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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

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Climate change

Climate change

Why is it important to us?

Climate change and global warming pose systemic risks to society and the global economy. It impacts the availability of resources, the price and structure of the energy market, the vulnerability of infrastructure and the valuation of companies. Failure to take action on climate change has been ranked as the highest risk in terms of impact by the World Economic Forum, and in terms of likelihood it ranks second only to extreme weather1.

1 http://www3.weforum.org/docs/WEF_Global_Risk_Report_2020.pdf

As investors, we understand that climate change poses a complex problem which has already impacted, and will continue to impact different assets in different ways.

What is First Sentier Investors doing?

In 2016, First Sentier Investors established a climate change working group to take a broader view of the issue and its investment implications. From this work, we identified the following key areas of climate change risk and opportunity facing investors today and into the future.

  • Physical impacts of climate change
  • Carbon emissions / Regulatory intervention
  • Business transition / Stranded asset risk
  • Fiduciary duty / Legal risk
  • License to operate/ Reputational risk

Following the completion of this work, we released a series of five white papers which present the context for each issue, the implications for investors, and provide guidance on how investors can incorporate these issues into their risk management and investment decision-making processes.

Over the past year:

  • Individual investment teams have been working to implement the findings of these white papers into their own investment processes.
  • We have developed new tools to help us measure and monitor climate risk, and are working on ways to report more systematically on climate related risks and opportunities to our Global Investment Committee, boards and RI Steering Group.
  • Climate change, and what it means for a portfolio to be net zero aligned, has formed a key pillar of our 2019 RI Learning and Development strategy. 
  • We have run a series of sessions for the business with a focus on investment teams, including external speakers on market developments and how best to engage more effectively to achieve net zero.

Reporting on progress

The table shows the following key carbon metrics for our actively managed listed equities teams, as recommended by the Taskforce for Climate-Related Financial Disclosures (TCFD):

Weighted average emissions intensity: portfolio weighted average of each company’s greenhouse gas emissions intensity (scope 1 & 2) per $m sales.

Carbon Footprint: the carbon emissions of a portfolio per $m invested. Scope 1 and 2 emissions are allocated to investors based on an equity ownership approach (if an investor owns 10% of a company’s total market capitalisation, then they own 10% of the company and therefore 10% of the company’s emissions). This is then normalised by portfolio value.

Total carbon emissions: This metric measures the absolute greenhouse gas emissions associated with a portfolio (Scope 1 and 2) expressed in tCO2e*. Scope 1 and 2 emissions are allocated to investors based on an equity ownership approach (as with the carbon footprint).

Fossil fuel companies: average number of fossil fuel companies per portfolio. This includes companies who mine fossil fuels as well as generators of fossil-based energy sources as well as other users of fossil fuels.

*tCO2 refers to tonnes of carbon dioxide equivalent

Source: First Sentier Investors, MSCI Data as at 31 December 2020.

Challenges

Understanding and acting on the various risks and opportunities posed by such a complex area is not without its challenges. One persistent challenge we have faced is around data reliability and availability. Company disclosure of climate-related data remains low and often of poor quality. Two challenges we have faced this year have been:

  • the availability of high quality data on the physical risks of climate change for listed equities and fixed income; and
  • data becomes stale very quickly, and when the most recent reported data is from 2018, it does not give an accurate picture of the risks and opportunities inherent in a portfolio today.

However, a lack of data reliability and availability is not an excuse for inaction; it merely highlights the importance of our own research and engagement with companies.

We actively encourage companies to take this issue seriously and report high quality data in line with Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Across all ESG issues we need sustainability reporting that has the same rigour as financial reporting and we are aware of our responsibility as active owners to encourage this from the companies we invest in.

Future plans

In the coming year, we plan to build on the work we have done in 2020 to understand where our portfolios are aligned to the transition to a net zero economy and where we need to do more work.

We have been piloting the implementation of the draft Institutional Investor Group on Climate Change Net Zero Investment Framework across several teams and will continue to do this in the year ahead. As it has now been several years since our initial TCFD aligned reporting we also plan to revisit this disclosure in 2021, with a view to improving the information that we are publishing.

Responsible investment reports

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