Talking Heads – Investing in global equities with a net zero tilt

This is an audio transcript of the Talking Heads podcast episode: Investing in global equities with a net zero tilt

Hello and welcome to the BNP Paribas Asset Management Talking Heads Podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing net zero and equity investing. I’m Daniel Morris, Chief Market Strategist. And I’m joined today by Nadia Grant, Head of Global Equities, and Shazaan Gaffoor, Investment Specialist. Welcome, Nadia and Shazaan, and thanks for joining me.

SG: I’m delighted to be here.

NG: Thank you, Dan.

DM: Net zero has become important, not only for us as an asset manager, but arguably for the world. We certainly read a lot about the topic of net zero, but you’re much closer to trying to make that a reality because you’re trying to take the objective of net zero and implement it or reflect it in a global equity portfolio. So, that’s what we would like to talk about today. Maybe if I can start with the issues, can you explain what net zero is? We don’t want to assume that everyone is as familiar with it as we are. Can you help us understand why it is so important for society and investors?

SG: We define net zero as a state where the amount of greenhouse gas emissions produced and the amount removed from the atmosphere are equal. We believe that the shift towards a low carbon, environmentally responsible economy is key for a sustainable future. As a member of the Glasgow Financial Alliance for Net Zero, we are committed to publishing a comprehensive net zero plan. In fact, limiting global warming will avoid a number of climate change impacts and will have lower risk associated with long-lasting or irreversible changes in climate patterns. This is not just an environmental issue. The vast social and economic consequences of unmitigated climate change are what is driving countries, companies and the financial community to act. The financial industry can play a huge role in decarbonisation and the reduction of GHG emissions by allocating capital to companies in transition to reach net zero targets, thereby reducing the funding gap estimated at around USD 38 trillion, according to the latest report of the IPCC.

DM: How does that reflect when you’re trying to manage a global equity portfolio? How can global equity investors participate in net zero?

NG: To select stocks for our portfolio, we assess their alignment to the transition towards net zero. The investment team uses our sustainability centre’s proprietary framework, which itself is inspired by the Paris Alignment Initiative. Our net zero investment framework encompasses about 60% of the MSCI All Countries World index. That enables us to source opportunities across regions, sectors and market capitalisations, thereby reflecting the whole economy. We believe it’s important to have such a broad investment universe because we’re aiming to reduce greenhouse gas emissions across the whole economy. From a portfolio standpoint, the result is a diversified core portfolio with no significant style, regional or sector tilt versus the broader index. Thirdly, it’s important for us to take a holistic approach. When we think about a problem as complex as climate change, we don’t want to be short-sighted. As such, the global equity team acknowledges the social risk and the rising inequality resulting from climate change and the energy transition. That’s why we draw on our social expertise, and we aim to achieve what we call the just transition. A just transition has, as its priority, a fair and inclusive approach to ensure that workers and communities are not left behind. We use a just transition approach when engaging with all companies in our portfolio to ensure the transition doesn’t leave anyone behind. In addition, we are active managers and therefore we aim to deliver consistent excess return over the benchmark. The global net zero transition equity* strategy is managed using a differentiated behavioural investment approach. This is how we select the stock from within the universe. Looking at quality companies with improvement in their business momentum and a reasonable valuation, we draw on the great depth and breadth of expertise within BNP Paribas Asset Management to do the fundamental analysis of the stock and use this investment process. And we want to walk the talk and as such we have a partnership with a charity whose mission it is to reduce energy poverty, fight climate change, inequalities of access to electricity and water, and promote the energy transition.

DM: We started with an explanation of what net zero is and the importance of net zero. Nadia then went into how you implement those objectives in a global equity portfolio. Shazaan, can you please summarise the key points that the two of you have made?

SG: In a nutshell, we invest in a broad universe of companies in transition towards net zero via our proprietary screens. We take a holistic approach, engaging with all the companies in our portfolios to ensure a just transition to net zero, taking into account the social aspect of the transition. We build a core diversified portfolio with no significant tilt to the broad benchmark and target a consistent generation of excess returns through our differentiated process that has its roots in behavioural finance.

DM: Thank you very much for joining me.

SG: Thanks for having us.

NG: Thank you very much, Daniel.