From concerns around a lack of carbon dioxide for fizzy drinks or the production of protein, and panic at the petrol pumps, it is clear that the political, regulatory, commercial and consumer worlds are colliding, and carbon is at the molecular center. After a year of devastating weather events across the globe — wildfires in the Arctic Circle, droughts in subtropical Taiwan and deep freezes in dusty Texas — extreme weather is also becoming hugely disruptive — to the fragility of the planet, to people’s well-being and also to companies’ profits, with businesses’ operational resilience tested time and again. A hot topic With the COP26 fast approaching, the conversation is heating up. Following a damning, code red IPCC report, a debate at the UN General Assembly and letters from the Financial Conduct Authority telling managers to act and evidence their efforts, decarbonization is the word on everyone’s lips. We can see this in the price of carbon. The cost of offsetting one ton of carbon emissions is the highest it has ever been, €64/tCO2 at the time of writing, when before last year it had barely broken through €30/tCO2. Carbon emissions are fast becoming a punitive cost of business, not a by-product. Analyzing the carbon transition How carbon-intensive businesses navigate the low-carbon transition is a deeply strategic issue, both in the context of their products and services and how they operate. When looking at this in an investment context we need to consider the different scopes of carbon emissions, where they appear in the value chain, and what the implications of various low-carbon transition pathways will be on a company’s revenues, costs, competitive positioning and ultimately their licence to operate. When considering what a company will do, as investors we need to analyze corporate strategy. Making a commitment to net zero or alignment with the Paris Agreement is an important first step, but to really convince us we want to see more businesses providing detailed, credible and irreversible plans on how they will achieve sustainable decarbonization. These will preferably be backed up with short, medium and long-term targets of both the emissions themselves as well as key strategic and capital allocation milestones. Without this, these commitments risk being empty promises, easily reversible by future boards and excos yet to be appointed. Trying to both understand and quantify the potential future impacts of climate policy on a company’s operations and supply chain or demand for its products is complex, particularly in the absence of standardization of measurement and harmonization of reporting standards. Ultimately what we look for is emission reduction. The credibility of a company’s low carbon transition plan is embedded in the extent to which a company intends to continue with the status quo and use carbon offsetting and capture mechanisms to achieve its reduction targets, not least given the vast acreage that would be required to deliver the offsets through afforestation. As investors, we prioritize real-world emission reduction as the most direct and dependable path to alignment with a low-carbon world. We expect this to be a major part of the policy debate. Be prepared We expect that climate risk disclosures will become more prevalent and standardized, and their quality will increase. In combination with the clearer policy direction that we expect in the coming years, this should allow investors to be more confident in internalizing costs of climate change into their valuation models and seeing the direct effects of paying for carbon on a company’s cost base. Being prepared across portfolios and asset classes for these inevitable policy developments will be a key determinant of long-term returns. As fund managers it is important that we help our clients to understand that capital allocation can play a crucial role in driving change for a better world, and how their savings deliver real world outcomes — to the planet, to people, and to profit. • Abbie Llewellyn-Waters, head of sustainable investing, fund manager at Jupiter Asset Management.