Fund manager Merle: "We only invest in European stocks"

by Julia Gro, Euro on Sunday

Dhe Intergovernmental Panel on Climate Change (IPCC) published part of its sixth assessment report on Monday. It summarizes the latest scientific results of the past eight years. The data are alarming: Global warming is progressing faster and more severely than expected, leaving only a short time window for consequences like sprevent rising food prices and global trade disruptions.

The financial sector has already reacted in recent years and now very often includes climate risks in company valuations. So-called impact funds such as Echiquier Climate Impact Europe go further: They want to use their influence on companies to achieve climate and sustainability goals. LFDE portfolio manager Paul Merle explains why targeted investments in providers of technologies that save greenhouse gas emissions are not enough.

euros on Sunday: The latest publication by the Intergovernmental Panel on Climate Change analyzes, among other things, where the environment and society are particularly vulnerable to global warming. Where do you see the greatest vulnerability in the economy?

Paul Merle: That is a difficult question. The last report already came to the conclusion that the climate is warming up faster and more intensely than feared. This affects everyone and everyone, companies, governments, consumers. Every industry will face major upheavals. Of course you are more vulnerable when you have locations and factories in countries that are particularly affected by change. But if we are to meet the Paris climate targets, every industry needs to take steps in the right direction. That’s why we don’t just focus our investments on solution providers, we want to support the transition to a low-carbon economy in every industry.

You also rely on companies that have only just started to act more sustainably and on so-called climate pioneers. Why do you think it is important to invest in corporations that already act very sustainably and also have a comparatively small CO2 anyway₂– have a footprint?

We also invest in the companies with the most ambitious climate strategies from sectors that are not typically considered in climate funds, such as pharmaceuticals or financials. We believe these companies are systematically influencing their stakeholders, their customers, their suppliers, even their competitors. Such companies force the entire system in which they operate to meet ambitious climate targets. AstraZeneca, for example, has climate targets that are in line with the 1.5 degree target, and they can only achieve them if the suppliers also pull together. Or BNP Paribas: A bank initially has very low CO₂emissions, but if you look at her investments, she can finance oil and gas companies all over the world, or the expansion of renewable energies. And BNP Paribas has communicated that the CO₂-Reduce emissions from its investments and increase financing for renewable energy.

Does that mean you manage a European fund, but the impact you achieve is global?

Correct. We only invest in European equities. But the companies are active worldwide and the impact is also global.

What about the companies that have only just started to operate in a more sustainable and climate-friendly manner?

For example, many climate funds exclude large parts of the energy sector from the outset. We think it’s important not to ignore this sector because it accounts for around 25 percent of the world’s CO₂emissions is responsible. In this category, for example, we bought shares in Neste. Neste was an oil refinery group and is still in the fossil fuel business. But they are in the middle of the transformation and are already the world market leader in regenerative diesel for the transport and aviation sectors. In 2030 they will only be active in this area. For example, Neste recycles frying fat from fast-food companies or algae and garbage to produce renewable diesel that produces 80 to 90 percent fewer greenhouse gas emissions than fossil diesel. Such companies are important to achieve the Paris climate targets.

How patient are you with this type of company when they don’t reach their goals?

We calculate a “Climate Readiness Score” based on a proprietary methodology. If we don’t see an improvement within two years, we’ll probably talk to the management of the company about the reasons, and then we’ll eventually sell the shares.

What role does the EU taxonomy play for your fund?

We currently use our own methodology to rate green stocks. It is still too early to work with the EU taxonomy. But of course it is very important to us because we have investments in a number of companies whose taxonomy compliance is still being debated. This applies to the forest and paper group Svenska Cellulosa, for example. Unfortunately, this has become a very political issue.

Following the controversial decision that nuclear power and gas should be classified as sustainable in the EU taxonomy, many asset managers have said they will not subscribe to that classification. Will the financial industry end up being stricter than the EU taxonomy?

Definitive. It is in the nature of things that a compromise between so many member states often makes very few demands. We think we have to be more stringent than the EU taxonomy.

The fund was unable to escape the recent market turbulence. What adjustments are you making to the portfolio to prepare for the coming months?

In anticipation of higher interest rates, we increased the proportion of cyclical and value stocks from 45 to 51 percent and reduced the weighting of interest-rate-sensitive stocks. This affects many companies in the renewable energy sector, such as Orsted. Of course we are not changing the fundamental DNA of the fund to invest in companies involved in the transition to a low carbon society.

What about inflation?

This is the second important factor for 2022. Here we have increasingly identified companies with pricing power that suffer less from inflation, such as Croda, Sika or Schneider Electric. Of course, the climate also remains a very important topic, and we have strong medium-term growth expectations here. And the Ukraine crisis shows that Europe is still too dependent on Russian gas and should invest heavily in renewable energies. The protection of biodiversity is becoming increasingly important for society and for investors. Here Veolia, Svenska Cellulosa and Alfa Laval make a positive contribution.

Echiq. Climate Impact Europe:The fund, launched in December 2020, is currently suffering from the market turbulence and the headwind for growth stocks. However, the concept is convincing. Long-term oriented investors use the low prices to get started.

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Image sources: Julien Millet/LFDE