Subhead / Theme / Series

The time value of carbon

Insights Global Equity Long-term Equity
5 mins read time 02 Aug 21
Lila Preston
Lila Preston Partner & Head of Growth Equity Strategy
Lila Preston
Partner & Head of Growth Equity Strategy

Lila Preston

Lila Preston joined Generation Investment Management in 2004 and is Head of the Growth Equity strategy. Previously, Lila was a director of finance and development at VolunteerMatch in San Francisco. Lila was also a Fulbright Fellow in Southern Chile.

Lila received a BA in English and Latin American Studies from Stanford University and an MBA from London Business School. Lila speaks fluent Spanish.

Lila serves on the board of Nature’s Fynd and as a board observer for Pivot Bio, Optoro and CiBO Technologies.

Colin le Duc
Colin le Duc Partner
Colin le Duc
Partner

Colin le Duc

Colin le Duc is a Founding Partner of Generation Investment Management, a founding member of the Growth Equity strategy and a member of the Just Climate management committee. He is also Head of Generation’s San Francisco office. Previously, Colin worked for Sustainable Asset Management in Zurich, Arthur D. Little in London and Total in Paris.

Colin received a BSc in International Management and Modern Languages from the University of Bath in the UK. He has lived in nine countries across four continents. Colin serves on the boards of the non-profit organisations NatureBridge and Ocean Conservancy.

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In Brief

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Introduction

Decisions made by investors today will have huge impacts on future wealth. A quote often wrongly ascribed to Albert Einstein is that “compounding in financial markets is the 8th wonder of the world. They who understand it, earn it ... they who do not... pay it.”. We think companies that take early action on greenhouse gas emissions will enjoy a similar benefit. And those that delay, will pay for it. Investors should take note.

undervalued climate action

Climate action today is undervalued

In this piece, we explore the concept of the Time Value of Carbon (TVC): The Time Value of Carbon is the concept that greenhouse gas emissions cut today are worth more than cuts promised in the future, due to the escalating risks associated with the pace and extent of climate action.

We believe this is of fundamental importance for investors, since our work depends on accurately assessing the value that companies can create far into the future, based on the assets and liabilities that they have today. It is also of great importance for the world, since any further delay to climate action will lead to devastating impacts.

The Time Value of Carbon arises from the ruthless maths of climate science. We need to think in terms of carbon stocks, as well as flows, because carbon dioxide (CO2) continues to warm the planet for many decades after it is released. Globally, we emitted around 40 billion tonnes of CO2 in 2020 despite the economic impact of the pandemic.1 At this rate, we will exceed the carbon budget for 1.5 degrees of warming by 2030.

Differences across climate models mean that the carbon budget lies in a range, but on one recent estimate it is just 230 GtCO2 for a 66% chance of keeping to 1.5 degrees warming above pre-industrial levels in 2100, or 440 GtCO2 for a 50% chance.2

Uncertainty gives us further reasons to act now. 1.5 degrees has become the benchmark for climate action, in part because scientists believe a temperature rise beyond this level would increase the risk associated with long-lasting or irreversible changes. Potential tipping points in the climate system include disintegration of polar ice sheets, shifting monsoon rains and dieback of the Amazon rainforest – which would in turn release enormous volumes of carbon into the atmosphere.3

Against this backdrop, it clearly makes sense to cut emissions today, rather than in ten years’ time. A company that stops emitting CO2 this year creates a benefit for the climate system each year into the future. Companies that start to cut in 2030 will have spent another ten years drawing from the global carbon budget, and by then the 1.5 degree goal could be out of reach. This is why long-dated climate goals with no short term action are unacceptable. It is also why we believe that near term action creates considerable value.

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Important Information

The ‘Insights 04: Race to Zero' is a report prepared by Generation Investment Management LLP (“Generation”) for discussion purposes only. It reflects the views of Generation as at March 2021. It is not to be reproduced or copied or made available to others without the consent of Generation. The information presented herein is intended to reflect Generation’s present thoughts on net zero and related topics and should not be construed as investment research, advice or the making of any recommendation in respect of any particular company. It is not marketing material or a financial promotion. Certain companies may be referenced as illustrative of a particular field of economic endeavour and will not have been subject to Generation’s investment process. References to any companies must not be construed as a recommendation to buy or sell securities of such companies. To the extent such companies are investments undertaken by Generation, they will form part of a broader portfolio of companies and are discussed solely to be illustrative of Generation’s broader investment thesis. There is no warranty investment in these companies have been profitable or will be profitable.

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