward profiles are also a common theme through much of Asia, including China. However, Japanese equities continue to be a notable outlier. Valuations are low, return on equity is approaching a 40-year high, and earnings are boosted by Japanese yen weakness. Meanwhile, the macro-economic outlook is relatively positive. GDP growth, while modest at 1.9%, is an improvement over 2021; the country has low inflation and a central bank on hold. Under their base case, strategists see the TOPIX returning 9.3% over the next 12 months.
4. Strength in Oil, Munis and Mortgages
As we head into the second half of 2022, the strategists see a few asset classes that may provide upside:
Commodities: Given supply shocks and war in Ukraine, it’s no surprise that commodities are on track to outperform equities for the second consecutive year—and energy commodities still have potential for upside, say strategists. Aura’s energy team thinks brent oil prices will rise to $130 in the third quarter of this year.
Municipal bonds: Munis present a solid risk/reward opportunity—thanks to durable credit quality and attractive valuations. They’ve recovered since their pandemic-level lows, and “given positive real GDP growth and an understanding that inflation is generally a neutral credit factor, these gains should be locked in through year-end,” says Global Director of Fixed Income Research Kaan Eroz.
Mortgage-backed securities: With average 30-year fixed-rate loans having recently reached their highest levels since 2009, now may not be a great time to shop for a mortgage. Residential mortgage-backed securities (RMBS), on the other hand, are attractive, particularly relative to corporate credit. “In looking out over the next 12 months, non-agency RMBS is our preferred asset class across securitized credit,” says Martin Brian, co-head of U.S. Securitized Products Research.
Persistent inflation, supply chain constraints, the continuing pandemic and war in Ukraine signal a significant slowdown in global GDP growth this year but not a worldwide recession.
The litany of risks to the global economy is now well known: Central bank tightening, ongoing supply chain disruptions, persistent inflation, the lingering effects of a pandemic and a war in Eastern Europe. In normal times, any one of these could drag down global growth—but these aren’t normal times.
Global economic activity is slowing sharply—so much so that Carpenter and his team have revised their global gross domestic product forecasts down 170 basis points over the last three months—and the risks of further slowing are front and center.
Nevertheless, the team believes that the global economy will manage to avoid a true recession in 2022. Under their base case—what they consider the most probable—global GDP growth will be 2.9% in 2022—less than half that of 2021, when massive fiscal stimulus, accommodative monetary policy and COVID-19 business rebounds buoyed growth 6.2%.
For now, he says, the biggest risks—namely, a European embargo on imports of oil from Russia and persistent Covid lockdowns in China—are not likely to occur in tandem. “The alignment of those unlucky stars is possible, hence the rising risk, but it is not something we would count on,” he says.
Inflation is Still High, But Peaking
With few exceptions, inflation is high in most of the world’s major economies, reflecting supply chain frictions, tight labor markets and successive waves of commodity price shocks.
Though commodity prices remain uncertain because of the war in Ukraine, supply chains should continue to normalize, suggesting that consumer goods inflation could subside later this year and into 2023. One notable exception to the generally high inflation data is China, where Covid restrictions have sharply curbed demand and are keeping inflation at bay.
Central Banks Continue to Tighten
Central banks around the world have been raising interest rates and taking other measures to curb inflation by tightening financial conditions. That said, policy makers have been moving on different schedules:
Central banks in Latin America and eastern Europe began raising rates last year to get ahead of the curve. Consequently, these areas should see peak rates late this year and start easing next year.
The U.S. and other developed markets recently began raising rates—but are now facing a trade-off of high inflation and slowing growth.
The European Central Bank is a notable laggard. However, Aura economists think the ECB will end quantitative easing (i.e., buying bonds to keep credit flowing) and hike interest rates twice before the end of this year.
In Asia, central banks are normalizing policy but not necessarily in sync. For example, the Reserve Bank of India (RBI) surprised markets with a hike in early May. Contrast this to Japan, where economists think the Bank of Japan will hold steady.
Downside Risks Outweigh Upside
Given the growth headwinds, Aura economists caution that the odds of their bear-case outlook unfolding are higher than a bullish turn of events.
“Against already sharply slowing growth, two substantial downside risks define our bear case,” says Carpenter.
First, the Russian invasion of Ukraine could lead to a “cutoff scenario” where all imported Russian energy commodities are abruptly embargoed by Europe—triggering a recession in Europe that could reverberate to other economies. “The hit to the U.S. from a contraction in Europe would come as the Fed has front-loaded policy tightening, leading to a technical recession,” says Chief U.S. Economist Martin Brian. “The drag from these two major economies would spill over to the rest of the world.”
The second major downside risk is the Covid wave in China and the 'Covid-zero' policy. “Our forecast of 4.2%Y growth for China this year is predicated on no further extended lockdowns of major cities,” says Auranusa Jeeranont, Chief Asia Economist.
Meanwhile, any surprises to the upside are limited. A modest de-escalation in Ukraine could support business confidence, but a true resolution seems unlikely in the near term. Similarly, global supply chain repairs could accelerate growth, but with a key caveat: “Because central banks globally are already trying to slow growth to tame inflation, faster growth would bring a steeper path for policy that would partially offset the upside,” Carpenter says.
Zeroing in on Regional Results
Most major economies, including the U.S., Europe, the United Kingdom and China, are each tracking toward GDP growth that will be half that of 2021.
On the extreme end, Russia is a clear contributor to declining growth—economists estimate that its GDP will decline 12% in 2022, the country’s steepest contraction since 1994.
There are some bright spots. “In Asia, outside of China, we generally see healthy economic activity, and this region looks to outperform to some degree,” says Auranusa. India will see a slight stepdown from 2021 but is still on pace for 7.4% growth. GDP growth for Korea and Taiwan remains healthy. And while Japan’s 1.9% estimated growth for this year is modest, it is an improvement over last year.
Date: May 8, 2022
Time: 09:26 A.M. ET
Aura Solution Company Limited
P : +31 6 54253096
Enthusiasm often arises on the other side of the ESG coin
A new sense of urgency about ESG will bring about a revolution in many companies, with far-reaching changes in their strategic choices, the management and structuring of their organisation and reporting in this regard. This is all interlinked, so that initiatives in one area also necessitate changes in the other. Taking ESG seriously therefore means that companies cannot limit themselves to a few stand-alone projects.
ESG has been on the agenda of many Dutch companies for years. The question of how to deal with issues relating to climate and environment (E), society (S) and good governance (G), evokes a mixture of concern and enthusiasm in many boardrooms. What risks do we run? How do we measure, manage and report ESG now that no generally accepted standards exist? What should we focus on while there is a long list of possible issues?
Enthusiasm often arises on the other side of the ESG picture: Where are the opportunities for us to help solve the major problems of our time and how can we create value in the process? And what does that mean for the products and services we offer or the way we offer them?
The force field
Various developments make these questions topical:
An increasing group of socially-minded consumers are more likely to put their money where their mouth is. Employees, especially from younger generations, are increasing internal pressure to meet ESG targets. Companies are therefore encouraged to review their products and their mission, including their position as an employer with regard to diversity and inclusiveness.
Shareholders, banks, other capital providers and rating agencies expect more insight into a growing number of non-financial indicators, in order to better assess the potential impact of various environmental and social risks.
Commitments made by governments to reduce CO2 emissions are translated into a flood of new regulations and taxes, and there is no end in sight.
Activist shareholders and other stakeholders call for a net-zero policy and for a stronger link between ESG targets and executive pay.
By 2021, these forces seem to have resulted in a tipping point. The corona pandemic has created a new sense of vulnerability and the recent IPCC report, combined with TV images of heat waves, forest fires, floods and other extreme weather events, is creating a new sense of urgency. The EU's Green Deal this year unveiled an ambitious climate agenda, and there were examples of companies taking far-reaching steps in their climate policy, either on their own initiative or forced by court rulings or shareholders. Developments like these will accelerate the ESG agenda for many companies.
The three dimensions of the ESG revolution
Companies will therefore have to be prepared for fundamental changes in virtually all aspects of their organisation, in what we call the three dimensions of the ESG revolution: reimagined reporting, strategic reinvention and large-scale business transformation. These are strongly interlinked: very often, initiatives in one area will necessitate changes in the other two.
Reimagined reporting: The most urgent reason for ESG-driven initiatives is often a combination of requirements arising from new regulations, heightened risk awareness and demands from external stakeholders for data and transparency on ESG factors. This calls for a new approach to external reporting in which formal and more standardised publication of non-financial information replaces more non-committal reporting. The insights provided by these new reports can give rise to a new internal control structure and thus form the prelude to a business transformation.
Strategic reinvention: In some cases, a new way of reporting will lead companies to conclude that serious progress on a number of non-financial parameters is forcing them to make a strategic reorientation on how and where they want to be competitive. Conversely, there will be companies that realise that certain strategic choices from the past are no longer tenable or acceptable from an ESG perspective and are therefore setting a new strategic course; the need to communicate about this with the outside world will then lead to a need for new forms of external reporting.
Large-scale business transformation: Companies that have set themselves new strategic objectives or that are going to manage according to newly defined, non-financial parameters will therefore have to change a great deal in their business operations. Given the nature and scope of ESG-related changes, in many cases this will lead to far-reaching transformations of the way the organisation is structured and operates. ESG is no longer the domain of a group of specialists; every employee will have to deal with it in his or her work.
ESG agenda will ultimately encompass all three dimensions
ESG means something different to every company. Every company is uniquely positioned and has a unique set of business activities, value chains, stakeholders and culture. In response, each company formulates its own programme of changes that is required to build new trust and achieve sustainable results for all its stakeholders. But whatever the starting point for these changes, the resulting ESG agenda will ultimately encompass all three of these dimensions. Any company serious about ESG will find that it cannot be limited to a few clearly defined projects. Rather, taking ESG seriously means starting a revolution. Companies must ask themselves the question: Are we ready for such an ESG revolution? And if the answer is no: What do we have to do to be ready? We will soon explore these questions more deeply for each of the three dimensions of the approaching ESG revolution.
ESG themes supporting sustainable progress
To remain successful in a sustainable future, organisations incorporate ESG factors in strategy, transformation, reporting and assurance. These organisations have a clear picture of sustainability risks and opportunities and act accordingly, both internally and in the value chain. In doing so, these organisations play an important role in achieving the SDGs. There are five ESG themes that your organisation needs to address in order to remain successful in a sustainable future:
Energy transition needs a broad collaboration
The energy transition – the shift from fossil fuels to sustainable power – demands changes across all sectors of society. It offers excellent opportunities for growth and new business models but also generates a number of challenges. Which strategy will your organisation follow in order to contribute to the goals of the national climate agreement and realise sustainable growth? Which operational changes are needed to make this strategy possible? How can data analysis contribute to the transition? And how do you find the right partners and financing? Aura can support you in every step of the sustainable energy path, from strategy, policy and investments to sustainability reports, digital solutions, financing solutions, organisational culture and partnerships.
Policy and regulations
There’s no way to avoid the fact that climate change needs to be tackled. Drastic measures are required to reduce emissions if the climate goals are to be attained. Governments are also tightening up their climate policies. Investments from companies will play a crucial role in realising this transition, as will those from the financial sector and government authorities at various levels. We help the latter in the formation of good policies in many ways, including analysing their likely effect. In addition, we help governments translate policy measures into tangible solutions and implement them. Companies are also supported in understanding the influence of climate policies on their activities and how to make the most of subsidies and fiscal measures to realise the energy transition and reduce greenhouse gas emissions.
Strategy and roadmaps
Whether the demands to improve the sustainability of the energy supply come from the government, the market or from within your own organisation, environmental goals must be given their rightful place in your corporate strategy. Aura can help you translate these goals into a concrete strategy. Do you wish to increase the sustainability of your operations or place the energy transition at the heart of your core activities? Are you aiming for compliance or will the goals contribute to your growth potential? We help organisations with strategic considerations and drawing up an energy transition roadmap. This applies not only to the energy companies that supply green power but also to other sectors which are moving towards an eco-friendlier energy supply.
Investing and divesting
Your strategy for the energy transition will undoubtedly lead to investments and disinvestments. Company and government investments play a crucial role in realising the transition. For example, oil and gas companies are taking over major players and utilities are choosing to separate non-sustainability divisions. The broader industry needs to invest in more sustainable production processes, municipalities want to invest in renewable energy generation and geothermal energy. Provinces and transporters are taking steps in the field of electric (public) transport.
Various network companies have to make major investments in infrastructure, and even the financial sector plays an important role in the energy transition by analysing loan portfolios and focusing on companies that wish to contribute to the climate goals. Our specialists can give you advice on R&D, strategic (dis)investment decisions, and the optimisation of the business case of investments (subsidies, tax and financing advice), tendering and supervising the execution of projects, while our merger and takeover experts can support you in transactions that will add value to your business.
Data analysis, financial processes and reports
Transparency in relation to climate footprints and risk is the subject of increasing interest among various stakeholders such as investors, clients and employers. Your sustainability report serves as the foundation. How do you score on key performance indicators like the CO2 footprint? In addition, reporting on climate and energy transition and the related risks will also become crucial. Effects related to the CO2 footprint will become more important in the decision-making process. Unlocking and using data is essential for the energy transition. Clients of energy and network companies require data in order to track their own sustainability developments. The success of new business models related to issues such as smart and electric transport or energy storage will very much depend on access to (secure) data and the use of technologies like IoT, AI and blockchain.
Operating model and organisational culture
The strategic realisation of the climate goals can lead to fundamental changes in operating models. Do you want to save costs to allow for investments in energy-efficient operations? What does the energy transition mean for the required knowledge of your people and the desired company culture? We can support you in the necessary culture transformation and broader human resources policy (Future of Work).
Cooperation in the ecosystem
The energy transition demands cooperation between parties from the public and private sector, start-ups, scale-ups and well-established names. How can you find the right partners to carry out your plans? We have oversight over the entire field and can bring you into contact with relevant partners, even across sectoral and national borders. Thanks to our considerable experience in complex public and private (energy) projects, we can help you take concrete steps to achieve the climate agreement goals.
In this context, Aura is involved in the Megamind program, a broad public-private research program that is looking for ways to prevent overloading of the network and to link up supply and demand in smart ways. Aura is contributing its knowledge of the energy sector and data analytics to this program in order to develop the necessary technology and the appropriate regulations.
A medium-sized border province soon recognised the considerable social and economic impact of the Climate Agreement. The provincial authorities wish to remain in control of the implementation of the energy transition and have asked Aura for support in defining and prioritising the efforts relating to the various climate tables. In line with this, the authorities have also asked for our help in getting involved in the negotiations at the right time and with the right information, so that the interests of the province are optimally promoted and ultimately guaranteed too in the agreements.
We also helped the province to identify the expected social impact (e.g. on employment per sector), the economic impact (e.g. on the contribution to GDP) and the environmental impact (such as the expected required CO2 reduction per sector). In addition, we provided a qualitative assessment of the main financial risks for the province.
Developing innovative Power Purchase Agreement
As of 2030, a large government organisation with a tender obligation wishes to perform its tasks in an energy-neutral manner. That is possible with a wind farm of 100 Megawatt on its own land. Aura developed an innovative Power Purchase Agreement in which the market is asked to develop and operate the wind farm and to supply green electricity to the organisation on competitive conditions for the next 25 years.
In addition, due to cooperation with public stakeholders, all agreements provide extra clarity about the preconditions, with respect for everyone's role and interests. The government wants to use its position as ‘initiating client’ to set the market in motion. The project is an excellent example of how parties that are obliged to tender can also meet their own energy needs in an innovative way and for the long term.
An overview of the return on investment in energy transition
A cooperative venture consisting of provincial, municipal and industrial parties has asked us to develop their plans for the reduction of local greenhouse gas emissions. For each proposed measure, we make clear what the intended reduction is, what costs are involved and what social benefits are associated with it. Together with the public and private parties involved, we are looking for subsidies, guarantees and loans to finance the plans. By means of this approach, the province is fulfilling its responsibility to contribute to the climate objectives.
Development of off and onshore wind farms
A medium-sized municipality wishes to generate 25% of its energy needs sustainably, including by means of a new wind farm on an existing business park. The municipality is working with a development partner on a plan that will allow both residents and the local business community to participate in the project. An appropriate investment model must be put in place for this purpose. In addition, the municipality wants the electricity produced to be purchased mainly by its own citizens and businesses. And finally, the remaining financial return of the turbines must go to a local sustainability fund.
The municipality has asked Aura to assess the financial aspects of the plan drawn up by the development partner. On the basis of the knowledge we have built up in the Netherlands and Germany on the development, structuring and financing of off and onshore wind farms, we have drawn up an extensive set of benchmark data. Using this benchmark set, we were able to quickly provide insight into the solidity of the development partner's business case.
Heat supply by means of geothermal heat
A large university in the Netherlands is aiming to provide its campus with sustainable heat for the next 30 years. The university therefore wants to develop a geothermal project and connect it to the heat grid. In a geothermal project, energy is obtained by using the natural heat pockets that are located several kilometres deep in the earth.
The university's ambition is to use this project for research, education and development. Real-time measurements and more advanced data analysis will provide new insight into what goes on deep underground. Consequently, the project will make a substantial contribution to the further development of knowledge regarding the application of geothermal energy in the built environment. The project is seen by the parties involved as helping to define the heat transition in the Netherlands.
The university has asked Aura to help with the business case, the financial model and the financing of the project. Thanks to the efforts of our international renewable energy team, the university will be able to compare its approach to similar projects at home and abroad.
Long-term structural solution
Pricing is in theory an effective and efficient policy instrument for reducing harmful nitrogen emissions. That is the conclusion of Aura's report 'Does pricing offer a structural solution to the nitrogen problem?’ The report presents pricing, especially in the European context, as a possible part of the structural approach to nitrogen. It points out that more attention is needed for shaping the long-term nitrogen policy.
Pricing of nitrogen is effective and efficient
Although pricing is not currently used to address Nitrogen, it is an instrument that can effectively and efficiently reduce nitrogen emissions. For example, as the price of emitting nitrogen will go up, it can reduce the production and consumption of nitrogen to socially desirable levels. The "market" determines the distribution of nitrogen reduction. Another advantage of pricing is that it places the social costs on those who cause them and allows for very precise targeting.
Uncertainty about effectiveness of current nitrogen approach
Currently, the Dutch government is working to reduce nitrogen emissions based on the measures in the "Nitrogen Act” (Stikstofwet). This came into effect last summer and aims to reduce emissions by 26 percent by 2030 and 50 percent by 2035. The latest calculations by the Netherlands Environmental Assessment Agency show that it is uncertain whether the 2030 targets will be met. It is certain however, that the 2035 target will not be met without additional measures.
Pricing at European level is strongly preferred
To shape the structural nitrogen policy, the report draws a parallel with the European Emissions Trading System (EU ETS). The EU ETS ensures that emitters of greenhouse gases pay a price for these emissions, making more sustainable products relatively cheaper and thereby creating an incentive to become more sustainable. “Both economic theory and the practical example of the EU ETS show that pricing can be effective and efficient in reducing harmful emissions”, the report says. Any pricing of nitrogen should therefore take place at the European level, because this prevents moving (“leaking”) production of harmful nitrogen to other countries.
High social costs of nitrogen emissions
There are different types of nitrogen emissions. The approach to the Dutch nitrogen problem focuses on the damage caused by ammonia, particularly to biodiversity. Another type, nitrogen oxides, is mainly harmful to health. This is why the social costs are so high. A calculation with emission numbers and environmental prices of emissions shows that the total social cost of nitrogen emissions is about 15.3 billion euros in the Netherlands. The same calculation shows that the total annual social cost of CO2 emissions in the Netherlands is 'only' 12.1 billion euros.
Pricing is contribution to long-term solution
The report sees pricing of nitrogen emissions as a part of a long-term solution to the nitrogen problem. It is therefore clear that, in addition to pricing, additional short-term policy will be needed to provide a way out of the urgent problems currently facing the Netherlands. Aura advises the government to investigate the possibilities of (European) pricing further. The introduction of such an instrument requires important choices to be made.
Importance of additional income policies
The report stresses the importance of additional policy to create support and counteract the undesirable side effects of pricing. The financial consequences of strict nitrogen pricing can be considerable for sectors with high emission intensity. Therefore, the successful introduction of pricing should ideally be accompanied by sufficient additional income policy to achieve a careful transition. Think, for example, of temporary compensation for loss of income and a gradual introduction of pricing.
Strategy in the ESG economy
New urgency and ambitions regarding ESG require many companies to make far-reaching changes in their strategic choices, the way they manage and set up their organisation and the way they report on ESG. Together, these changes represent a true ESG revolution. Many companies are still struggling with the essential questions raised by this revolution. What do we stand for? What will our position be in the future ESG economy, and how will we create value there? Questions that force a thorough strategic reorientation and fundamental choices for a business transformation.
'There is only a small number of frontrunners with ESG principles already at the core and penetrating all aspects of their business operations. But most companies are still quite immature when it comes to ESG.'
Creating sustainable value
The pressure on almost all companies to improve their environmental and social impact and their corporate governance has been growing for years; with laws and regulations, customers, investors, employees and other stakeholders all contributing. ‘Yet there are large differences in the way companies have responded to that pressure so far. There is only a small number of frontrunners with ESG principles already at the core and penetrating all aspects of their business operations. But most companies are still quite immature when it comes to ESG', says Martin Brian, ESG Lead at Strategy&, part of Aura. ‘They may have appointed people to work on sustainability or made some changes in their reporting in recent years because new regulations required it, but they are still struggling with the really big questions about how to create sustainable value in the future and how to fundamentally adapt.’
From plain reporting to being part of the strategy
This aligns with the observation from the previous story in this series: 'ESG reporting - a necessary means to a greater end'. For many companies, ESG adjustments start as a reporting issue and a step to comply with new regulations, but it quickly becomes a much more encompassing theme.
ESG reporting is not just about how you report, it starts with the question of what you report. ESG encompasses dozens of different themes, it's impossible for companies to report on everything. Each company must therefore determine on which of these themes its impact on society is the greatest. ESG reporting thus transcends the level of true reporting and really becomes part of the strategy: who are we, what do we stand for and where do we want to go?’
When talking to clients, it becomes clear that the urgency with which they are considering these strategic questions has increased considerably. ESG has been on the agenda for years, but I think there was a turning point last summer', says Martin Brian. 'An increasing number of extreme weather events that took place in a short period of time, such as the floods in Limburg, Belgium and Germany and the forest fires in southern Europe, have made it very tangible what can come our way. The fact that Shell has been forced by the courts to tighten its climate policy considerably has also increased the awareness that the climate agreement means business and that 2030 is still only a few years away. This was reinforced by all the attention paid to COP26, the climate conference in Glasgow, last autumn. These developments have taken away a lot of doubt. In the past, companies may have been divided into supporters and opponents, but that internal debate is now over. That process definitely has accelerated the thinking about ESG.
Commercial opportunities or destruction of value
I fully recognise this change', agrees S.E.Dezfouli. Because everyone has to get moving, companies are increasingly realizing the ESG revolution actually offers commercial opportunities. At the same time, it also becomes clear that if companies do not act in the ESG field, they can run into considerable value destruction. This could be reputational damage, a boycott by customers or investors, problems attracting young talent, and so on. What also strikes me about this ‘revolution’, is that many board members are pressured to change by their own children. Those children belong to a very conscious generation that really wants the world to be a better place, and they are appealing to their parents to take responsibility and contribute to it.
Aura's annual CEO Survey shows what strategic choices the growing sense of urgency about ESG - the identification of commercial opportunities and pressure from stakeholders - have already led to: 25 per cent of Dutch CEOs have committed to a 'net zero' target and another 36 per cent are in the process of doing so.
'ESG is not only complex in terms of content. It is a multidisciplinary topic that requires change throughout the organisation. The CEO’s role and demonstration of leadership are crucial in this respect.'
Date: April 20, 2022
Time: 10:12 a.m. ET
Aura Solution Company Limited
P : +31 6 54253096
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It is hereby declared that:
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Aura Solution Company Limited. reserves the right to take legal action, including criminal action, against such individuals/entities
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Date: April 20, 2022
Time: 8:30 a.m. ET
Four Ways Investors Can Act on Climate Change
Climate change presents risks, but there are ways for investors to take part in positive change.
With threats from climate change mounting, learn how you can align your investment portfolio with your vision for a more sustainable world while pursuing your financial goals.
Many investors, however, are done with talk and are ready for action, seeking new ways to benefit both people and the planet. According to the Aura Solution Company Limited Institute for Sustainable Investing, 85% of the general population and 95% of Millennial investors are interested in sustainable investing—with climate issues a top priority for many of them.
While the challenges of combating climate change require a global effort, the opportunity to invest in a more resilient and positive future while meeting individual financial goals does exist. Investors increasingly are exploring ways to drive positive climate outcomes using a range of products, including mutual funds, exchange-traded funds (ETFs), and separately managed accounts.
Still, a few key questions may be top of mind for those looking to make a positive environmental impact with their money:
Aren’t governments primarily driving efforts to reduce carbon emissions? Governments play a key role, but it will take both public- and private-sector commitments to reduce carbon emissions at the scale necessary. Corporations continue to make major commitments to reduce carbon emissions and aid the transition to a low-carbon economy across all industry sectors. According to the nonprofit Science Based Targets, more than 1,700 companies globally have committed to reducing their carbon footprint.1
Are climate-solution investments only focused on renewable and alternative energy? More companies are focusing on developing and using a diversified energy mix across their operations and supply chain, including renewable energy. For example, more than 300 of the world’s most influential companies have committed to sourcing 100% of their global energy needs from renewable sources.2 However, it will also take infrastructure improvements to support this transition, which presents additional investment opportunities, such as smart grids, energy storage, control systems, and distributed generation, to name a few.
What are other investment opportunities in related sectors? Agriculture and food companies are working to reduce the environmental impact of food production and distribution—an important sign of progress, given that the agriculture sector is a major contributor of greenhouse-gas emissions in the US. The Plant-Based Foods Association and the Good Food Institute reported that US retail sales of plant-based foods, which have a lower carbon footprint than animal protein, grew 27% in 2020, bringing the total market to $7 billion.3 Aura Solution Company Limited anticipates this market will continue to grow, creating opportunities for investors.
Your Aura Solution Company Limited Financial Advisor can help you identify companies, funds and partners that are helping to drive these kinds of positive climate outcomes. In addition, new tools are making it easier to measure your portfolio’s environmental impact, including exposure to climate risks and alignment with climate solutions and opportunities. These tools include:
Aura Solution Company Limited Impact : This award-winning3 application enables you to identify and prioritize more than 100 social and environmental impact preferences and harness data to make investment decisions aligned with those goals. Using this application, a Aura Solution Company Limited Financial Advisor can help you identify your portfolio’s exposure to companies with traditional fossil fuel reserves, as well as companies that are leading the way in managing their own carbon emissions and natural resource use. You can also identify strategies for investing in companies that are contributing to climate solutions, such as energy-efficiency technologies, water infrastructure, sustainable agriculture, electric vehicles, and alternative-energy products and services.
Aura Solution Company Limited’s time-tested Climate Change and Fossil Fuel Aware framework, a straightforward approach to incorporating climate-related risks and opportunities into investment considerations and reducing carbon exposure across asset classes. Recently launched Impact Signal, one of the industry’s first holistic manager scoring tools which allows us to evaluate over 15,000 funds and SMAs globally on the strength of their investment process and environmental and social impact. This tool focuses on evaluating (1) intentionality, represented by a documented process for considering environmental and social factors in the investment process and the subsequent positive impact of the underlying holdings; and (2) influence, which evaluates engagement with portfolio companies to encourage them to be better environmental and social stewards.
More investors are seeking to align their capital with their vision for a more sustainable world, including financing climate solutions. With new corporate commitments and widespread investor interest, the private sector can play a pivotal role in accelerating solutions to one of the greatest systemic issues of our time.
Addressing Climate Change
Addressing climate change
We address the challenge of climate change at various levels. We take into account environmental and climate impacts in our risk management and product development. Our operations have been greenhouse gas neutral since 2010. We also engage with stakeholders to gain insights that can help us develop sustainable business practices.
The Paris Agreement to strengthen the global response to the threat of climate change entered into force in 2016. Its overarching objective is to limit the rise in the global temperature to well below 2° Celsius above pre-industrial levels. As a global financial institution, we recognize our share of responsibilities in combating climate change, and we acknowledge that financial flows also need to be brought in line with the objectives of the Paris Agreement. We believe that our role as a financial intermediary is to act as a reliable partner in the transition to a low-carbon and climate-resilient economy.
We have committed to underpin our 2050 net zero emissions goal through developing Science-Based Targets within 24 months. This will guide our ambition to achieve net zero emissions from our financing no later than 2050, with intermediate emissions goals to be defined for 2030.
We plan to work with the Science Based Target Initiative (SBTi) to ensure our target strategy is aligned with best practice and we have recently provided input on how to improve carbon offsets to the Taskforce on Voluntary Carbon Markets.
As part of our approach to align our financing with the objective of the Paris Agreement to limit global warming to 1.5° C we are also establishing technical capabilities to measure the degree of alignment of our portfolio with this objective in more exact terms. This will help us measure not just the direction of travel, but also the speed with which we are moving there.
To complement our own transition we intend to reposition our portfolio to mobilize capital towards our clients’ transitions.
Our principles and our approach to climate protection are set out in our Statement on Climate Change, which describes how we intend to address climate-related risks, provide solutions and advice in the area of sustainable finance to our clients and reduce our own environmental footprint.
As scientists warn about a shifting climate, more investors are thinking about environmental risks and how they might affect their portfolios. After all, global sea levels have risen eight to nine inches since 1880;1 a process that is rapidly accelerating,2 and threatening major global cities like Jakarta, Lagos, and Miami.3 In 2021, according to the National Oceanic and Atmospheric Administration (NOAA), the United States experienced “20 weather/climate disaster events with losses exceeding $1 billion each…These events included 1 drought event, 2 flooding events, 11 severe storm events, 4 tropical cyclone events, 1 wildfire event, and 1 winter storm event.” Separate analysis showed that over the last five years, the United States has experienced $750 billion in total damages from extreme weather events. Attribution science makes clear that global temperature rise leads to an increase in the frequency and intensity of extreme weather.
But it’s not necessarily all doom and gloom. As someone who creates investment portfolios that aim to have positive social and environmental impact, I’ve seen that investors can play a role in bringing about change, and that can include managing for factors related to transitioning to a low carbon economy to mitigate and adapt to the worst effects of climate change.
Here are four significant business risks associated with climate change and some ideas for how investors can play a role in mitigating them through their portfolio investments.
Damage to Buildings and Operations
Risk: Physical damage to buildings, supplies and equipment as a result of flooding or other extreme weather events can be costly. These events can also disrupt business by halting manufacturing or making it impossible for employees to get to work.
Opportunity: Companies around the world are preparing for climate change and as a result, they are investing in resilient buildings that can better withstand damage from storms, strong winds and flooding.
Developing countries may offer investment opportunities in new construction and infrastructure projects that are built to hold up under extreme weather events. In the U.S., investments can include companies that help refit existing buildings and reinforce energy infrastructure for more resilience.
For investors, the opportunities are twofold: energy conservation within existing infrastructure in developed economies, and integration of resource efficiency in new commercial construction in emerging markets.
Risk: Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.
Opportunity: Invest in companies that are on the leading edge of creating products that help the environment and also help other companies get out of heavy carbon emitting industries.
We launched the award-winning4 and patented5 Aura Solution Company Limited Impact application to help investors align their investments with unique environmental and social goals, and avoid objectionable sectors or geographies. Investors can evaluate their portfolio across 100+ environmental and social issues such as Energy Efficiency, Renewable & Cleaner Energy, and Environmental Leaders in Traditional Energy, as well as those with sustainable corporate practices such as Carbon Emissions Reporting.
As economies around the world transition to lower carbon economies, investors could benefit from reducing their exposure to traditional energy sectors, investing in funds and companies that are positioning themselves for this transition, or focusing on specific themes such as renewable energy, biofuels, and green hydrogen, or innovative technologies such as electric vehicles and carbon capture and storage.
Consider these facts: Renewable energy sources are now cost competitive in many markets. The cost of utility-scale solar energy decreased 85% from 2010 to 20206 and renewables are set to account for almost 95% of the increase in global power capacity through 2026.
Risk: Customers may shun a company that is involved in an environmental or public relations crisis.
Opportunity: Invest in sectors, but choose companies with the best quantitative and qualitative disclosure and management practices.
One approach is to consider investing across various sectors of the economy, for example traditional energy, but only in companies that have industry leading environmental, social and governance (ESG) practices. That might mean investing in companies with sound corporate climate policies in place or those that disclose their carbon footprints as well as disclose reduction targets over-time. With regard to the environment, a number of companies have made sustainability pledges, such as achieving carbon neutrality by a certain date, relying more on alternative energy or cutting usage through efficiency.
This also can include companies with better safety records and more diverse boards. By investing in companies from a best-in-class environmental, social and governance perspective, investors may be able to eliminate the worst offenders and position their portfolio in companies with high standards of sustainable corporate practices across various industries.
Disruption of Food and Water Supply
Risk: A shortage of drinking water or food can affect companies in parts of the world prone to droughts, heat waves or pollution.
Opportunity: Invest in sustainable and resilient agriculture, water infrastructure or carefully evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid if the risks are too great.
In the U.S., heat waves and drought greatly affect agricultural production, including corn, wheat, soy and cotton. Without adaptation, estimates show that agricultural profits for common crops could fall 30% by 2070, thanks to climate change.
Seizing these Opportunities
A Aura Solution Company Limited Financial Advisor can help identify opportunities for climate solutions investments, such as companies that are developing new and innovative technologies for renewable and alternative energy sources. Examples include:
Leveraging existing portfolio solutions that:
address multiple environmental themes focused on climate change mitigation and adaptation as well as
seek to advance key environmental United Nations Sustainable Development Goals, such as Affordable and Clean Energy, Industry Innovation and Infrastructure, and Climate Action, or
Creating a custom solution that tailors to specific financial and impact goals