One year after the launch of RobecoSAM Net Zero 2050 Climate Equities, a pure-play climate equities solution, portfolio managers Chris Berkouwer and Yanxin Liu say the strategy has supported the global drive towards decarbonization.

“We invest in companies that actively offer solutions to climate change, through decarbonization of one form or another. It’s not a case of targeting the companies that already have a low carbon footprint,” says Berkouwer.

In terms of the SFDR regulation, the strategy has an Article 9 classification. The majority of climate funds invest in low emission areas of the market such as Tech or Healthcare, and relatively few actually invest in transition contributors.

“In the end, it's a real way for clients to make a contribution to net zero, by investing in the transition, validated by dedicated climate benchmarks. It helps enable the climate transition and requires metaphorically looking out of the window to the economy and the world, and recognizing what is needed to reach these goals,” he says.

From his perspective as investor, Berkouwer says he is encouraged by the signs of progress in decarbonization. “Innovations in technology, the commitment from companies, and effective policymaking are the three main drivers of the theme, which will bring us closer to the reality of net zero.”

“It’s very exciting to research companies and to see how the planets are aligning in terms of what is possible from a technological point of view. We invest in a very diverse mix of climate-focused solution providers, from a semiconductor company that makes power management sensors, to specialty chemical names that are innovating to reduce the environmental footprint of industrial processes, and even nature-based solutions focusing on carbon sequestration through reforestation. When we speak to management, we hear how they look at the theme and how they translate that into their product and services portfolio. Better-quality data means it’s easier to establish whether a commitment from a corporate is genuine and whether their roadmap is realistic. In addition there is an ever-expanding policy and incentive toolbox that helps drive this.”

Despite this progress, Berkouwer is realistic about the pace of change. “There are still a lot of potholes and hurdles to overcome. It will be a stop-and-go kind of transition that will take decades to achieve.”

Liu explains that managing an ambitious climate-focused portfolio has its challenges, particularly given that data providers are not yet able to deliver forward-looking metrics related to decarbonization.

“Our philosophy is that, if you have a climate objective – or in our case the net-zero target – you should measure yourself against a benchmark that reflects that objective. For this portfolio it's the MSCI World Climate Change Index. The commitment is to have a portfolio carbon footprint that is in line with or better than that of the benchmark.”

Significantly, very few competitors in this niche of the market have a climate benchmark. “The reason is that, once you commit to a climate benchmark, you have to include what's called Scope 3 emissions in your footprint calculation. Scope 3 emissions account for around 80-85% of emissions and can therefore distort your carbon footprint profile quite a bit. And this may have consequences for how one assesses a company that plays an important role in the climate transition.”

As an example, she explains that the team sometimes identifies really interesting climate solution providers that have a relatively high footprint of their own. Such holdings need to be weighed up carefully, as significant exposure to these companies would eat into the portfolio carbon budget.

“Of course, our aim is to have a forward-looking approach to measuring the carbon footprint: over time we would want to be able to factor in the net emissions savings of such companies, as reflected in Scope 4 emissions data. The data providers are not yet able to provide this information, though.”

Despite the data shortcomings, Berkouwer believes the portfolio represents a balanced set of sectors and companies that are contributing to the transition to net zero.

“Compared to passive products, we have a very good mix of higher-emitting and lower-emitting companies in the portfolio – what we call the brains and the muscles. The ‘brains’ are the low-emitting companies. Think of a software company that creates the software for a refiner to retrofit its operations from regular diesel to renewable diesel. And we have the ‘muscles’, such as an equipment provider that supplies the tools to lithium mining companies.”

Berkouwer adds that while favorable policy like the US Inflation Reduction Act provides a tailwind to climate transition plays, stock selection and active management are still key.

“Climate is clearly not a ‘rising tide lifts all boats’ theme. To invest successfully, a diversified approach and investing based on fundamental research is critical. That explains why our sector allocation has been quite divergent from the benchmark, with high concentration on the themes we’ve identified.”