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The Decarbonizing Portfolio

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The Decarbonizing Portfolio The decarbonizing portfolio A sustainable investment strategy for a low-carbon future The decarbonizing portfolio 04 Foreword 06 Investing for a sustainable future 08 Threats from climate change 10 A growth story 12 Financing goes green 14 The case for investor action on climate change 24 Top 10 climate innovations for the 2020s 26 How investors are responding 32 A time for action 36 The sustainable asset class universe 38 Building it better 40 Conclusion Credit Suisse The decarbonizing portfolio 3 Foreword Sustainable and impact investing has come With an ever greater number of signatories a long way. When Credit Suisse began the committed to following the UNPRI guidance, the sustainable investments journey with our clients number of asset managers launching environ- nearly two decades ago, there were very few mental, social and governance (ESG) strategies sustainable options available in the market and grew in parallel, and sustainable finance was even fewer that proactively sought to address transformed from a retail “ethical” investment climate change. In the early days of values- niche into an institutional market focusing on aligned investing, we started by offering port- improved risk/return through the integration of folios that excluded so-called “sin stocks,” material sustainability factors. such as tobacco and controversial weapons. In 2002, we helped co-found one of the The last decade and indeed the last year alone first impact fund managers, responsAbility have seen unprecedented growth in sustainable Investments, focused on financial inclusion and impact investing, driven in part by an even through microfinance lending in developing greater recognition from the world’s leading markets. investors that exciting opportunities exist to tackle systemic challenges while also generating As early-adopter investors began to link the attractive returns. The existential threat of power of their capital to drive positive change, climate change may be the greatest challenge of the sustainable finance field took a significant our lifetime, which presents tangible physical and step forward with the launch of the UN Princi- valuation risk for investors, but also offers ples for Responsible Investment (UNPRI) in significant returns potential from the inevitable At Credit Suisse, we want to play a meaningful ways to assess the climate preparedness of a 2006. shift to a low-carbon economy. role in helping to ensure that our clients’ portfoli- portfolio and steps investors can take to manage os are “climate transition ready.” Not only do we the risks and leverage the opportunities that will view climate risk as a material issue that needs come from the climate transition. The “decarbon- to be integrated into our mainstream investment izing portfolio” has two meanings: first, that the process, but we seek to offer our clients oppor- portfolio reduces its exposure to carbon risk and tunities to gain exposure to the sectors which aligns with a low-carbon future; and second, that will benefit from this transition, such as green the portfolio proactively contributes to decarbon- energy, sustainable and regenerative food izing the economy. It is not only important that production, smart cities and water access. clients take climate risk and opportunity into account from a financial perspective, but it is also While our clients increasingly recognize the vital that they help fund the solutions required to importance of climate change, many do not yet address this global challenge. know how to go about integrating these consider- ations into their portfolios. Adding to the com- Today at Credit Suisse, we are pleased that we plexity, the methodologies are developing fast. are able to offer dozens of funds and single For example, carbon footprinting was considered instrument options that capture the broad climate cutting edge a few years ago, whereas investors thematic. Our goal going forward is to continue can now analyze the climate preparedness of to expand our investment suite to provide our their portfolios and the degree to which they clients with an increasingly larger diversified set align with a 1.5°C global warming scenario. of options to decarbonize their portfolio, in line with our motto, “Generate returns. Sustainably.” This publication is designed to help clients explore the issue of climate change from an We hope you enjoy reading this publication and investment perspective, and how it can be we look forward to engaging with you on this addressed in a portfolio context. We look at important topic. Marisa Drew Michael Strobaek Chief Sustainability Officer & Global Head Global Chief Investment Officer Sustainability Strategy Advisory and Finance 4 Credit Suisse The decarbonizing portfolio 5 Investing for a sustainable future Traditional investments Ə Limited or no consideration of ESG aspects in the investment approach Ə Systematic avoidance of Ə Country exclusions Exclusion exposure to controversial (sanctions) Sustainable investing covers Credit Suisse’s business areas or unethical Ə Exclusions based on behaviour a variety of investment strategies sustainable business conduct Ə Norms-based exclusions (UN Global Compact breaches) and approaches. investing focus Ə Values-based exclusions Ə Consideration of financially Ə ESG integration in ESG Integration material ESG risks and investment processes in At Credit Suisse, we focus on the part of the opportunities combination with financial spectrum that combines financial returns analysis Ə Based on industry specific (comparable with traditional investment strate- sustainability expertise Ə Approach adapted to gies) and sustainability. These range from asset class, product Ə Reflects the Credit Suisse simple exclusions of controversial sectors such characteristics and House View on ESG topics as weapons and adult entertainment, through investment objective to environmental, social and governance Ə Participation in sustainable Ə Alignment of investor (ESG) integration strategies that seek to Thematic Thematic & impact growth themes and enterprise mission to outperform or manage risks associated with generate impact & impact aligned Ə sustainability, as well as thematic/impact- Contribution to the UN investing Sustainable Development Ə Address societal challenges aligned and impact investing approaches that Goals (SDGs) that target competitive focus on companies and projects whose financial returns products and services directly solve social and environmental challenges. In this paper, we explore how to create a portfo- Ə Impact investing fully com- enterprises via financing Impact Return pliant with the International growth or active ownership lio containing investments that reach across this investing first Finance Corporation’s Ə May include models where spectrum, and address the risks and opportuni- Operating Principles for the risk and return to Impact Management ties that will come from the carbon transition. investors may be blended Impact Ə Clear and direct investor con- (i.e. catalytic capital to first tribution to the impact of the crowd in for-profit investors) Ə Address societal challenges Philanthropy without generating a financial return Targeting competitive financial returns Mitigating ESG risks Pursuing ESG opportunities Focusing on measurable high-impact solutions Source Credit Suisse 6 Credit Suisse The decarbonizing portfolio 7 Threats from climate change + 78% 2020 5 years 2015 Fossil fuels Heat stress Burning fossil fuels is the main cause of global warming The past five years were the hottest and climate change. Between 1970 and 2011, green- since records began, and the house gas (GHG) emissions caused by fossil fuels 20 warmest years on record were increased by 78%. in the past 22 years. 1998 2 800,000 km + 2 feet Deforestation Forests play an integral role in the carbon Rising sea levels cycle. Yet 80 million hectares of primary forest have been destroyed in the last 30 years. Under a 2ºC global warming scenario, sea levels are predicted to rise by a minimum of 2 feet. By 2050, this could displace approx.1 billion people. + 70% Air pollution 26 m people Concentrated energy consumption in urban areas leads to greater air pollution, with significant effects on Extreme weather conditions human health. Cities cause more A recent World Bank report states that the than 70% of global CO2 emissions. impact of extreme weather conditions is driving 26 million people into poverty each year. Sources United Nations, WWF, NASA, World Bank, Credit Suisse 8 Credit Suisse The decarbonizing portfolio 9 A growth story USD 40 trn 1 According to the Global Sustainable Investment Alliance, Global sustainable investing1 +122% (2014–2019) sustainable investments, broadly defined, have more than 2019 doubled in volume over the last five years. Impact invest- ment – the subset of the sustainable investing spectrum that can demonstrate measurable impact – has grown even USD 715 bn faster over a similar period. While traditional investment funds have seen outflows, sustainable and impact funds Global impact investing2 +1,092% (2014–2019) have experienced strong growth and are one of the few bright spots in the asset management industry. There are Market size in USD USD 30.8 trn many drivers of this growth, including the recognition of the Sustainable investing1 urgency of climate change. USD 502 bn Impact investing2 2018 Ə Public sentiment and policy Ə Demand from clients We are seeing a rapid shift in public sentiment Institutional investors, and increasingly family around sustainability,
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