Approach to responsible investment

Many of the countries we invest in are particularly vulnerable to climate-related risks given their geography and economic sensitivity. Therefore, we expect that every company we invest in will be exposed to some form of climate risk. Specifically, we have large exposures to financial services and consumer staples companies in our portfolios. To assess climate risk in the finance sector, we focus on lending practices and the impact this has on climate change. For consumer staples, the most material environmental topics are raw material use, water management and plastics pollution.

Climate risks – including those related to the transition to low-carbon economies, the physical impacts of climate change, reputational concerns, and regulatory and legal requirements – are all interconnected issues. Of these, we consider transition risks and physical risks to be the most significant to our portfolio and those that we can address directly with companies.

Transition risks are growing in consideration as companies think through the societal and economic shifts toward a low-carbon future. We see them as immediate challenges to address. Whilst our direct exposure to fossil fuels, agriculture and mining is minimal, we acknowledge that these businesses form a meaningful part of our investee companies’ supply chains. We therefore consider these risks from a top-down industry perspective as well as from a bottom-up, company-by-company point of view.

Physical risks refer to the impacts of a changing and volatile climate on existing business practices. As such, we believe this affects all companies – either through their primary business activities or their supply chains and distribution activities.

Beyond these two primary risks, companies also face more stringent regulatory and legal risks, which increases the risk of reputational damage. The governments of countries in which we invest have begun to implement penalties for non-compliance. We fully expect these risks to increase over time.

We identify climate-related risks throughout the research process, from the initial company assessment to the ongoing monitoring and review. We believe the most effective way to identify risks is through regular engagement with company management. This also provides us with an opportunity to assess other “soft factors” and determine whether a company’s efforts to manage climate risks are genuine.

To evaluate a company’s climate-related risks and opportunities and to prepare for these conversations with management, we review company disclosures and note the adherence to the Task Force on Climate-Related Financial Disclosures (TCFD). We also review data from third-party providers such as ISS and MSCI to provide us with a company’s historical carbon intensity and scope 1 and scope 2 emissions. Additionally, we use Sustainalytics and RepRisk, among others, to alert us of significant recent events and controversies. These findings are used to augment our engagement with companies.

Throughout the engagement process we identify areas where companies could improve and offer external resources that may assist in the process. For example, we encourage companies to utilise established frameworks like TCFD and the Science-Based Targets initiative (SBTi) to report on climate-related disclosure and targets.

We do not, at this stage, conduct separate scenario analyses as it relies heavily on unknowable assumptions, particularly around scope 3 emissions.

We manage climate-related risks from both a holistic portfolio perspective and in a bottom-up manner.

From a portfolio perspective, we conduct fund-level sustainability reviews with environmental and social indicators to identify the outliers and laggards, which then focuses our engagement efforts. Specific to climate risks, we review total carbon emissions, trends in emissions intensity, quality of disclosure and alignment to SBTi. We launched a decarbonisation process in 2021 with an assessment of how our holdings were positioned, how they performed at that point in time, and their plans for the future. With our engagement-led process, we started with an assessment of our largest positions, with the aim of driving multi-year emissions reductions. The lowest performing companies in our initial review have been prioritised for more pressing engagement.

From a bottom-up perspective, we integrate climate considerations throughout the research process. With every potential investment, we consider the business model and its exposure to climate-related risks, and decide whether we are comfortable with the level of risk the company faces. Assessing the quality of management is a critical component of our investment process. We look for signs that there is a long-term owner/manager who is passionate about climate issues – or is incentivised to care about this multi-decade challenge.

We may further express our views through votes on company proposals. Whilst we subscribe to proxy voting services such as Glass Lewis and Ownership Matters as a guide, the ultimate decision on how we cast our proxy votes lies with the respective investment analyst.

Our funds tend to have significantly lower carbon intensity than their respective benchmarks. However, we believe this data is best viewed as an output of our investment philosophy, which is centred on assessing the quality of companies holistically rather than selecting only those that perform well on this metric. We are hopeful that as the broader corporate world decarbonises, the gap between the benchmark and our portfolios will gradually close – and improve together.

Our efforts to decarbonise are focused on reducing the total carbon emissions of our holdings. Rather than selling our carbon-intensive assets or buying companies that rely on an abundance of offsets, we seek to encourage an aggressive reduction in greenhouse gas (GHG) emissions among our investee companies, as is necessary to contribute to a real world reduction. We place less emphasis on grand-gesture statements and more on action and evidence.

We launched our decarbonisation process in 2021 with an assessment of how our holdings were positioned, how they performed at that point in time, and their plans for the future. While we plan to engage with all of our companies on this topic, we started with the most urgent – our largest positions in regional and country portfolios and those in carbon-intensive sectors covering 75% of FSSA’s total assets under management (AUM).

Our assessment is based heavily on the “net zero alignment maturity scale” from the Net Zero Investment Framework Implementation Guide (NZIFIG) produced by the Institutional Investors Group on Climate Change. Each portfolio company has been assigned to one of four tiers ranging from leader to laggard. The nuance in our tiers provides flexibility around a company’s direction of travel, resource constraints and purposefulness, which we think is essential in an emerging market context.

We have set targets to achieve by 2025, 2030 and 2050. With every passing year, we aim to increase the number of assessed companies graduating into Tier 1. We will report on the progress annually, then provide a detailed report in 2025 and every five years thereafter.

By 2025, we aim for 25% of assessed AUM to be assigned to Tier 1, aligned to net zero by 2050.

We will engage with all companies under assessment to meet 100% disclosure of scope 1 and scope 2 emissions by 2025, and encourage the alignment of targets to the Science Based Targets initiative (SBTi). We recognise that companies in our portfolio are subject to different timeframes (i.e., carbon neutrality by 2060 for China and by 2070 for India). We expect our holdings to align with the IPCC's recommendation of limiting global warming to below 1.5° Celsius and to reach net zero emissions by 2050.

By 2030, we aim to increase the percentage of AUM assigned to Tier 1, aligned to net zero by 2050, from the initial 25%.  

Rather than penalise companies that are less advanced towards their net zero goals or those in hard to abate sectors, we aim to make and measure progress by supporting companies in this effort. We will achieve this through frequent engagement with company management to move towards genuine reductions and meaningful targets.

We are initially committing 50% of our AUM to be aligned to achieving net zero in 2050 (assigned to Tier 1), with an aim to increase the portion of AUM towards 100% as economies gradually decarbonise.