Finding credible transition trajectories is preferable to across-the-board divestment, says Thomas Hohne-Sparborth
Diversification becomes a problem if you simply divest from sectors that have a high carbon footprint and put money into healthcare and education instead.
"Firstly, you're moving capital out of those sectors where financing of decarbonisation opportunities is needed the most," explains Thomas Hohne-Sparborth, head of sustainability research at Lombard Odier Investment Managers. "Secondly, it's blind to the opportunities that exist in some of these high-emitting sectors where we can find climate leaders.
"Instead, we believe that if you can find players who have a credible transition trajectory towards net zero steel, or net zero or carbon-neutral cement, for instance, then that represents a tremendous commercial opportunity.
"They're very much the kind of companies we want to invest in."
New business models
The renewable power firm Orsted is one example of this type of company. It used to be heavily involved with coal but has now become a leader in wind energy.
"Then we have companies in industrial sectors like Cummins," adds Hohne-Sparborth. "It manufactures industrial machinery and is rapidly transitioning towards hydrogen to become a leader in that space.
"These types of companies all have high carbon footprints, or have had in the past, and are rapidly generating new business models in their respective industries."
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