Expanding Scope Brings Decarbonisation into Focus
Raj Shant shares his views on why the PGIM Jennison Carbon Solutions Equity strategy’s broad approach offers investors untapped opportunities.
As the decades-long decarbonisation journey unfolds, most green investors are fixating on traditional candidates such as electric vehicles and renewable energy. That’s a restricted mindset that misses the bigger picture, says Jennison Associates Client Portfolio Manager Raj Shant. In his view, reaching a low-carbon economy with high living standards also depends heavily on the diverse array of companies helping avoid emissions in the first place.
‘If society is going to achieve this goal, we’re going to have to avoid a tremendous amount of emissions over the years,’ Shant said in a recent interview.
The PGIM Jennison Carbon Solutions Equity Fund has aggressively adopted this philosophy. The Fund aims to take a much more diversified approach than other investment vehicles in this space because it seriously considers a broader range of opportunities that includes avoided emissions.
Under the Greenhouse Gas Protocol, emissions related directly or indirectly to operations, such as power plant pollution, fall under Scopes 1-3, while emissions avoided are classified as Scope 4. Analysing Scope 4 emissions is challenging due to a lack of standardised reporting, and the need for granular analysis, but it is integral to the Fund’s investment process. In fact, Shant sees the analysis of greenhouse gas emissions as incomplete if it does not seriously consider Scope 4, which is so vast that it could often eclipse Scopes 1, 2 and 3 combined.
‘Once you start thinking about emissions avoided, the universe of investment opportunities expands enormously,’ Shant said.
Shant acknowledges that the Fund’s portfolio may look quite different than its competitors. Consider a clean energy consulting company that helps a wide variety of clients— including factories, universities and even entire towns—reduce their carbon footprint. Hiring more staff as it grows could disqualify it from most traditional carbon-reduction portfolios as its direct emissions would be growing, but that viewpoint overlooks the significant benefits the company offers by helping its clients avoid emissions.
Shant also sees traditional energy companies—particularly natural gas producers—playing a pivotal role in greenhouse gas reduction. He notes that 30% of global energy needs are still met by coal, which accounts for 50% of the world’s carbon emissions. Natural gas is a much cleaner-burning fuel option, making it a key component in the power generation industry’s transition away from coal and its devastating pollution.
‘Most people seem to think all fossil fuels are the same, but coal should be public enemy number one if you really care about this issue,’ Shant said.
The amount of spending required between now and 2030 to reach a low-carbon economy is conservatively estimated to be $2.5 trillion. That is a huge amount of “money in motion”, which should create a lot of business and investment opportunities. The Fund seeks companies that are genuinely benefiting from this megatrend, which Shant says should help their revenue and profits grow faster than the market expects and enhance their valuations over the medium and long term. The goal is to identify and invest in underappreciated companies at an early stage—before the broader market recognises them as major players in the decarbonisation journey.
‘The mechanism for outperformance is to surprise the market on the upside on revenues and profits over many quarters and years,’ Shant said.
Raj Shant shares his views on why the PGIM Jennison Carbon Solutions Equity strategy’s broad approach offers investors untapped opportunities.
How quantifying avoided emissions opens new avenues for investment while advancing the carbon-reduction cause.
What do most traditional decarbonisation approaches miss? Find out in our recent webinar, where PGIM experts shared key insights about this megatrend.
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