COP26 puts portfolio transition at the top of the agenda

The latest report from the UN’s Intergovernmental Panel on Climate Change (IPCC), released at the end of February, has reinforced the threat posed by global warming.

By mid-century, a rising sea level will leave more than one billion people exposed to much greater risks of flooding, the IPCC found. By 2100, up to US$12.7 trillion of global assets could be exposed to one-in-100-year coastal flooding under the IPCC’s “medium” scenario.[1]

The report on the impact of climate change adds further urgency to the global transition away from a carbon-intensive economic model.

Among the many agreements hammered out at the COP26 climate conference in November, world leaders set ambitious targets for methane emissions and moved towards a global exit from thermal coal. Private investors are doing their part: over US$100 trillion of assets are now aligned with the global push to reach net zero carbon emissions by 2050, a key component of restricting global warming to 1.5°C above pre-industrial times.[2]

This transition towards a more sustainable future will affect every industry. In many cases, moving towards net zero emissions will force companies to radically change their business models. According to the International Energy Agency, only two of 46 energy technologies and sectors are on track to meet its 2050 net zero target.[3]

The urgency of this transition leaves investors with some difficult choices to make. While many carbon-intensive companies are already working towards a more sustainable future, it is too early to predict which businesses will succeed – especially in so-called ‘hard-to-abate’ sectors such as aviation or heavy industry.

Many shareholders in out-of-favour sectors, such as coal mining, may be tempted to exit their positions before valuations fall further and they become stranded assets. Many of the biggest investors, however, prefer to stay engaged and influence these firms’ transition, recognising that a total withdrawal of capital would stop ‘brown’ companies from going green.

As an alternative liquidity provider to accredited investors, sophisticated investors, professional investors, and otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions, EquitiesFirst is ready to work with such investors who are looking to diversify their carbon-intensive portfolios. Equity financing can allow shareholders to unlock value from their exposure to legacy companies, providing downside protection while still allowing investors to gain from long-term appreciation in the underlying stock price, as well as dividends.

A transaction with EquitiesFirst is structured as a sale-and-repurchase agreement with no restrictions on the use of proceeds and no further collateral requirements. As long as borrowers keep up with their repayments, EquitiesFirst simply returns the same number of shares at the end of the agreed term. If borrowers are unable to repay the non-recourse loan, their maximum loss would be the shares they pledged to EquitiesFirst.

There is no doubt that the world is moving towards a more sustainable future. Many details, however, need to be worked out before investors can be confident of the fate of individual companies and sectors. In the meantime, unlocking liquidity from a portfolio can provide liquidity to finance diversification.


[1] https://www.ipcc.ch/report/sixth-assessment-report-working-group-ii/
[2] https://www.gfanzero.com/press/amount-of-finance-committed-to-achieving-1-5c-now-at-scale-needed-to-deliver-the-transition/
[3] https://www.iea.org/topics/tracking-clean-energy-progress