COP 21 agreement spurs East Capital to review "high climate change"- related investing risk

by Roger Aitken

The climate agreement sealed at the COP21 summit in Paris on 12 December 2015 underscores, once and for all, that climate change is a common issue that needs to be addressed in a “strong and coordinated manner”, argues Louise Hedberg, Head of Corporate Governance at East Capital Group, an emerging and frontier markets specialist headquartered in Stockholm that manages €2.1 billion (c.US$2.3bn) in assets for international clientele.

 As a major achievement on the diplomatic front, which bridges the views of developed and developing nations, the COP21 agreement leaves no nation behind as it provides nearly 200 countries with a global roadmap for accelerating the vital transition to a low-carbon economy.

“It’s now up to national governments to turn goals into real action,” says Hedberg at East Capital, which has offices in Dubai, Hong Kong, Luxembourg, Moscow, Oslo and Tallinn.

“Looking at the Intended Nationally Determined Contributions (INDC’s) submitted in conjunction with COP21, we clearly expect China to demonstrate the most visible leadership for the short term in our investment region,” the Stockholmer adds.

China has already signalled that the environment will take centre stage in its 13th Five-Year Plan, which comprises five key pillars (including confronting Green issues) and runs between 2016 and 2020. Among other things, Hedberg suggests that this will imply “tougher pollution standards, stricter regulation as well as taxes and fines to incentivise corporates to decrease pollution” and increase energy and resource efficiency.

“We also expect to see further clarity on a national carbon trading scheme and initiatives for Green finance. This will fuel growth of China’s clean tech market, which is already the largest in the world,” East Capital’s Corporate Governance head contends.

And, this is touted by the firm as being “clearly supportive” of its recent decision to transform their East Capital China Fund, a €20m (c.US$22m) AUM fund at launch in January 2016, into a thematic environmental strategy.

While the investable universe in their China fund is around 280 companies, East Capital’s portfolio here consists of 50 to 60 liquid and what it views as “attractively-valued” onshore and offshore equities. Two-thirds of the portfolio comprises A-shares with 25% of the overall total high-yield stocks.

In other parts ofEast Capital’s investment region and universe, the firm expects national action to be “less revolutionary” - at least in the short term. “Russia, the fourth largest greenhouse gas emitter, has seen very limited national pressure to act on climate change and its INDC did not surprise on the upside in terms of ambition,” Hedberg says.

She adds: “The climate agreement is nevertheless an additional reason for us to review all our portfolios for unnecessarily high climate change-related investment risk. In particular, we believe that coal will struggle in the new world following COP21.”

In light of the agreement struck in the French capital, East Capital decided to exit the direct coal exposure that they had in their Eastern European fund. “Furthermore, we are benefitting from the underweight in the energy sector (oil & gas) that we have in all our funds,” the Stockholm-based Corporate Governance head explains.

This ‘underweight’ amounted to as much as 19 and 25 percentage points in the firm’s Eastern European and Russian funds, respectively, as of 31 December 2015.

In a concluding remark, Hedberg states: “We also believe the component in the climate agreement requiring nations to be transparent on progress and to ratchet-up national commitments every five years will result in a strong self-regulating effect between nations, creating a moral push for the largest possible climate efforts, eventually also bringing stubborn climate laggards into the fold.”