Data drive for climate resilience
Companies and asset managers must make a shift in thinking when it comes to assessing physical climate risk within their business models
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Solar and the
BNP Paribas Asset Management
Climate change investment risks
J.P. Morgan Asset Management
Ecology Fund – a natural home for your capital
Jupiter Asset Management
Demystifying climate finance complexities
Six months on from COP26 and it is still difficult to gauge exactly how much the investment community is stepping up its activity on mitigating climate change, despite further Intergovernmental Panel on Climate Change reports highlighting the urgency needed.
It feels like investment managers are in limbo – they’ve made their commitments to reach net zero by 2030, 2040 or even 2050, and now must work to achieve these by aligning with science-based targets, partnering with research specialists in the field and boosting their own in-house resources.
But as we keep hearing at ESG Clarity, there isn’t any time to waste, the industry must crack on and step up action on tackling these issues instead of waiting for clear-cut answers.
We have dedicated this issue to climate and biodiversity to help investors understand the complexities faced. Our cover feature looks at the intricacies of climate data, what is required when considering climate risks and scenarios within the business and supply chains. Asset managers and industry bodies such as the Principles for Responsible Investment and the Taskforce on Nature-related Financial Disclosures share their approaches and recommendations, and you will find just some of the investment solutions that are dedicated to investing in companies backing a greener future, too.
What is evident from the sentiment shared throughout these pages is the need for a unified approach. Meaningful industry collaboration and using the might of trillions in assets under management will create a sustainable planet and society for the savers we look after to retire in – and for future generations to carry forward.
Data drive for climate-resilient investing
Companies and asset managers must make a shift in thinking when it comes to assessing physical climate risk within their business models. Christine Dawson reports
Ninety One CEO Hendrik du Toit discusses building a greener future, while accepting a windfall of massive emissions in the near term
Campaigning for transition finance at COP27
The need for freshwater, ocean and land ecosystems to sit alongside climate change on the nature agenda has never been greater, warns Tony Goldner, executive director of the Taskforce on Nature-related Financial Disclosures
Know your ecosystems
Also in this issue ...
Shelagh Whitley of the PRI on the impact of climate change and biodiversity loss on business
More progress, more
ESG Clarity finds out how professional investors across the globe are taking nature into account
Raising the bar on biodiversity
The investment industry must incorporate the same urgency in its actions if it’s to realise a net-zero vision, says Rebecca Kowalski
Learning from the activists
Federated Hermes’ Sonya Likhtman on committing to net-positive biodiversity impact by 2030
Make biodiversity a stewardship priority
The renewable energy sector is fast growing, says Victory Hill’s Richard Lum, as is the investment opportunity
Future looks bright for clean energy investors
As investors look beyond renewables for opportunities, climate-conscious funds are gaining momentum
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Baillie Gifford’s Kate Fox and Lee Qian explain how responsibly deployed capital can be a powerful mechanism for change
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Measuring exposure to climate risk
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Data drive for climate-resilience
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Nothing about our current way of life is viable at a certain temperature above pre-industrial levels, and financial services and asset managers are in no way immune. As Patrick Arber, group head of government engagement – sustainability at Aviva, recently commented at a City Week conference, “[Aviva is] not going to survive on a 3C or 4C planet.”
There is a 50/50 chance of breaching a 1.5C temperature rise this century, but this is not sufficiently factored into investments, according to Silvie Kreibiehl, sustainable finance expert and lead author of the latest Intergovernmental Panel on Climate Change (IPCC) report. She recently told ESG Clarity: “Physical risks are completely underestimated by corporates, but also by the financial industry.”
But some responsible investors are starting to calculate and price exposure to the physical risks of a hotter Earth. However, getting hold of the data to do so is no easy task, and will require more regulation, engagement and transparency.
Senior vice-president for sustainable investing at Impax Asset Management, Julie Gorte, says its clients had not yet requested physical risk data, but were always grateful once it had been provided and explained. However, she adds increased incidence of extreme weather events that impact the value of assets could lead to higher demand for transparency on physical risk.
For its part, Impax is striving to get as complete a picture as it can. The team previously wrote to the Securities and Exchange Commission (SEC) in the US asking it to require more disclosure from companies on climate risk. The SEC recently published a draft rule including this and disclosure of Scope 1, 2 and 3 emissions.
In the UK, one of the places an investor should start to be able to access information on physical risk is in a listed company’s annual Taskforce on Climate-Related Financial Disclosures (TCFD) report.
However, in practice, these tend to focus on transition risk linked to climate policy scenarios, regulation and markets, and their potential impact on asset price – these being simpler to calculate than physical risk.
TCFD recommendations include looking at the extent to which the “organisation has assessed the physical impact to its portfolio … and to what extent … physical risks [have] been incorporated in investment screening and future business strategy.”
It also recommends asking: “To what extent has the impact on prices and availability in the whole value chain been considered, including knock-on effects from suppliers, shippers, infrastructure and access to customers?”
TCFD is moving towards both companies and financial institutions disclosing metrics for assets or business activities vulnerable to physical risks. Guidance published in October last year gave example metrics such as the proportion of assets exposed to climate-related hazards and the amount of revenue associated with water sourced and used in regions of high-water stress.
From last month, the largest UK-registered companies and financial institutions fell under the scope of mandatory TCFD reporting requirements. However, a December 2021 policy statement from the Financial Conduct Authority acknowledged some finance groups had expressed concern that end investors would be confused by climate-related metrics on products and portfolios.
By Christine Dawson
Trucost physical risk showcase visualisation
Pablo Berrutti, senior investment specialist at Sustainable Funds Group, acknowledges there is an increasing amount of data available for assessing different climate scenarios, but it is still not good enough. For this reason, his team prefers “to undertake bottom-up analysis to understand the ways companies are managing these challenges”.
Berrutti gives the example of data about a factory’s risk of flooding depending on whether it is at the top of the bottom of a hill: “As an initial scan or risk screen this is very valuable. However, those scenarios cannot tell you whether the back-up generator the factory relies on is vulnerable to flooding because it is, for instance, situated in the building’s basement.”
He adds that related infrastructure, such as the transportation means by which goods are shipped, is the most difficult to assess. “For any company with a diverse asset base and complex supply chains, this is a very challenging problem to manage,” says Berrutti.
Ketan Patel, fund manager of EdenTree Responsible and Sustainable UK Equity Fund, and ESG Clarity Committee member, considers where all the operations of a company are based and even the rising cost of insurance in some locations with heightened physical risk.
“Often, we go and see companies in situ around the world and you get a sense of where their operations are and how they think about [this] risk. If they haven’t thought about physical risk then that’s a big warning sign,” he says.
According to Patel, answers from companies about locations and risks require a high level of granularity, but this can be tricky when the companies may not have huge resources available to invest in supplying those responses.
The complexities multiply when you seek physical risk data for very large companies. PwC partner and UK chair, sustainability and climate change, Jon Williams, argues when you consider the challenge of getting the relevant data from a large multinational company you soon need to seek alternatives to first-hand data collection.
“Think about Unilever, about the thousands of products it has and all the ingredients that go into those products and where those ingredients come from,” he says. “You’re really getting into understanding the supply chains of the company. The head of procurement at a company like Unilever probably has a reasonable handle on where their material risks are. They’ve now got to say: ‘How does climate change affect those risks?’”
Williams adds one of his customers has 19,000 equities in their funds and says it is unrealistic to go through the process described in the example above for that number of holdings.
Instead, he says, when PwC works with asset managers, it will use input output modelling to approximate where those risks are likely to be most significant and notes a data provider called Jupiter Intelligence that PwC works with on this.
WHEB Asset Management partner and head of research Seb Beloe echoes Patel’s mention of the culture shift towards physical risk as he describes the way companies are having to look at their supply chains now.
“Material risk from weather-related disruptions to supply chains is forcing businesses to re-evaluate how they organise their supply chains.
“A lot of businesses are now focusing on ‘just in case’ rather than ‘just in time’, which might seem an inefficient way of running your supply chain. Having multiple suppliers in diverse locations adds cost.
“But it’s a much more resilient way of managing your supply chain and people are recognising that you really have to take on that cost. It ensures you are able to operate in this new environment we are in.”
Fund managers are putting pressure on their holdings for this physical risk data so they can test the resilience of their wider portfolios – and are grappling with the most efficient way of doing so. There is far from a consistent approach to this with some relying on modelling, some using their own data collection methods and others using a hybrid. Impax Asset Management, has recruited a climate scientist to build a proprietary model to assess the physical risk exposure to climate-related hazards of each company, and thereby each portfolio.
Cost, relevance and accuracy all play their part in fund managers’ decisions on how to calculate this risk in the assets they hold. And there is plenty of variety on the market when it comes to third-party services, from the scientific datasets available to the platforms that tailor this data for their clients using models and scenarios, according to Samantha Burgess, deputy director of the Copernicus Climate Change Service (C3S).
One such piece of software available is Aware for Investments, a climate risk screening tool that provides the user with a risk report and gives recommendations for further action. Another tool is the Trucost Physical Risk database from S&P Global Sustainable. This does not provide recommendations for further action, but gives a picture of portfolios’ and holdings’ level of exposure to risks such as hurricanes, floods and heatwaves.
Burgess says there is “quite a need” for standardisation across scenario-based risk approaches and she urges asset managers to make evidence-based assessments of assets using the “best available data”.
Gorte says one of the big barriers investors such as the Impax team faces when it comes to getting the whole picture on physical risk is not data on the very precise locations of operations down the supply chain, which is a challenge, but what companies are doing to mitigate physical risk.
A high-profile case in point is tech giant Alphabet, which failed to respond to Impax’s engagement on the issue.
“We just filed a shareholder proposal at Alphabet and asked it to report on what it’s doing about physical risk. The company didn’t want to talk to us.
“This is going to be on its proxy ballot in June at its AGM. But its headquarters are basically at sea level and if your headquarters flood and you’re not anticipating it, and you don’t have a business continuity plan, you could be vulnerable to a major business interruption.”
Burgess agrees calculating physical risk is not a lost cause, but she encourages transparency on its limitations. “[For] some climate indicators such as temperature, the scientific evidence [for future change] is very clear.
For other climate indicators, such as rainfall, future trends in some locations are less clear.
“In general, asset managers need to differentiate between cases where it is possible to make a quantitative risk assessment and cases when the uncertainty is so large that it is difficult to estimate probabilities. In the latter case, they may need different resilience management strategies,” she says.
The quality and accuracy of data available on physical risk continues to advance and no doubt the investment industry will be in a better place to access and make use of the information than many other industries. But with everything liable to be impacted by climate-related hazards, there is a long way to go before we have a transparent picture of how physical risk translates to investment risk.
‘Physical risks are completely underestimated by corporates, but also by the financial industry’
Silvie Kreibiehl, sustainable finance expert and lead author of latest IPCC report
‘If companies haven’t thought about physical risk that’s a big warning sign’
Ketan Patel, fund manager, EdenTree Responsible and Sustainable UK Equity Fund
‘“Just in case” rather than “just in time” ... is a much more resilient way of managing your supply chain’
Seb Beloe, partner and head of research, WHEB Asset Management
‘In cases when the uncertainty is so large it is difficult to estimate probabilities, asset managers may need different resilience management strategies’
Samantha Burgess, deputy director, Copernicus Climate Change Service
Members of the ESG industry investing in companies transitioning to a greener business plan and outcomes have faced criticism for backing some of the highest emitters. But for Ninety One Asset Management CEO Hendrik du Toit, ‘brown’ companies are the “low-hanging fruit”, where fund managers can make a real difference in the move to a more sustainable world.
As a result, the company will be lobbying for a ‘transition finance’ category to be considered at COP27 for investors to park their money.
“This category is not just green but essentially brown,” Du Toit tells ESG Clarity in the London Ninety One office. “It’s not dirty: it’s changing, it’s getting towards green – it’s just not brand new green.
“We are arguing the case for a category where asset owners can legitimately apply capital, earn a decent financial return, but help businesses that don’t have the internal financial resources or skills to change themselves and live in a net-zero world.”
Echoing sentiment from across the industry, Du Toit adds COP26 was “all about promises and commitments”, while this year’s COP27 in Egypt is about putting this into practice.
“We’re excited,” he exclaims. “It is being held in an emerging market country in Africa, a place where things such as water pollution and biodiversity are extremely important.
“But we want the asset owners, boards of trustees and industry members to communicate that if we all quickly jump in and finance lots of new green activity it will be good … but not good enough. The low-hanging fruit is the brown companies – the highest emitters that need to emit a lot less.”
Watch the video interview with Du Toit for more on the transition to
By Natalie Kenway
term existential challenge for the next five years is to
on a path to decarbonise.
We mustn’t lose focus on that’
Hendrik du Toit, CEO, Ninety One Asset Management
No linear game
For this reason, Du Toit sees global emissions moving higher from this point before tracking down again, but says this is part of the process of building a greener future.
“It is not a linear game. When we build a whole new green energy infrastructure, we will need to use all sorts of materials that are mined and come out of the ground, and have emissions. Until the wind farm works and produces clean energy we are going to create this windfall of massive emissions.”
This, he says, needs to be accepted as part of the future, adding Ninety One will play its part by working and actively engaging with these companies. However, the emphasis is on listening to management rather than instructing on how to operate.
“We genuinely believe in active engagement, but it is not prescriptive for us. For the next year or two we will be listening to companies on how they are committing to a transition, creating a credible transition plan, how they will execute it and then hold them to account.”
He describes this as “positive, constructive engagement” as “simply shouting at a company doesn’t make sense”, and neither does divestment, as this can result in inappropriate ownership.
Du Toit also says industry collaboration and education are very important to the business, which rebranded from Investec in 2020 after separating from the main financial group. It remains dual-listed in London and Johannesburg.
Often, these two elements of collaboration and education combine. Ninety One is a member of the Net Zero Asset Managers initiative, a sector-specific alliance of the Glasgow Financial Alliance for Net Zero (GFANZ), which was formed in December 2020 to “galvanise the asset management industry to commit to a goal of net-zero emissions”.
As part of this, Du Toit says groups are working together on education: “In GFANZ, we work with financial firms and working groups that are collaborating with major emitters and industrial companies that need to transition.
“But what is key is making sure we are talking the same language.
“We’re developing common languages, which will then allow us to execute much better and much quicker without misunderstanding. This needs to be a collective effort, not an individual firm effort, if we want to succeed.”
Ninety One is also signatory to various climate and biodiversity-focused initiatives. “Protecting biodiversity is a really important aspect of a sustainable society,” comments Du Toit. “The financial sector must ask what we can do at this stage that is meaningful and impactful.”
Specifically, he says he would like the industry to focus on biodiversity data creation, and how finance can be channelled for outcomes that are measurable in terms of decarbonisation, which will be easier as carbon pricing starts to take place.
“It’s much easier to start pricing rationally, and saying this investment is worth ‘X’ minus the liability of a future carbon tax. There’s the biodiversity scientific work, and then there’s the work to adapt it to financial decisions. We are still in the early stages at Ninety One. The near-term existential challenge for the next five years is to get everyone on a path to decarbonise. We mustn’t lose focus on that, because if we lose that battle we’ve already lost biodiversity.”
Click here for Hendrik
du Toit’s biography
Hendrik du Toit’s biography
Hendrik du Toit has been CEO of Ninety One – the rebranded Investec Asset Management – since 2020. From 2018 to 2020 he was joint CEO of Investec Group (co-CEO during the demerger from Investec Group). Between 1991 and 2018 he was founder and CEO of Investec Asset Management. From 1988 to 1991 he worked as an investment analyst at Old Mutual.
Turning to the product range, Du Toit says ESG has been embedded into all the group’s investment propositions, but for investors wanting specifically responsible investments, funds include the £1.8bn Global Environment Fund, run by Deirdre Cooper and Graeme Baker, the £150m UK Sustainable Equity Fund, run by Matt Evans, and the recently launched Global Sustainable Equity Strategy, managed by Stephanie Niven.
In the future, Du Toit would like to see impact funds added to this but “only in areas where we genuinely have the skills to achieve the impact, not just the skills to measure and report something that actually is inherent in your mainstream portfolios”.
The conversation quickly turns to greenwashing and how so many funds across the industry are being repurposed as sustainable without changes to underlying portfolios. However, Du Toit highlights it is tricky for asset managers to balance this and cautions against scaring firms away from getting involved.
“My request to the regulator is, yes, keep people honest, but don’t make the hurdle so high for firms that want to participate in the solution, which is the creation of a more sustainable world, that they are incentivised to stand away for risk of brand damage. I would argue for a nuanced approach.”
He adds that clearly there is some greenwashing and “some pretending” in the industry, but this is a problem we need to solve collectively.
“We can’t be pretending to solve the climate problem, because that would just leave a devastated Earth to our children and grandchildren. Let’s get real, but let’s not jump on the greenwashing soapbox too quickly.”
Criticising firms for not being “green enough” goes against the idea of channelling capital towards a sustainable solution and puts firms off trying to participate in a positive process, he adds.
“The fact that they talk about it, create funds for it, however imperfect, is a much better thing than when it was discussed at the fringes.
“Let’s consider the problem openly rather than leaving it to a specialist group of NGOs or very green people, because, actually, we should all be green.”
Click here to see
which climate and biodiversity-focused initiatives Ninety One is signed up to
Ninety One is a signatory to various climate and biodiversity-focused initiatives
• UK Stewardship Code
• The Carbon Disclosure Project (CDP)
• Climate Action 100+
• Crisis Group
• Glasgow Financial Alliance for Net Zero (GFANZ)
• Institutional Investors Group on Climate Change (IIGCC)
• International Corporate Governance Network (ICGN)
• Impact Investing Institute
• Net Zero Asset Managers Initiative
• Responsible Investment Association (RIA) Canada
• Say on Climate
• Sustainable Markets Initiative (SMI)
• Task Force on Climate-related Financial Disclosures (TCFD)
• Thinking Ahead Institute
• Transition Pathway Initiative (TPI)
As at 31 March 2021
Assets under management
Managed in sustainable solutions
The need for freshwater, ocean and land ecosystems to sit alongside climate change on the nature agenda has never been greater, warns the TNFD
This month, world-leading scientists discovered we have surpassed the planetary boundary for fresh water, meaning we are putting more pressure on the water cycle than the planet can sustain. At the same time, it emerged that a third of listed financial institutions are not assessing the risks that come from their exposure to water-related dependencies.
This contrast is replicated when it comes to other realms of nature, including land and ocean. Scientists tell us we urgently need to halt and reverse nature loss, while financial institutions – and the companies they invest in – are not sufficiently assessing their exposure to nature-related issues, let alone managing or reporting on it.
The same gap between science and market practice used to exist in the climate space. Now, climate change is widely recognised as a systemic risk issue, and it demands attention across all sectors. Helpfully, a new vernacular has emerged for talking about climate change and climate action. Much remains to be done for financial institutions and corporates globally to align with the net-zero transition in practice, but net-zero ambitions have quickly become the expected norm.
In its 2022 global risk perception report, the World Economic Forum says extreme weather events and nature loss now sit alongside climate change as the top three global risk issues of most concern to CEOs. We have reached a tipping point for the rest of the nature agenda – freshwater, ocean and land ecosystems – to catch up with policy, corporate and financial sector action on climate.
Understanding nature risk
At the Taskforce on Nature-related Financial Disclosures (TNFD) we are playing our part in improving risk management and helping shift the flow of global capital to more nature-positive outcomes. The taskforce, comprised of 34 members from financial institutions, corporates and market service providers, is designing and delivering a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities.
This cross-sector initiative is backed by the political support of G7 and G20 ministers; more than a dozen leading science, standards-setting and conservation partners; and more than 400 institutions globally that have joined the consultative TNFD Forum.
The taskforce has explicitly set out to build on, and integrate, existing standards, metrics and data, including the core approach recommended for climate-related disclosures by the Taskforce on Climate-related Financial Disclosures (TCFD). The TNFD will release further updates to the beta framework, before the release of the final recommendations in Q3 2023.
Reporting and disclosure
What we have heard in our early consultations is nature is a new and complex topic for most market participants. We all understand nature intuitively as concerned citizens, but how should businesses and financial institutions understand nature and assess nature-related risks in a business context?
With that in mind, the taskforce has supplemented its TCFD-aligned draft reporting and disclosure recommendations with a set of fundamental concepts and definitions for understanding nature and nature-related risks, as well as prototype guidance for corporates and financial institutions to support their internal assessments of nature-related risks and opportunities.
That practical ‘how to’ risk assessment guidance, called ‘LEAP’, is intended to support internal risk and portfolio management practices for companies and financial institutions of all sizes. It is built around a four-phase assessment process: ‘Locate’ your interface with nature; ‘Evaluate’ your dependencies and impacts; ‘Assess’ your risks and opportunities; and ‘Prepare’ to respond to nature-related risks and opportunities, and report and disclose to investors in line with local market regulator requirements.
Executive director, Taskforce on Nature-related Financial Disclosures
‘Our consultations show nature is a new and complex topic for most market participants’
An emerging landscape
The TNFD’s guidance is being developed to capture synergies wherever possible with the approaches and practices financial institutions and businesses have already put in place on climate risk management and transition planning. Nevertheless, the place-based characteristic of nature-related risks and dependencies requires a particular focus on location.
Echoing well-established ‘know your customer’ practices embedded in standard risk management practice across business and finance today, a simple adage for this emerging landscape of nature-related risk reporting is to ‘know your ecosystems’.
Allowing nature loss to continue unabated will inevitably result in more and larger risks to societies and economies everywhere. Conversely, addressing nature loss will restore the resilience of the environmental assets and ecosystem services that underwrite our prosperity and take full advantage of nature’s potential to be our best ally in tackling climate change.
Evaluate your dependencies and impacts
Assess your risks and opportunities
Prepare to respond to nature-related risks and opportunities, and report
Locate your interface with nature
LEAP: the TNFD nature-related risk and opportunity assessment process
Natalie Kenway speaks to Shelagh Whitley, chief sustainability officer at Principles for Responsible Investment, about the impact of climate change and biodiversity loss on business
Why do investment firms need to address climate change and biodiversity in their business models?
With each passing year, the risks posed by climate change become increasingly clear. The Intergovernmental Panel on Climate Change’s 2021 report (click here to read the full findings) indicated the planet is on track to exceed 1.5C within two decades. Global biodiversity has declined notably as warming has progressed. More than half of the world’s gross domestic product – $44trn (£36.1trn) – is moderately or highly dependent on nature and its services, such as the provision of food, fibre and fuel.
Biodiversity and ecosystem service loss is already impacting on businesses as a result of transition, physical, litigation, regulatory and systemic risks, which have the potential to affect investment value in the short, medium and long term. The unprecedented loss of biodiversity places this value at risk. This is driven by the interaction of unsustainable consumption, pollution, climate change, alien invasive species and habitat conversion for economic and social endeavours.
What have been some good examples of best practice, in terms of tackling climate change and biodiversity, in the investment industry?
As climate change has gained traction to become one of the most dominant themes within the current investment landscape, associated issues have begun to surface – including biodiversity and deforestation. The Commitment on Eliminating Agricultural Commodity-Driven Deforestation is one example. Comprised of more than 30 leading financial institutions, with more than $8.7trn in collective assets under management, the initiative’s signatories have committed to tackle agricultural commodity-driven deforestation.
In terms of specific examples, as shown in our paper Investor action on biodiversity, AXA Investment Managers is engaging companies with activities known to impact biodiversity, or those most vulnerable to nature-related risks. It had a dialogue with 33 companies in 2019 and will continue engaging, requesting the following:
• Biodiversity management and oversight – having board and senior management expertise and oversight, company-wide assessment of impact and dependence.
• Biodiversity operational impact management – policies addressing biodiversity, direct and indirect supply-chain biodiversity impact management programmes, external assurance.
• Biodiversity transparency – reporting of key performance indicators and setting targets.
• Engagement response – willingness to discuss biodiversity, responding to engagement over time, participating in external stakeholder initiatives.
Watch the video interview with Whitley for more on tackling the issue
‘The focus should be on stewardship activities on real-world outcomes that deliver, not on policies and processes that may not translate into change on the ground’
Shelagh Whitley, chief sustainability officer, Principles for Responsible Investment
How can investors play a part in reversing trends such as loss of forest cover and deforestation, plastic waste and pollution?
On deforestation, a first step in reversing trends such as loss of forest cover is understanding it as a systemic issue. Deforestation not only drives climate risk, but also reputational risks related to consumers and civil society. Traceability technology and tools can identify investors and companies that are connected to deforestation and expose them to liability and loss of market share.
Investors can address the issue by halting their contributions towards deforestation. More than 30 financial institutions have already made such pledges through the Commitment on Eliminating Agricultural Commodity-Driven Deforestation announced at COP26.
Further to this, investors can engage with their investee companies on eliminating deforestation from their direct operations and supply chains. The PRI recommendations are as follows:
For plastics, investors can influence change through their own activity. The plastics value chain is complex, touching most – if not all – business sectors. By identifying where and how their portfolios might be exposed to plastic pollution, investors can allocate capital accordingly, mitigating associated risks while capturing opportunities. In doing this, investors simultaneously protect value and direct capital toward innovative business models and solutions, helping to enable the seismic changes required in the shift to a circular model. PRI released a series of engagement guides for investors on how to address plastics.
What does international conflict mean for climate change?
The prospect of a less stable international order will force investors to shift their outlook on environmental goals and energy policy (as well as on other ESG themes such as human rights and global governance).
Conflict between nations is not under the direct influence of investors, but there is still much that investors with an ESG approach can do in relation to drivers and consequences arising from armed conflict, including in relation to climate.
We must ensure that in the near term, the imperative to reduce dependence on imported natural gas does not lead to lock-in to high carbon infrastructure. In the mid- to longer run, the national security co-benefits of the shift towards net zero are powerful new drivers for accelerating this transition.
What practical engagement advice do you offer investment managers on climate and biodiversity?
There are a number of initiatives that can help investors engage on climate and biodiversity issues, such as Climate Action 100+ and the Net Zero Asset Managers Initiative. The PRI is also planning a forthcoming collaborative engagement on Resilient Natural Systems, which we will share more information on in due course.
Findings from our biodiversity discussion paper show investors should engage companies on reducing negative biodiversity outcomes and design stewardship approaches to deliver positive outcomes. Engagement should prioritise high-risk sectors – those that have a high dependency and/or high impact on biodiversity. In addition, investors can explore opportunities to engage with sovereign issuers to understand how they measure and manage natural capital. To facilitate this engagement, investors need to develop expectations on what constitutes good practice.
Furthermore, an Active Ownership 2.0 approach should be adopted, especially given biodiversity loss is a systemic issue. The focus here should be on stewardship activities on real-world outcomes that deliver, not on policies and processes that may not translate into change on the ground. For example, a company may have a no-deforestation policy but then lobby for weakened environmental regulation.
How can regulators go further in the green financial transition?
The formation of a supportive policy and regulatory landscape that underpins investor efforts on environmental issues is hugely important. We ultimately need to see financial frameworks on disclosures duties and processes realigned to some extent – in essence, structural change that aligns the direction of travel for the industry with sustainability goals. Of course, the recipe for success in every country is slightly different, but ultimately the aim of regulators should be to create an environment that supports investor efforts to align with the overarching goals of the Paris Climate Agreement.
One area in which we’re seeing movement currently is around mandatory climate disclosures. At the time of writing the Securities and Exchange Commission is consulting on implementing mandatory climate disclosure rules for the US market, a potentially significant move that could set the regulatory standard for other markets the world over.
How will the PRI be involved with COP27? What would you like to see?
Following COP26 last year, gaps remain in the global response to the Paris Climate Agreement – the world is still not on track to limit warming to no more than 1.5C. As such, the PRI will call for bold action from governments and investors alike, pushing them to raise their ambition and take swift and meaningful steps towards zero emissions goals.
This means seeing progress on ambitious transition targets and more near-term accountability on the journey to reach those targets. In terms of biodiversity and deforestation, we must encourage greater integration of climate and nature goals into investor practices, to build on the success of this work realised at COP26.
1. Continue pushing for commitments to halt deforestation, with full traceability as a key lever to change company practices.
2. Prepare to escalate when policies do not translate into action and outcomes on the ground.
3. Multi-stakeholder action is key to tackling deforestation. Collaboration across sectors and supply chains should be a key feature of future stewardship initiatives.
4. Integrate interconnected ESG issues (for example, paying living wages can help reduce smallholder deforestation, and indigenous land rights are key to conservation efforts) into future stewardship activity on deforestation.
Shelagh Whitley’s biography
Shelagh Whitley is chief sustainability officer with the Principles for Responsible Investment (PRI), leading PRI’s programmes on ESG issues and sustainability outcomes.
Prior to joining PRI, she was head of the climate and energy programme at the Overseas Development Institute (ODI) where she led research on fossil fuel subsidies, green fiscal policy and private climate finance.
Whitley has also worked in the private sector and within civil society on carbon market development and climate finance, included working with Camco, a carbon project developer, and The Climate Group, a non-profit organisation dedicated to advancing business and government leadership on climate change.
Click here for Shelagh Whitley’s biography
Rebecca Kowalski, director, Overstory Finance
Biodiversity is notoriously difficult to measure and has been somewhat neglected by regulators. ESG Clarity finds out how professional investors across the globe are taking nature into account
If it’s difficult to set worldwide standards for carbon and climate reporting, then for biodiversity it appears even harder. As well as being more difficult to measure, it is by definition unique to each area of land, sea or forest, making solutions such as offsetting a trickier prospect. Not to mention the fact it’s had far less attention from regulators and investors.
The Taskforce on Nature-related Disclosure (TNFD) has its work cut out in incorporating different geographical regions’ approaches to taking biodiversity into consideration in investment decisions – if they have an approach at all.
In Asia and the UK, government schemes and regulatory standards are paving the way for investors to measure biodiversity, portfolio managers in those regions tell us. But in the US, Alliance Bernstein’s Salima Lamdouar says regulation is behind, and in parts of Africa, where “nature is very real”, FSD Africa’s Mark Napier explains the take-up of biodiversity frameworks is unclear.
That said, across the world, investors are creating tools to measure biodiversity and set performance indicators linked to natural capital.
Click on the map below to read how investment professionals in the UK, Asia, the US and Africa are taking action to measure, report on and invest in biodiversity in their regions.
By Natasha Turner
‘Biodiversity has had far less attention from regulators and investors’
In the UK we want to make sure we continue to maintain productive timberland and woodland for decarbonising our economy. The necessity to transition away from carbon-intensive concrete and steel is only going to be delivered through a natural fibre such as wood. However, the industry has historically had a reputation of monoculture, or single-species growing, so we’re trying to make sure we can deliver that outcome without compromising the opportunities to expand, manage and maintain biodiversity.
Some of that is regulatory – within the UK Forestry Standard there are clear guidelines about what, where, how and when you can plant. The standards are actually very good but they’re incredibly dense documents, with detailed requirements in terms of planning and process. We have to make sure people are aware of how much is done already on this basis for forestry and woodland planting in the UK, although it’s all voluntary in the UK and Europe at the moment.
We’re managing around 350 separate forests in the UK and have carried out a review of all of them to look at the biodiversity within them. Now we are assessing how we can enhance that in our existing portfolio and when we’re planting new woodland. The problem is, it’s not an exact science.
We also released our forest charter, designed to create a level of transparency, focus on a number of factors and set and report on KPIs. But we’re not sure where the end goal is yet and haven’t set any targets so far.
Olly Hughes, managing director, forestry, Gresham House
‘Good guidelines already exist’
Biodiversity issues are generally less well understood by regulators and the investor community in the US, while in Europe regulatory focus is already there. A case in point is biofuel regulation, where land use issues are clearly incorporated in Europe while even in California – arguably the most advanced jurisdiction in the US – the low-carbon fuel standard criteria do not incorporate land use considerations to the same extent.
In Europe, for example, the regulation clearly gives preference to waste-based products by stipulating that “the amount of biofuels produced from cereal and other starch-rich crops grown on agricultural land that can be counted as a sustainable source of renewable energy is limited to 7% of the energy in transport”.
Long term, for biodiversity-based investing to scale we will need to be able to accurately measure impact (think about a biodiversity footprint such as the number of acres destroyed per year much like a carbon footprint) but the tools we have at the moment to measure this are not scalable. When speaking to academics on this topic, they say biodiversity is complex and difficult to attach a number to, but so is carbon footprinting, and at least Scope 1 and 2 numbers give us a base we can build from.
The other issue with biodiversity investing is that – unlike for climate – it is hard to find corporates that provide a solution to biodiversity issues. In many cases we are looking for firms that are mitigating negative biodiversity impacts as opposed to those which improve biodiversity outcomes.
Salima Lamdouar, vice-president and portfolio manager for sustainable fixed income, AllianceBernstein
‘We need to be able to accurately measure impact’
As nature is a public good, governments recognise the responsibility they carry for establishing frameworks, policies and long-term ambitions for combating the biodiversity loss through the enforcement of specific regulations and support of new, nature-positive economic models.
These inroads are currently happening globally, including the efforts of Hong Kong and China to avert biodiversity loss with direct ecosystem protection projects, and also industrial efforts. Hong Kong, for example, plans to reduce plastic waste by 45% and increase recycling by 55% as part of a recently announced Waste Charging Scheme. These are opportunities to scale technology for recycling or biomaterials – and with that, create financial benefits for the producers and users of these alternative materials.
Many companies in Asia are making similar inroads, recognising that being prepared for the inevitable transition positions them well to create stable, sustainable companies that have a faster-growth outlook compared with peers.
The HSBC Biodiversity strategy uses scientific research conducted by LOIM in co-operation with Oxford University and Systemiq, aimed at identifying the solutions and business models that will enable biodiversity to thrive.
Along this assessment, we use a number of measurement techniques based on the materiality specific to each investment case. These are: forest management performance, which includes materiality, policies and targets, and performance against these; and waste reduction and recycling applications within the company’s operations and products, where we look at reported volumes of material recycled, packaging/materials avoided, or the use of recycled materials in the production process.
Alina Donets, portfolio manager, Lombard Odier Investment Managers
‘Companies in Asia are making inroads’
African economies are so influenced by nature (typically 80-90% of employment comes from agriculture, timber, tourism etc), and climate and nature are interdependent. Carbon reduction seems intangible to many in Africa, especially as the prevailing mood is that the region contributes hardly any emissions anyway, whereas nature is very real – when you start to think about your own farm, or the impact of drought on livelihoods in your own communities, etc.
ESG is at a very low level of adoption – only South Africa has mandated ESG disclosure – and there are almost no ESG products being developed by asset managers, insurance companies etc. Domestic African investors are categorically not investing through a climate or nature lens. On biodiversity, there are numerous frameworks being considered, such as Biodiversity Footprint Financial Institutions, Species Threat Abatement and Restoration, the Global Biodiversity Score for Financial Institutions, Biodiversity Impact Analytics – and now, of course, TNFD. But I’m not sure how many have been taken up.
There is even talk in Ghana of a Biodiversity Offset Scheme being developed, whereby project developers can offset any negative impacts they might have on biodiversity by investing in pro-biodiversity projects elsewhere. It’s good to see this sort of innovation starting to happen but it will be difficult to pull off. There will need to be a lot of cross-government support besides the formidable measurement challenges.
FSD Africa is working right now to develop a Biodiversity Investment Rating Agency, which would set standards for assessing ex ante the biodiversity impact of an investment. This could lead to some sort of kitemark – a bit like the energy efficiency measure on a house in the UK. But we may go the route of integrating this into someone else’s product so as not to add to the proliferation of frameworks.
Mark Napier, CEO, FSD Africa
‘African investors are not investing through a nature lens’
Learning from climate activism
Inspired by her activist daughter, Rebecca Kowalski suggests the investment industry must incorporate the same urgency and intent in its actions if it’s to realise a ‘net-zero financial centre’ vision
My eldest child has been busy staking her personal future on creating a better one for all of us. She faces trial for her activity, which makes me judge the merit of my own actions daily. Is the investment industry being activist enough and can we gain any insight from the climate activism currently taking place in civil society?
The UK Sustainable Investment and Finance Association (UKSIF) has recently released a report highlighting its vision for how the UK can become “the first net-zero financial centre”. Given this organisation represents a very wide range of industry players, I was not especially hopeful but keen to see some activism in its proposals.
Activism might not be the term the UKSIF uses, but I am delighted to see activist intent in both its words and suggested actions.
“It is clear we are far beyond the point of urgency in tackling the climate crisis. As the defining mission of our age, each of us must now act at the pace and scale that this challenge demands – and vitally this includes financial services.”
One of UKSIF’s proposals is the need to address the “real skills’ deficit in the finance sector, from pension schemes’ trustee boards to financial advisers and many other groups, in terms of individuals with strong knowledge of both sustainability issues and financial services”.
I’ve made becoming one of the aforesaid individuals my main activism in the past few years and believe ongoing learning is key if you wish to understand not only climate science but also climate investing and its wider social and economic implications. Whether a climate activist or an investment activist, if you intend to bring about change and, dare we say, even a little disruption to business as usual, you need to be able to justify your reasons. It’s a vital part of onboarding and aligning people with the transition.
Should an adviser who can’t even define what impact investing means be hard-marketing this kind of investment to novice investors? Of course not, but I’ve seen it happen.
Let’s get some compulsory sustainable finance hours into the CPD requirement. Why do advisers need to do 15 hours on personal protection but none as yet on planetary protection?
Step up to the plate
A civil society climate activist feels compelled to step up and act, no longer prepared to wait for or rely on others. We need to apply that same personal responsibility in finance.
Take, for example, the decisions independent financial advisers make when they decide to entrust the investment of their clients’ funds to an investment manager or discretionary fund manager. Should they at that point simply assume that all the strategy, individual stock selection, prioritisation of ESG factors and ongoing engagement activity is going to align with their clients’ preferences? I don’t think so.
There are going to be companies bought and voting decisions made that might cause some clients to question them. The right thing to do is not to discourage awareness, but to get under the lid of the sustainable solutions you advocate and ask the questions before they are asked of you. There might be a perfectly reasonable answer, but if you don’t ask, you aren’t going to get it.
Climate activists are a minority. If they can reach the mainstream, then this will massively boost the transition to net zero at the necessary pace and scale.
The UKSIF report also recognises this, and advocates “considering ways to strengthen the readability of stewardship reports for clients and others, helping ensure reports are read by a wider audience”. Having spent precious hours wading through engagement and voting reports in recent times, it has really highlighted the need for quality over quantity when sharing information.
If we want to influence people or even just get them to listen to our message, it must be accessible, relevant to them and make the call to action clear. The user-friendly voting platform developed by young fintech company Tumelo is a perfect example of this. It heartens me to see it growing in strength and winning the approval of the investment industry establishment.
Acknowledging personal power
Everyone, whether as an individual or part of a group, has their own way of making a difference or getting things done. My climate activist daughter tells her story of disillusionment with her work as an environmental scientist and her decision to give up financial security to do something she really thinks is worthwhile. I use my total independence as a part-time small business owner to allow purpose rather than profit to guide what I do in finance.
Not everyone has the willingness or the capacity for financial loss to embrace such independence, but we all have ways in which we can amplify our ability to bring about change. We need to be prepared not just to bring our own A-games, but also speak out if we identify that other people aren’t bringing theirs.
There is one thing climate activists and the investment industry have in common. Both tend to be mistrusted and subject to prejudice from people who don’t understand much about them. Accusations such as being ‘trust fund kids’ or distanced from ordinary people are hurled at both parties.
Both have incredibly huge amounts to either lose or gain if we don’t get this transition done, urgently and justly. Both could either accelerate or hinder the other’s specific agendas and timescales but fundamentally could have the same purpose – to invest all they have in a liveable future.
Director, Overstory Finance
a climate activist or an investment activist, if you intend to bring about change and, dare we say, even a little disruption to business as usual, you need to be able to justify your reasons’
Click here for Rebecca Kowalski’s biography
Rebecca Kowalski’s biography
Rebecca Kowalski has worked in the Scottish IFA industry for more than 25 years. Much of this was as a technical paraplanner, a role in which she achieved three Paraplanner of the Year awards, in 2008, 2014 and 2016. Kowalski then moved into a compliance and management role, delivering T&C training and supervision to financial advisers, as well as mentoring less experienced paraplanners.
Inspired by her climate activist daughter, Kowalski has developed a huge interest in sustainable investing, because in her own words “it has, after all these years, turned financial services from a job into a vocation. When you care passionately about something, you have to make sure you do it right”.
As a result, in 2021 Rebecca launched her own sustainable investment consultancy, Overstory Finance, designed to help IFAs embrace sustainable investing and remove any hurdles that might prevent them from doing so.
Image by Ehimetalor Akhere Unuabona @Unsplash
It’s imperative that companies and investors commit to net-positive biodiversity impact by 2030, says Federated Hermes’ Sonya Likhtman
All life on earth and all businesses, to varying degrees, rely on nature, meaning biodiversity loss poses a risk to investors and a systemic risk to the economy. While the two challenges are tightly intertwined, by looking at the problems solely through a climate change lens, investors are unlikely to properly address the decline of biodiversity and ecosystems. A more effective way to integrate engagement with companies on these topics is needed.
Climate change is one of the five main drivers of biodiversity loss, which will likely become stronger as the physical impacts of climate change, such as temperature changes and extreme weather events, become more prevalent. Equally, protecting and restoring biodiversity will enable us to both mitigate and adapt to the negative consequences of climate change, such as through carbon sequestration by soils, forests, peatlands and other ecosystems, as well as by providing natural protection from floods and storms.
At COP26 in Glasgow, there was an increased focus on the role of nature in tackling climate change. Countries committed to halt and reverse forest loss and land degradation, and financial institutions, including the investment community, committed to address deforestation in portfolios through due diligence and engagement.
However, unlike climate change where we measure carbon dioxide emissions, biodiversity loss is more challenging to measure and compare, with impacts often localised and dispersed throughout supply chains. For investors, this presents challenges when it comes to assessing a company’s impact and dependence on biodiversity, though the Taskforce on Nature-related Financial Disclosures should help to strengthen and streamline approaches.
In spite of the hurdles, it is an environmental, social and economic imperative that investors make biodiversity a stewardship priority alongside climate change. We call on companies to commit to having a net-positive impact on biodiversity throughout their operations and supply chains by 2030 at the latest.
The mechanisms to achieve this goal will vary by company and sector, but some strategies can address climate and nature challenges simultaneously. For instance, tackling deforestation in value chains will protect biodiverse ecosystems that are major carbon sinks.
Equally, transitioning to a more sustainable food system is critical, as up to 30% of global emissions currently arise from the food system, and given the immense land requirements for animal rearing and growing animal feed. Nature-based solutions can also address the dual challenges of climate change and biodiversity loss.
Engagement on biodiversity
Engagement should focus on companies’ most material impacts and on reducing corporate pressures on biodiversity, such as land-use change, climate change and pollution. Equally, innovation across operations, supply chains and products will be necessary to deliver the ambitious goal of having a net-positive impact on biodiversity at the organisational level.
This goal should be accompanied by strong governance, effective measurement, an impactful strategy and regular disclosure.
Engagement on biodiversity is growing, through the upcoming collaborative engagement initiative Nature Action 100, for example, but further partnership across the industry is needed.
A policy environment encouraging investors and companies to effectively contribute to halting and reversing biodiversity loss is also essential, which is why we continue to advocate for an ambitious and transformative outcome at the biodiversity COP15 through the Finance for Biodiversity Foundation.
To date, the value of biodiversity and ‘ecosystem services’ – the common goods provided by nature, such as clean air and water, fertile soils, pollination and favourable climatic conditions – has been largely unacknowledged by companies and their investors.
A failure to act could result in the collapse of food systems, further breaches to planetary boundaries and significant financial repercussions across the global economy.
Lead engager, Federated Hermes Biodiversity Fund, EOS at Federated Hermes
‘Engagement should focus on companies’ most material impacts and on reducing corporate pressures on biodiversity, such as land-use change, climate change and pollution’
The future looks bright for clean energy investors
The renewable energy
sector is growing fast, writes Richard Lum of Victory Hill,
as is the magnitude of the opportunity it offers
Retail investors are increasingly recognising the growing opportunity of renewable energy as an asset class and, encouragingly, it has become a key component of many portfolios. The transition to net zero means global renewable energy markets are developing fast and, within this, there is a wide range of investments.
As of 2019, global technology reached the capacity to produce 2,713.6 gigawatts of clean energy. Meanwhile, according to the International Energy Agency, global renewable electricity capacity is forecast to rise more than 60% from 2020 levels to over 4,800 GW by 2026 – equivalent to the current total global power capacity of fossil fuel and nuclear combined.
This swelling renewable energy capacity and its application undoubtedly displays potential for sustainable investing.
Emerging markets on track
In particular, there are cases where emerging markets are ripe for driving sustainable goals, while simultaneously generating differentiated returns.
For example, Brazil is expected to attract $300bn (£245.4bn) in infrastructure investment into its energy sector by 2040, an increase of 189% of its current capacity. Most of the large-scale PV investments are on track to be finalised before 2035, demonstrating the immediate opportunities available to the retail community.
More than 100 cities across the globe now derive at least 70% of their electricity from renewable sources such as wind, solar and hydro. Building on this, urbanisation is becoming ever-more prominent, as is demand for capital to develop more efficient renewable-powered batteries for transport, solar and wind for electricity, meaning potential returns through environmentally friendly projects.
There are further opportunities in alternative energy sources that investors can consider. For instance, carbon capture and battery storage can play a pivotal role alongside more weather-dependent technologies in the collective shift to net-zero emissions, while providing financial returns.
Sources such as wind and solar are limited by intermittent weather patterns, so they can interrupt the energy supply. Diversifying the global energy mix with more certain – and traditional – sources of thermal power combined with carbon capture and battery storage, for example, would undoubtedly strengthen the foundation for achieving a net-zero future and attract new capital allocation.
Furthermore, Direct Air Capture (DAC) technology captures the carbon from an emitting source of energy and stores it in underground facilities. Since the captured CO2 is used to produce lower-carbon versions of conventional products, including fuel, building materials, chemicals and beverages, there is great scope to deploy this technology in parallel with conventional forms of renewable energy, such as wind and solar, in a far less pollutive manner.
Although this technology is still being developed, its great potential is reflected by the fact that, by 2030, the market value is estimated to reach upwards of $100bn. Meanwhile, the cost of DAC technology is predicted to decrease as it is more widely applied. This means DAC technologies can be applied to the energy market on a larger scale, providing plenty of opportunities for investors.
Managing partner and co-chief investment officer, Victory Hill Capital Advisors
‘Carbon capture and battery storage can play a pivotal role alongside
more weather-dependent technologies
in the collective shift to net-zero emissions’
Funds in focus
Global climate funds’ assets have doubled in one year, boosted by continued fund flows and an accelerated pace of product development, reaching $408bn (£326.4bn) worldwide in December 2021. Within those, climate-conscious funds have overtaken clean energy/technology in popularity.
According to Morningstar research, low-carbon funds provide the greatest shield from carbon risk but offer little in the way of climate solutions. Conversely, clean energy/tech funds offer high exposure to climate solutions, but also currently hold the greatest carbon risk in the bunch.
These differences make it crucial for investors to carefully consider their green preferences and carbon-risk appetite when choosing a climate product. They should also understand the funds’ investment objectives and investment process, ensure they are comfortable with the level of carbon exposure offered and, crucially, look at the funds’ holdings to avoid any nasty surprises.
Here are three examples of climate funds to take a look at:
Impax Environmental Leaders: Leader
This is an ecology-themed strategy benefiting from strong ESG integration and best-in-class resources, which warrants a Leader ESG commitment level rating from Morningstar. The valuation-conscious portfolio managers of this fund hunt for growth companies operating in resource efficiency and environmental markets. The process is thoughtful and has been executed with great discipline. An efficient proprietary filter is used to identify attractive prospects, which are then vetted in a detailed and structured 10-step process. As of November 2021, the fossil-fuel-free portfolio was relatively concentrated at 47 stocks and 29% of assets stashed in its largest 10 positions.
The fund is co-managed by a cohesive and seasoned six-member portfolio construction team led by co-managers Hubert Aarts, David Winborne and Sid Jha. The managers are backed by an extensive and stable group of 23 industry veterans and more junior staff with eclectic backgrounds, though they often have experience in sustainable investing.
Click here to see performance chart
RobecoSAM Smart Energy: Advanced
RobecoSAM Smart Energy is an example of a long-standing clean energy approach with solid ESG integration. The strategy deserves a Morningstar ESG Commitment Level of Advanced.
This fund doesn’t integrate sustainability only through its thematic approach – ESG criteria and research are also incorporated in a large part of its investment process. The investable clean energy universe is split into four clusters: renewable energies, energy distribution, energy management and energy efficiency.
Companies should have a minimum of 20% revenue exposure to the theme to be eligible for inclusion here. The sustainable investment research team evaluates sustainability drivers for each cluster and performs in-depth sustainability due diligence on individual stocks. The team accounts for material ESG issues in its valuation assessments, for example by adjusting the cost of capital for each company.
The fund lost its entire team after lead manager Thiemo Lang and his two directly supporting equity analysts left the firm in August 2021. Robeco was swift in hiring a new team, but the track record of the new lead manager doesn’t stand out and the new team has still to prove itself. Although execution needs watching, the clean energy thematic approach remains largely unchanged.
Click here to see performance chart
iShares MSCI EMU ESG Enhanced: Basic
The fund tracks a climate transition index, the MSCI EMU ESG Enhanced Focus Climate Transition Benchmark (below it has been benchmarked against the index the Morningstar research team assigns to all funds within a Morningstar category). Its approach will suit those looking to reduce for Scope 1, 2 and 3 carbon intensity and improve sustainability metrics without making too large bets against the market-cap-weighted MSCI EMU Index. The fund applies a combination of light ESG screen and optimised reweighting strategy to its benchmark. While the strategy goes further than exclusions-only peers, it still falls short of the punchier best-in-class peers available.
The MSCI EMU ESG Enhanced Focus Climate Transition Benchmark Index excludes a small number of companies involved in the most severe business controversies: only nine of 232 stocks have been excluded versus its parent index as of April 2022. These exclusions can affect some of the largest players in the parent index however, such as pharmaceutical colossus Bayer and aerospace giant Airbus. An optimiser is then used to reweight holdings to maximise exposure to ESG factors while reducing the emissions risk of fossil-fuels reserves by 30%. The fund earns a Morningstar ESG Commitment Level of Basic.
Click here to see performance chart
‘The strategy goes further than exclusions-only peers, it still falls short of the punchier best-in-class peers available’
‘This fund doesn’t integrate sustainability only through its thematic approach: ESG criteria and research are also incorporated’
ESG fund analyst, Morningstar
‘The managers are backed by 23 industry veterans and junior staff with eclectic backgrounds’
Impax Environmental Leaders
RobecoSAM Smart Energy
iShares MSCI EMU ESG Enhanced
Bonhill Intelligence and ESG Clarity’s Christine Dawson examine how the Pictet Global Environmental Opportunities Fund is calculating the climate-related physical risks its assets are exposed to
Fidelity International, Nordea Asset Management and Pictet Asset Management funds topped the ESG Clarity and Bonhill Intelligence Responsible Ratings Index (RRI) sustainable funds ranking this month.
The Fidelity Global Dividend Fund was in first place, Nordea’s Global Climate and Environment Fund was second and Pictet was third with Global Environmental Opportunities. With this magazine drilling down into climate and biodiversity, we asked if any of these top performers could share insights on how they foster climate resilience in their funds.
Speaking about its Global Environmental Opportunities Fund, Pictet senior client portfolio manager, thematic equities, Jennifer Boscardin-Ching, says physical risks linked to climate change are on the radar and are being measured in the fund.
As discussed in our cover feature, there are a range of ways in which managers are calculating how much physical risk from climate-related hazards assets are exposed to. At Pictet, Boscardin-Ching says: “We use a specialised physical climate risk data provider called Four Twenty Seven.
“It measures the physical risks of climate change including exposure to hazards such as extreme rainfall, hurricanes, heat stress or sea level rise. This is measured on a company-specific basis and also summarised on a portfolio level.”
Four Twenty Seven , which was acquired by Moody’s in 2019, uses a framework for assessing a company’s exposure to climate risk based on operations, supply chain and market risk. According to Four Twenty Seven’s own description of its service, operations risk is “based on its facility-level exposure to floods, heat stress, hurricanes and typhoons, sea level rise, water stress and wildfires.”
Supply chain risk looks at “risk in countries that export commodities that the company depends on and a company’s reliance on climate-sensitive resources such as water, land and energy, based on its industry”, while market risk considers “where a company’s sales are generated and how its industry has historically been impacted by weather variability”.
As the Taskforce on Climate-related Financial Disclosures sets out, there are two main areas of risks from climate change, the second being transition risk – in effect, how climate policy, markets and carbon prices will impact the value of assets.
On this front, Pictet ’s Boscardin-Ching is confident the firm is minimising risk and says it has not been going through a process of selling carbon-intensive holdings.
She explains: “The Global Environmental Opportunities strategy generally has very low transition risk due to its objective of investing in environmental solution providers that are already operating within the safe space of the planetary boundaries.
“Therefore, based on our planetary boundaries framework, very carbon-intensive holdings – for example, thermal coal, oil and gas – would not be part of our investable universe of environmental companies in the first place.”
The top 10 holdings of the fund include companies focused on dematerialising the economy, pollution control and energy efficiency. The top holding, at 4.46% of the portfolio, is waste management and recycling company Republic Services.
Over five years, the cumulative performance of the fund has outperformed MSCI ACWI by 32.2%. It has also outperformed on tonnes of CO2 equivalent per million dollars of annual revenue (TCO2/MN$) when compared with the same index. As of 31 December 2021, Pictet Global Environmental Opportunities’ figure was 411.03 TCO2/MN$ while MSCI ACWI stood at 1,647.74 TCO2/MN$.
Click for Pictet Global Environmental Opportunities performance graph
‘Based on our planetary boundaries framework, very carbon-intensive holdings would not be part of our investable universe in the first place’
RRI ratings providers and methodologies
• Responsible Ratings Index (RRI) combines the scores of ESG ratings agencies. ESG Clarity’s bespoke index provides a comprehensive analysis of the top ESG funds available to investors.
• Square Mile’s Responsible ratings combine a fund’s positive impact on the investor’s financial wellbeing alongside the positive impact it has on the world around them. Three factors are considered before being awarded a rating: exclusion – excluding those that have a negative impact on society or the environment; sustainability – rewarding and encouraging positive change and leaders in sustainability; and impact: those that have positive impact on society or the environment.
• Morningstar Sustainability rating provides an objective evaluation of how funds are meeting ESG challenges. Each fund is ranked within their peer group.
MSCI ESG Fund ratings measure the resilience of funds to long-term risks and opportunities from ESG issues.
• Lipper/Refinitiv ESG scores are designed to objectively measure ESG performance, commitment and effectiveness based on publicly reported data across the three pillars – environmental, social and governance.
• Overall Morningstar ratings award funds one to five stars based on past performance. These rankings are based on the performance over the past three years, with risk and costs also taken into consideration, and judged against funds in the same category.
• FE Crown ratings are quantitative ratings of one to five crowns based on past performance, stockpicking, consistency and risk control. FE fundinfo provides these ratings to distinguish funds that are strongly outperforming their benchmark. Funds awarded five crowns are in the top 10%.
• FE fundinfo Risk scores define ‘risk’ as a measure of volatility relative to the UK leading 100 shares, which have a risk rating of 100. More volatile funds have a score above 100, while those below 100 are more stable. This offers investors a reliable indication of relative risk.
• Morningstar Analyst ratings provide forward-looking analysis of a fund based on five pillars: process, performance, people, parent and price. Top-scoring funds receive a ‘gold’ rating.
Click for the top 25 Responsible Ratings Index listings
Pictet Global Environmental Opportunites
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Decarbonising, digitalising and decentralising are three words commonly used in the energy transition story
The themes of decarbonising, digitalising and decentralising the global energy system could hardly have more catalysts for acceleration over the coming 5-10 years in particular.
However, the energy transition narrative has changed markedly recently. There is a realisation that what is at stake is far more than ‘environmental challenges’. The world has woken up to the significant and broader risks of how ‘climate security’ can affect geopolitics.
As the world deals with persistently higher inflation, a new element of the discussion is the ability for green energy to help cut energy and power prices. The sun and wind do not charge for the marginal unit of energy; the cost of producing power from solar and wind has gone down dramatically; and efficiency has risen significantly.
Within the environmental thematic, the market has been rich with catalysts; many of which are aimed at diversifying the power mix to a lower dependency on Russia and increasing the availability of secure and domestically generated energy; most viably achieved in most cases through renewables. Germany pulled forward its green electricity target by 15 years. A few days later, the EU announced its REPower initiative which outlined plans to displace 100 TW of imported Russian gas with a mix of alternative energy sources and energy efficiency measures.
Beyond Europe, global power prices are reaching levels of demand destruction and presenting a concern for industrial output. Environmental solutions have received an extraordinary amount of economic and policy tailwinds support, which will bear fruit over the next months. Fuel prices have lifted the demand for renewables; clean energy PPA’s (Power Purchase Agreements) for example have increased by over 50% since this time last year, on a MWh basis.
A holistic assessment of the effects of climate change can lead to only one conclusion – more must be done on climate adaptation and mitigation, and it must be done faster.
With this in mind, our role is not only to identify the newest environment solutions in the marketplace, but also seek out those companies that are making an impact. Regular interaction with business leaders is key to keeping up to date with advances in this area.
We recently discussed the ongoing growth potential of residential solar energy with John Berger, CEO and founder of Sunnova Energy International, one of the biggest US residential solar companies, and consider the impact residential solar is having, and how this might help power energy independence.
The need for change
Domestic power systems globally are archaic. Aside from the desire for a greener form of energy, John feels the notion of reliability will be a major factor in prompting domestic consumers to switch to solar energy. A watershed moment for the real-life benefits of solar came during the aftermath of a climate disaster in Puerto Rico.
Sunnova Energy International had already observed that the reliability of Puerto Rico’s oil-fired electricity generation was poor and had taken steps to develop a strong market for residential solar here. Therefore when Hurricane Maria devastated the island in 2017, it was able to react quickly. John says: “We sent in supplies, materials, new panels and inverters … and then we bought all the batteries we could from the worldwide supply and sent them all to Puerto Rico.” Helping residents recover quickly from the disaster, and have ongoing access to their own electricity supply and storage had a huge impact.
Living life uninterrupted
Yet, it isn’t just climate impacts that will drive change. Since the pandemic, more of us work from home on a more regular basis and we are also embracing more digitally enabled domestic appliances – the Internet of Things – meaning our reliance on connectivity and having a stable, consistent electricity supply has never been greater. Also now the issues with supply, and the soaring cost of traditional fuels, bringing inflationary pressures.
As solar gains its power from the sun, it’s a decentralised fuel system. As long as there’s even just a little sunlight, you can generate electricity. Homes are still connected to the central grid, which can fill any energy gaps for when there is not enough light for solar to produce power. Batteries can also be used to store excess energy to help householders gain greater benefit from the energy their solar panels produce.
As the price of solar systems comes down and their efficiency continues to improve, John envisions a future where the power system of all countries looks more like the internet, with a combination of centralised and decentralised energy systems. He says: “We call that living life uninterrupted or powering energy independence.” He believes this will be necessary as the growing demand for electricity is going to put a lot of pressure on the system.
Virtual power plants
Decentralising an individual property from the central grid is one step of this process, but John also sees this happening on a much wider scale in the form of microgrids or virtual power plants. This would involve linking whole communities together through decentralised energy sources, powered by solar, which would connect individual houses as well as utilise the local commercial roof space to form networks.
Virtual power plants would provide communities with greater energy resilience in an environmentally friendly way and give more optionality and flexibility to power delivery systems.
Fast forwarding renewable energy
The fight against climate change, particularly with the recent change in narrative, will result in enormous change in the coming decades. Not only are we looking at reducing the climate impact from power, but also mitigating inflationary pressures and supply issues associated with geopolitical tensions. Having a regular interaction with business leaders will not only help us stay on top of this rapidly transforming marketplace, but also informs how we, as asset managers, can best support the transition to a more sustainable and secure world.
Companies mentioned herein, are for illustrative purpose only, are not intended as solicitation of the purchase of such securities, and does not constitute any investment advice or recommendation.
‘The world has woken up to the significant and broader risks of how ‘climate security’ can affect geopolitics’
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head of sustainable
investing at J.P. Morgan
Asset Management, explains what investors should be focusing on
Climate change remains a dominant theme in sustainable investing, as investors look to take account of climate risk in portfolios and contribute to a more sustainable future. There are three key climate change investment risks that investors can focus on now if they want to support long-term climate change solutions.
1. Long-term energy transition risks
The recent rebound in traditional energy stocks, boosted by soaring commodity prices, and the simultaneous underperformance of renewables, has left some investors asking whether the level of transition risk (and opportunity) often associated with these energy stocks is, in fact, overblown.
The answer, in our opinion, is no. Volatility is to be expected on the road to net-zero emissions, and it is crucial that climate investors stay focused. Recent performance drivers behind the energy stock rebound already look to be reversing, as high fossil fuel costs boost the competitiveness of renewable energy providers and attract new investment to the sector. And in the longer term, solving the challenges presented by the transition to a low-carbon economy will likely require further leaps forward in renewable energy and carbon capture technology, providing potentially compelling future opportunities for climate investors.
For anyone still sceptical about long-term transition risks, the recent increase in carbon prices should be a wake-up call. Carbon prices are rising towards the $75 per ton level that the International Monetary Fund says is needed to keep the global temperature rise below 2C by 2050, while the proportion of emissions covered by carbon trading schemes is also increasing. As carbon prices rise, traditional energy production based on fossil fuels will become more expensive, supporting the economic argument for a transition to zero-emission energy sources.
Moreover, the risks that geopolitical instability pose to domestic energy security in countries that are reliant on fossil fuel imports have been made very clear by the war in Ukraine. As such, the crisis has the potential to be a catalysing force for accelerating the transition to renewable energy. Renewable energy can no longer be seen as an isolated response to environmental concerns. Rather, it may come to be viewed as a solution that can help countries achieve strategic energy autonomy and ensure the safety and wellbeing of national populations.
2. Physical climate change risk
Another important area of climate risk that investors need to bake into asset allocation decisions is physical risk, including the threat to asset prices posed by climate-related natural disasters, such as flooding, or hurricanes.
The impact of climate change on economies and businesses tends to be underpriced by markets, despite the fact that there has been a notable rise in both insured and uninsured losses from natural disasters over recent decades.
Insurance against severe climate-related events remains lowest in emerging markets, where many countries are particularly vulnerable to natural disasters but lack the resources to plan for them, or to handle the economic consequences, such as post-disaster relief efforts and rebuilding costs.
To prepare portfolios for the impact of climate change, investors will need to give more consideration to the sectors, countries and regions with the resilience, forward planning and flexibility to not only survive, but thrive, as global temperatures rise. It’s also important to factor physical climate risk into bottom-up company-level analysis, looking at global supply chains and other business vulnerabilities to disruptive events and disasters linked to global warming.
3. Climate change and biodiversity
Preserving biodiversity is emerging as one of the most effective ways to address long-term climate-related challenges – as well as being an important sustainability issue in its own right. Climate risk is inextricably linked to biodiversity, with around 20% of global greenhouse gas emissions attributed to deforestation. At the same time, it’s estimated that over a third of the reduction in emissions required to reach 2030 climate targets could be met with nature-based solutions, such as avoided deforestation. Preserving biodiversity is a win-win for the climate.
Biodiversity loss is a genuine source of financial risk for investors, although the economic impact of the destruction of species and ecosystems will hit harder in some regions, and have a bigger impact in some industries, than in others. Three sectors that account for some 15% of global GDP – construction & infrastructure, agriculture & commodities, and food & beverages – are expected to be among the most affected by action to prevent biodiversity loss. The capacity of these sectors to generate value for investors will suffer if the biodiversity they rely on is degraded.
But preserving biodiversity shouldn’t mean avoiding these sectors. Instead, construction, agriculture and food companies provide tremendous potential for investors to support sustainable innovation, such as the move to green buildings, reforestation and raw materials certification.
Investors are also being supported by a number of important steps that are now being taken at the global level to help boost biodiversity, in terms of policy, disclosures and investor action. For example, the United Nations recently held part two of its COP15 Biodiversity Conference – the nature-focused equivalent to COP26. And in 2022, we expect to see the release of the Task Force on Nature-Related Financial Disclosures draft framework, and a proposal from the World Bank for a Nature Action 100+ as a vehicle for collaborative engagement.
Don’t lose focus on long-term climate change investment solutions
While further periods of volatility around the energy transition are to be expected, the trend towards a more sustainable future is here to stay. For investors looking to mitigate climate risk, and support climate solutions, it’s important not to get distracted by the short-term noise. Instead, as financial markets and the global economy move into an era of climate policy implementation, retaining a solutions-oriented mindset with a focus on long-term climate objectives is key.
Stay informed with all the latest climate investing opportunities and developments.
‘For anyone still sceptical about long-term transition risks, the recent increase in carbon prices should be a wake-up call’
Global emissions covered by carbon pricing
Source: World Bank, J.P. Morgan Asset Management.
Physical climate risk often is not priced in
Source: Munich Re, 2022.
The link between climate change and biodiversity is clear
Source: WEF, Nature and Net Zero, 2021.
For Professional Clients/ Qualified Investors only – not for Retail use or distribution.
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Jupiter Ecology Fund – a natural home for your capital
The energy shock now faced by consumers may boost usage of existing energy-efficient technologies and spawn new ones
Energy shock: looking at both sides of the coin
With a protracted energy shock now seemingly inevitable, environmental solutions – on both the demand and supply-side of the energy equation – are pivotal to urgently shaping sustainable and resilient energy systems.
The analogies with the great energy shocks of the 1970s are growing almost by the day. Government plans labelled ‘operation thermostat’ chime with – and even borrow from – energy rationing initiatives in the midst of the first energy shock of that period, when President Nixon for example asked citizens to “lower the thermostat by at least six degrees”.
The causes are different, but no less complex. Similarly, recent events remind us not only how critical energy systems are to everyday life and living standards, but also how difficult they are to change in the short term.
As the new energy shock has dramatically escalated amid a tragic and despicable conflict, much attention has initially focused on tackling the supply-side of the challenge: the what and the where, (and indeed, from whom), our energy supply comes from. As a direct consequence of the shocks to energy prices and security, the 1970s saw the first green shoots of the renewable energy industry emerge, and we see compelling opportunity here in the medium and longer term, not just in renewable energy generation solutions, but to supporting technologies and infrastructure.
More recently however, developments that look to curb energy demand signal a growing necessity to address the other side of the same coin, representing both an immediate and longer-term opportunity.
A ‘whole systems’ approach
By definition, the unfolding systemic shock requires a systems approach to navigate the challenges and identify meaningful solutions. For our Ecology strategy, the six solutions themes we invest across include several that are designed to incorporate opportunities in companies focused on providing environmental solutions throughout the energy system, which we see as critical to enabling sustainable development objectives while also building resilience and long-term affordability.
On the demand side, if the past is any guide, the current shock will mark a step-change in the rate of market penetration for existing energy-efficient technologies, and indeed spawn new ones. Soaring crude prices due to the Saudi Arabia-led oil embargo and the aftermath of the Iranian revolution acted as catalysts for fuel-efficient cars, for example, changing the competitive landscape for the decades since.
This highlights the likelihood that across economic sectors, including those that have been relatively slow to adopt newer technologies, are set for profound change in the current landscape. One such domain is energy efficiency in the ‘built environment’. Over recent quarters, we have increased the allocation to our ‘Green Buildings & Industry’ theme, including solutions that address how we heat and cool homes and commercial spaces.
In commercial environments, a collapsing of pay-back periods for energy efficiency programmes will inevitably mean a nearer-term demand-side reaction than in residential environments, for example.
But the adverse effect of skyrocketing energy prices has reinforced the need to accelerate residential energy-efficient programs, with each energy bill hike adding to the calculated lost savings from previous delays to delivering on energy efficiency ambitions, while also hindering progress to tackling climate change.
With less than 5% of heating currently used across the UK’s homes coming from low-carbon sources, the scale of the challenge and the opportunity is significant. Heat pumps are one such solution for building efficiency improvement and emission reduction, simultaneously delivering on the three elements for the energy trilemma: security of supply, long-term affordability and net-zero alignment.
Click here for more information on the Jupiter Ecology Fund.
Alternatively contact your relevant sales contact or the client services team.
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‘Developments that look to curb energy demand signal a growing necessity to address the other side of the same coin, representing both an immediate and longer-term opportunity’
The value of active minds: independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Important Information: This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. 28910
Special Message to the Congress Proposing Emergency Energy Legislation | The American Presidency Project (ucsb.edu)
Analysis: Cutting the ‘green crap’ has added £2.5bn to UK energy bills - Carbon Brief
Decarbonising heat in homes - Business, Energy and Industrial Strategy Committee (parliament.uk)