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Blue Chip Journal - March 2019 edition

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CLIMATE CHANGE noted

CLIMATE CHANGE noted previously, are leading exporters of these goods. Greenhouse gas emissions may be taxed which would decrease companies’ profitability. The idea here is to reduce demand for products whose production process leads to heavy greenhouse gas emission. Examples would be cement production or air travel, which emit noxious substances into the environment. By taxing such products and/ or services, demand would in theory be reduced and at the same time companies would invest in more “green” technologies to offer the same product and/or service, but with less impact on climate. Part of the ESG equation Environmental, social and governance (ESG) factors are integrated into our investment analysis, and climate change is a key theme we are monitoring. We are aware of the potential risk that climate change poses to profits of companies we invest in. And, we think the fight against climate change will only intensify going forward. This may mean additional costs or a gradual shift in the business model for some companies. For example, for high-impact sectors or downstream products that are large CO2 emitters, this would be a key area we would evaluate in regard to impact on operating models, as scientists believe CO2 emissions are a primary cause of climate change. The fight against climate change doesn’t only impact coal production or electricity generation. Cement production and airlines, for example, are also heavy CO2 emitters. That doesn’t mean, however, there is no case for investing in these types of companies. As part of our investment approach, we examine how any ESG risk will impact a company’s ability to generate sustainable earnings. In addition, we actively engage with company management on best ESG practices, among other factors. In the case of a cement producer, we would look to invest in companies with the most advanced technology that can limit CO2 emission. Airlines have a big carbon footprint and may be forced to pay for the CO2 they emit, drawing a distinction between those with older, less efficient fleets and those with newer, more efficient ones. Those with higher CO2 emissions costs may pass them on to customers, which could decrease the demand for airline travel on certain carriers. Part of our ESG analysis involves awareness of these types of issues as we make our investment decisions. We strive to integrate ESG factors alongside our financial analysis as we assess both opportunities and risks within potential investments. This fundamental research provides an additional tool to differentiate between companies, in our view. Opening up new opportunities Climate change is not only about risks. It also creates potential opportunities. One obvious one might be companies in the clean-energy space. A shift towards renewables also brings the need to create viable electricity storage solutions. We see companies in South Korea and China as likely leaders in battery development for electricity storage and for electric vehicles Another area we see with potential is sensor designers and manufacturers. Cellular communication 5G technology and the Internet of Things will likely improve the accuracy in tracking the use of resources like water and electricity. In addition, there has been a growing need for the elimination of waste, whether through recycling or water treatment, for example, which we think represents another area of opportunity. These are just a few examples of opportunities climate change could create; we think there will be more as the world realises the risks. But really, that is true of any change – there are always people, places or industries that are displaced until new solutions emerge. And we are optimistic that they will. ■ References 1. International Monetary Fund, data as of 2018. There is no assurance that any estimate, forecast or projection will be realised. 2. World Bank: Air transport, passengers carried. International Civil Aviation Organization, Civil Aviation Statistics of the World and ICAO staff estimates. Data as of 2017. 3. World Trade Organization, world textile and apparel trade, 2017. 4. US Energy Information Administration, global coal production, data through 2010. 5. World Bank, “Meet the Faces of Climate Migration,” March 19, 2018. 6. World Economic Forum Global Risks Report 2019. The report presents the results of our latest Global Risks Perception Survey, in which nearly 1000 decision-makers from the public sector, private sector, academia and civil society assess the risks facing the world. Krzysztof Musialik, senior vice president, Franklin Templeton Emerging Markets Equity 28 www.bluechipjournal.co.za

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