R-co 4Change Net Zero Equity Euro: a transition approach to reach the Net Zero target

Since being launched in 2019, R-co 4Change Net Zero Equity Euro has managed to combine reduced carbon intensity with healthy financial returns through the transition approach, which is becoming more widespread in the “climate” investment universe. Anthony Bailly and Vincent Iméneuraët tell us more about their investment philosophy and the results they have achieved since the fund’s launch.

What is your strategy based on?

We developed our Net Zero strategy based on an analysis of carbon emissions. We found that, on a worldwide scale, five sectors (chemicals, commodities, utilities, construction and energy) account for 86% of CO2 emissions⁽¹⁾. When R-co 4Change Net Zero Equity Euro was launched, most existing “climate” funds were based on “low carbon” strategies, in effect excluding these five sectors. We then asked whether we would not have a greater impact by investing in all sectors⁽²⁾, including the heaviest-emitting ones, but while selecting those companies with the most credible and ambitious decarbonisation trajectories. We believe this approach is the most effective one for setting up a virtuous circle. This is based on our conviction that, within these sectors, when some companies demonstrate that they are able to meet their targeted trajectory, their efforts tends to encourage other companies to replicate their best practices, thus creating a positive snowball effect. Moreover, by focusing on exclusion, most low carbon funds take on a “growth” bias⁽³⁾. Meanwhile, valuations of companies in heavilyemitting sectors are being squeezed by uncertainty over their future cashflows⁽⁴⁾ arising from transition-related capex⁽⁵⁾. This has raised their risk premiums significantly. Accordingly, taking on exposure to these sectors seems to make sense from both the sustainability and financial points of view.

How do you ensure that companies in your portfolio meet their objectives?

Positioning ourselves like this means that we must actively engage with companies. Doing so is an integral part of our approach and the tasks of our analysts. We must, in particular, be in a position to analyse and examine carbon trajectories, as well as allocated capex. If companies do not make the necessary investments, they have little chance of hitting their targets. Meanwhile, we possess a transition analysis grid to assess the trajectory of each company in the portfolio, based both on our in-house research and the contacts that we maintain with the companies, and on external data providers, including MSCI for portfolio rating, and SBTi and Carbon4 Finance to assess emitters’ carbon trajectories. One of our goals is that 90% of the companies in the portfolio be SBTi-approved by 2030, and we accordingly encourage companies to commit if they haven't already done so. We are now at 67%, up from 21% when the fund was launched⁽⁶⁾.

What trajectory is your portfolio on?

Since fund inception, the portfolio’s carbon intensity⁽⁷⁾ has fallen by 42%⁽⁶⁾. When the fund was launched, it came to 138 tonnes of CO2 per million euros of revenues, vs. almost 200 for the benchmark. We thus started out with a -30% lead that we are striving to maintain, even though we are “contractually” bound to just a -20% lead. In accordance with Net Zero principles, we have managed to maintain our -7% annual average carbon intensity reduction target, and then some. However, we have gradually increased the weighting of heavily-emitting sectors from 19% upon launch to 23.2% currently⁽⁸⁾. This shows that selected companies have been able to keep their trajectories in line with our objectives. The utilities sector is a good example of this reduction. Keep in mind that we engage companies only on their Scopes 1 and 2 emissions⁽⁹⁾, as it is currently quite a challenge to compile Scope 3 data, which tend to be disclosed only partially or even subject to broad estimates and to overlap between different companies in the same value chain. We nonetheless include them indirectly, via SBTi and Carbon4 Finance, which include them in their analyses.

How has the fund fared financially?

When R-co 4Change Net Zero Equity Euro was launched, the context was rather favourable to low carbon strategies and their “growth” positioning. But, since then, rising interest rates have completely disrupted the equation. For example, renewable-energy companies, which are a particular target of these strategies, have faced challenges in financing their projects, something that has dragged down their financial performances. This trend is seen in the performance of the MSCI Global Alternative Energy index vs. the energy sector, as represented by the MSCI World Energy Sector index.

Over the same period of time, thanks to our transition approach and our portfolio’s significant underweighting of growth, we have managed to stand out from “climate” funds, with an annualised return of 12.8%, which has also outperformed even the Euro Stoxx, a broad-based index (+10.4%)⁽¹⁰⁾. As we naturally pay lots of attention to valuations, we have so far refrained from investing in renewable energy pure players. But we are keeping an open mind and in this new context such companies now look attractive and consistent with the fund’s DNA.

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