Sustainable investors should be open to owning any company that is committed to reducing climate change – even if that means looking in ‘dirty’ sectors like mining, according to Royal London Asset Management’s James Clarke. 
Some investors will only consider companies that currently boast low or zero carbon emissions, arguing that this is the most responsible way of allocating capital and combating climate change.
This means that businesses in the mining and materials industries are often ruled out, as they are a significant source of greenhouse gas emissions.
However, Clarke countered that “the reality is not so simple”. Royal London Asset Management integrates environmental, social and governance (ESG) factors into all its investment processes.
“The modern-day economy is reliant on fossil fuels and that will not stop overnight. It will take long-term efforts to alter deeply ingrained practices gradually and methodically,” he added.
“Unless carbon intensive industries are addressed, decarbonisation will not occur to a significant enough extent to avert a climate catastrophe. For investors, that means embracing companies in transition.”
Clarke cited research showing that greenhouse gas emissions from material production increased by 120 per cent in the 10 years to 2015, while the materials production rose from contributing 15 per cent of global emissions to 23 per cent. When accounting for the use of materials in the production of other materials, this meant 31 per cent of all emissions were caused by materials production.
“For these reasons, it will be essential that investors embrace materials companies in transition to a greener future to hit climate emission goals,” the manager added.
“We recognise that achieving sustainable climate change will require significant climate mitigation actions from the companies we invest in. The higher greenhouse gas emitters are required to reduce their emissions towards net zero as a pre-requisite to meeting the targets set out in the Paris Agreement.
“We do not believe a widespread exclusion policy, to simply avoid high current emitters, is the best way to achieve this transition. Our focus on climate mitigation is therefore on promoting corporates with high current emissions to accelerate decarbonisation towards net zero by 2050 or earlier.”
Therefore, Royal London Asset Management’s ESG process looks for companies that have current high emissions but are willing and able to reduce these in line with the Paris Agreement goals, including tangible improvements by 2030.
In addition, it engages with specific companies to adopt robust net zero commitments and influence demonstrable real-world outcomes that increase chances of successful mitigation. Finally, the firm avoids or sells out of companies that are not willing or able to reduce emissions in a credible or fast enough way.
This process leads to three broad categories of company: ‘clearly positive’, which are part of the environmental solution; ‘challenging but attractive’, which are working through their climate issues; and ‘clearly negative’, which are avoided.
Clarke continued: “The mining sector is very intriguing but an area of great paradox.
“On one hand, mining companies are almost vilified for their significant part to play in contributing to global carbon emissions, but on the other, the raw materials they make are of extremely high importance to society in terms of building houses, hospitals and other important infrastructure needed for daily life.”
The manager highlighted two materials companies that it owns because of the opportunity for them to reduce emissions.
The first is diversified mining company Anglo American, which Clarke singled out as a good example of a business facing environmental risks and rewards. The firm has legacy thermal coal assets that could be impacted by the transition away from fossil fuels but also produces large quantities of rare earth metals, which are essential for renewable and carbon capture technologies.
“Beyond the investment opportunity, there is also a chance to make a difference. Anglo American has committed to reducing greenhouse gas emissions by 30 per cent by 2030,” he continued.
“Because it is such a large company, this 30 per cent is the equivalent of 60 of the FTSE 100’s lowest emitters going carbon neutral. Therefore, there is an incredible opportunity here.”
Royal London Asset Management also owns Steel Dynamics, which is among the leading steel producers and metal recyclers in the US.
Despite being in the materials sector, Clarke noted that the firm has a number of “green plus points”, including the fact that 83 per cent of its inputs are recycled and 77 per cent of these are sourced within 250 miles of a mill, reducing its carbon footprint.
The manager finished: “Ultimately, the materials sector is a pre-requisite to the daily operations of the global economy – investors just can’t ignore this area, hope for the best, or worse and pretend it doesn’t exist.
“That’s why we believe it’s better to invest in leaders like Steel Dynamics, who use newer, cleaner steelmaking technologies in the production process, to reduce environmental and economic harm.”