Seizing the decarbonization opportunity

Ninety One, a global investment firm with experience in environmental investing, believes that trends in regulation, consumer preferences, and technology are all helping drive the transition to a lower-carbon world.

With respect to regulation, the number of global climate laws increased from 60 to more than 3,000 in the last 25 years,¹ and Ninety One expects this trend to continue. Notably, the Inflation Reduction Act of 2022 marks the single largest investment ($360 billion) in energy and climate change programs in U.S. history.² One of the act’s main goals is to incentivize clean energy projects and reduce the cost of renewable energy.

Despite these tailwinds, several studies have estimated that current climate finance investment levels are not enough to maintain a pathway to the Paris Agreement goal of limiting global warming to 1.5ºC by 2050. An additional $4 trillion in annual climate finance investments may be needed by 2030,³ creating a significant investment opportunity.

Ninety One believes that the decarbonization trend represents a potentially secular shift in capital investment, presenting a unique active investment opportunity for the right investor. Vanguard Global Environmental Opportunities Stock Fund focuses on this opportunity by seeking to invest in companies that are helping drive the transition to a lower-carbon world. 

Ninety One believes that companies with sustainable competitive advantages—such as innovative technology, strong management, and ability to mitigate transition risks—have the best chance at long-term outperformance. Navigating transition risks may entail responding to new mandates and regulation of existing products and services or substituting existing products and services with lower-emissions options.

According to fund co-portfolio manager Graeme Baker, the rapidly developing nature of the carbon transition means that many market participants underestimate the persistence of returns in these companies. “We think the market is overlooking the future growth potential of the companies we are investing in,” he said. “This is a market inefficiency we seek to exploit.” 

The firm builds a concentrated portfolio approach across sectors and regions, focusing on companies involved in three activities: 

“These are the three most important drivers of decarbonization,” said co-portfolio manager Deirdre Cooper. “We believe they have the greatest opportunity to contribute to long-term, positive environmental change.”

Ninety One’s experience and expertise enable it to evaluate environmental-related risks and opportunities and select companies that are zeroing in on decarbonization-driven revenues and risks.

“We look for companies that contribute to decarbonization throughout the entire value chain, from the early steps of production to the end product,” Cooper said. “That could mean, for example, not only the manufacturers of electric vehicles, but also the manufacturers of the components that make up the final products.”

When describing the edge they bring to active environmental investing, the portfolio managers focus on four areas:

1. Expertise in identifying environmental companies. Ninety One looks for companies with decarbonization-driven revenues and environmental impact via “carbon avoided” contribution. They define carbon avoided as the carbon emissions avoided by using a product or service that has fewer carbon emissions than the status quo product or service, thereby contributing to decarbonization.
2. Specialized fundamental analysis. The advisor focuses on companies it determines to have structural growth, persistent returns, and clear competitive advantages. Its fundamental approach features a data-driven and structured process.
   
3. Distinct skill sets. The portfolio management team has extensive expertise investing in decarbonization and a deep understanding of investment opportunities in emerging-market countries, and it is supported by a team of analysts with diverse backgrounds and skill sets.
4. A focus on engagement. Ninety One establishes unique engagement goals for all portfolio companies and meets with companies regularly to discuss financial, operational, and material sustainability issues. The advisor reports on these engagements in an annual sustainability report, which includes stock-by-stock sustainability reporting with an emphasis on carbon disclosure.
   

 

The fund seeks to meet its investment objective of providing long-term capital appreciation through an integrated investment approach. The intended outcome is a portfolio of approximately 25 companies with the potential to outperform the fund’s benchmark over the long term.

The fund managers believe that regular engagement and monitoring of the portfolio holdings play a key role in evaluating the fund’s potential. “We aim to deliver what Ninety One calls ‘sustainability with substance,’” Baker said. “That means thinking holistically and with a long-term perspective, examining all the nonfinancial and financial data, and assessing each company’s performance in relation to all its stakeholders.”

Vanguard Global Environmental Opportunities Fund is designed for investors with a high tolerance for risk who are seeking the potential to outperform the market over the long term, including those who may be environmentally conscious. The fund is intended to be used as a satellite position to augment a broadly diversified portfolio.

Download the brochure to read more on the fund’s philosophy, process, reporting, and management team.

Vanguard’s active management history goes back to our beginnings. When Vanguard started operations in the U.S. in 1975, all 11 of our mutual funds were actively managed. Today, Vanguard is one of the world’s largest active managers, with more than $1.7 trillion in active assets under management globally.⁴

We believe low costs and top talent are critical factors in improving the likelihood of outperformance using active investments. In every case, our focus is on long-term performance that helps investors achieve their goals.

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