Approach to responsible investment

We believe that climate-related risks and opportunities have the potential to meaningfully impact the companies we invest in over the short, medium and long term. The impacts may stem from the physical impact of climate change or the financial impact of the transition to a lower carbon economy - both have the potential to affect a company’s returns or its valuation. For this reason, the consideration of climate-related risks is a key part of our investment strategy.

We seek to identify and consider climate-related risk at the company and portfolio level with fundamental company and thematic analysis, and with the assistance of proprietary tools, including the Australian Equity Growth team’s ESG scoring system and the  Australian Equity Growth team’s net zero climate model.

As active investors with access to boards and executive teams, we also believe that we have an opportunity to encourage companies to sensibly transition to a low carbon future.

When considering transition risks at the company level, we consider two factors:

 1)    the company’s exposure to climate change; and

2)    the company’s transition plan.

It’s important to assess each company’s exposure to climate change using bottom up, fundamental research because each company’s exposure to climate change is different. Some companies operate high emissions businesses that are highly exposed to regulatory risk, carbon prices, and/or demand-side risk if customers have access to a more sustainable option while others operate businesses that are less exposed because of their emissions profile or product or service offering. We believe that judgment and experience is needed to assess the degree of exposure to transition risk.

Analysts consider companies’ exposure to climate change in the team’s proprietary ESG scoring system when they score a company on their exposure to the environment and their management of environmental risks. They consider the company’s business model and whether the company is managing their emissions and has a credible plan to net zero before scoring on both factors. Analysts also consider a number of data points (external and internal) before scoring companies including (but not limited to) carbon dioxide emissions, emissions intensity and company disclosures.

The team has also developed a net zero climate model which assesses companies’ alignment to the transition using the Paris Alignment Investment Initiative Net Zero Investment Framework as a guide. The model categorises companies as Not Aligned/Committed to Aligning/Aligning/Aligned using criteria including companies’ net zero ambition, whether they have short or medium-term targets, whether they are disclosing all material emissions, and whether they have decarbonisation plans. This categorisation and the analysts’ comments on the quality of these plans flow through to our ESG scoring system and is considered when scoring companies on their exposure to the environment and their management of environmental risks.

In addition to this, the team has access to the FSI’s Carbon Footprint Dashboard which depicts the carbon intensity of the team’s investment portfolios, our historic carbon intensity relative to benchmark, the geographic exposure to carbon intensity, and the top contributors to the team’s carbon footprint by sector and stock. This Dashboard is available on our website. 

Physical risks are considered when our analysts score companies on their exposure to environmental risks and the management of these risks. Analysts use their judgment and experience to note their concerns about particular exposures. For example, banks may have exposure to physical risk through their lending book if they lend in flood prone areas. 

The Australian Equities Growth team aims to address climate-related risks through engagement rather than divestment, which means encouraging our portfolio companies (as well as those we are not currently invested in when we can) to decarbonise in a sensible way. Our engagement agenda aligns with our decarbonisation commitments so we consider companies’ alignment with the IIGCC Paris Aligned Investment Initiative framework and seek to encourage identified shortcomings, prioritising those that may be financially material.