Interview: Minimizing climate risks effectively

The scale and impact of the climate crisis is already being felt, as are its effects on society and the economy. Damage caused by extreme weather conditions, higher purchase prices, long waiting times, loss of sales, increasing planning costs and even a complete halt to production and the non-fulfilment of orders are already a reality for many companies. As global warming progresses, the effects will increase massively in the future.
massively in the future. Companies must deal with the consequences for their business activities and correctly assess the risks and opportunities.

Large parts of the economy are very aware of the climate crisis and its irreversible consequences. Regulatory requirements for climate-friendly action are also increasing rapidly. Nevertheless, only a few companies are taking a structured approach to climate risks and opportunities and are asking themselves what adjustments to their service portfolio and business model are necessary in the long term.

As part of the investment strategy of ERSTE WWF STOCK ENVIRONMENT, Stefanie Schock, Senior Research Analyst in our Responsible Investments team, analyzes many companies in terms of their future viability in connection with a holistic sustainability strategy. We talk to her about how they can identify and minimize future risks and financial impacts arising from the climate crisis.

Note: Please note that investing in securities involves risks as well as opportunities.

Which climate risks are particularly common when analyzing companies?

In principle, we distinguish between four risk categories: physical risks, transition risks, risks at operational level and reputational risks. We assess all sectors and companies as part of the analysis process for ERSTE WWF STOCK ENVIRONMENT. Due to the focused orientation of the fund, we are increasingly coming across companies that are less affected by the risks or are turning them into business opportunities.

Physical risks, for example, result from damage caused directly by the consequences of the climate crisis. For example, lower water levels, particularly in spring and summer, represent a potential physical risk for operators of hydropower plants. Companies with water-intensive production in regions that are already suffering from increased water stress also fare worse in our assessment. In this case, however, we take positive account of corporate adaptation measures to changing conditions, such as regional biodiversity measures.

Companies that are assessed for the FIRST WWF STOCK ENVIRONMENT increasingly come from the utilities sector, the industrial sector or the consumer goods sector. They include the areas of renewable energies, energy efficiency, energy storage, waste & recycling, water and sustainable mobility. Due to this focus, the fund increasingly includes companies that are actively preparing their business model for future climate and environmental legislation. This specialization means that transition risks are generally not relevant in the fund’s investment universe.

Climate risks also occur at an operational level. These include increased costs due to expected regulatory requirements – for example toreduce CO2 emissions. Companies in the ERSTE WWF STOCK ENVIRONMENT fund primarily cover the supply side here. For example, companies offer measurement and control technology or environmental monitoring. They therefore use the regulatory changes to generate innovative business areas.

Finally, reputational risks are also important. These include losses incurred by the company if, for example, its business activities violate social or environmental standards and this leads to a loss of trust in the company.

Together with WWF Austria, we focus our analysis on the evaluation of such incidents. Companies that violate environmental laws would not be considered for selection into the investment universe of ERSTE WWF STOCK ENVIRONMENT. Here, too, it can be seen that companies that pursue ambitious climate protection minimize risks.

Given the size of the company and its interlinking with other areas, how can climate risks be climate risks be addressed effectively?

In our view, climate protection can only be implemented effectively if other areas of the sustainability assessment are also taken into account and given sufficient weight. We therefore also coordinate our assessment scenarios with external stakeholder groups.

For the management of ERSTE WWF STOCK ENVIRONMENT, we identify material climate-related risks and opportunities and their impact. This includes both financial and non-financial aspects. Investments are made in companies with a sustainable business model. When evaluating companies, we are always faced with the challenge that climate risks are linked to other areas. In addition to the climate crisis, biodiversity, i.e. the biological diversity of species and thus also economically important ecosystem services, is also under threat. The risks in this area overlap insofar as better biodiversity management also reduces climate risks, or in other words: “there is no Net Zero without nature”. For this reason, we pay attention to the resilience of the corporate strategy based on different scenarios.

According to calculations by Bank of America, the restoration of destroyed ecosystems would enable one third of the necessary_CO2 sequestration required to achieve the 1.5 degree target. When evaluating companies proposed for the fund, we therefore also pay attention to biodiversity management and specifically reward efforts to restore ecosystems.

Conflicting objectives also arise when evaluating environmental technologies: for example, wind turbines reduce climate risks but can also increase biodiversity risks if they are located in important migration areas for birds, for example. In our analysis, supported by the expertise of the Environmental Advisory Board and the experts from the WWF, we try to map and consider all risks accordingly.

Finally, the interlinking with social issues should not go unmentioned: possible human rights violations, e.g. in the supply chain of the solar industry, which is essential for the energy transition, are analyzed in our process and taken into account accordingly.

What role do climate models play in the company valuation scenarios?

For the valuation of companies, we rely on scenarios to illustrate future global warming and possible effects, thereby drawing conclusions about the future viability of the business model. Our analysis is based on the scenarios of the Intergovernmental Panel on Climate Change (IPCC).

ERSTE WWF STOCK ENVIRONMENT invests exclusively in companies that have a positive environmental impact. Active climate protection is a prerequisite for being selected, which also corresponds to the targets of the optimistic scenarios (1.5 or 2 degree path) of the Intergovernmental Panel on Climate Change (IPCC).

The results of the IPCC’s sixth assessment report also support this view: “it is both technically and economically possible to achieve the Paris climate target – because solar and wind energy are already particularly cost-effective technologies in the energy sector.” This is also reflected in the fund: in 2022 alone, 517 million tons of_CO2 could be saved through new installations of renewable energy sources by the companies invested in the fund.

What are the key points for investors when investing?

The decisive factor is not only the identification of sustainability risks, but also a transparent approach and sustainable risk management. The definition and validation of science-based targets (SBTi) is already being demanded by many investors and will be demanded even more in the future.

One example from the ERSTE WWF STOCK ENVIRONMENT fund universe is First Solar, a company that specializes in the production of solar modules. The published reports describe how the company organizes a responsible approach to emissions. The company has set itself science-based climate targets: Net zero emissions by 2050 and additional short-term targets to reduce Scope 1 & 2 emissions by 34% by 2028 (relative to 2020). These targets correspond to the 1.5 degree scenario and have also been validated by the Science Based Targets Initiative. In addition, massive efforts are being made to exclude the sourcing of conflict minerals such as tin, tantalum, tungsten and gold from regions where human rights violations occur in connection with mining. To this end, suppliers are traced right back to the beginning of the value chain.

This approach, together with other aspects, leads to one of the best results in our sustainability assessment. The fact that more and more investors are demanding that their investee companies take climate risks into account is also evident from votes at the annual general meetings of these companies.

Decarbonization is creating political, technological and social developments and therefore many new opportunities for companies. Where do you see future growth opportunities in this context?

Growth opportunities are heavily dependent on the regional environment and the circumstances there. While the expansion of renewables is already well advanced in some countries, there is still more urgency elsewhere. Globally, but especially in Europe, the further expansion of renewables, the diversification of the generation mix and the expansion of the grid infrastructure will require considerable investment and therefore offer growth opportunities.

The Handelsblatt recently reported that the conversion of the energy system in Germany to achieve climate neutrality by 2045 will require investments of more than one trillion euros. In my opinion, the development of new, even more efficient battery technologies and storage options will be the main focus within environmental technologies. The topic of sustainable mobility also holds massive potential and will definitely determine the future discourse.

Notes on ERSTE WWF STOCK ENVIRONMENT

The fund employs an active investment policy and is not oriented towards a benchmark. The assets are selected on a discretionary basis and the scope of discretion of the management company is not limited. Please note that investing in securities also involves risks besides the opportunities described.

For further information on the sustainable focus of ERSTE WWF STOCK ENVIRONMENT as well as on the disclosures in accordance with the Disclosure Regulation (Regulation (EU) 2019/2088) and the Taxonomy Regulation (Regulation (EU) 2020/852), please refer to the current Prospectus, section 12 and the Annex “Sustainability Principles”. In deciding to invest in ERSTE WWF STOCK ENVIRONMENT, consideration should be given to any characteristics or objectives of the ERSTE WWF STOCK ENVIRONMENT as described in the Fund Documents.

Advantages for investors

• Broad diversification in companies in the environmental sector even with a small capital investment.
• Support of the WWF’s environmental protection programs by Erste AM.
• Opportunities for attractive capital appreciation.
• The fund is suitable as an addition to an existing equity portfolio and is intended for long-term capital growth.

Risks to be considered

• The fund price can fluctuate strongly (high volatility).
• Due to the investment in foreign currencies, the unit value in euros may be adversely affected by exchange rate fluctuations.
• Capital loss is possible.
• Risks that may be of significance for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus and the information for investors pursuant to Section 21 AIFMG, Section II, chapter “Risk information”.