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 current 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.

Transition risks are gaining attention as companies consider the societal and economic shifts toward a low-carbon future – and 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 pertains to 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 risk 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 adherence to the Task Force on Climate-Related Financial Disclosures (TCFD). We also review data from third-party providers such as Sustainalytics, ISS, MSCI and RepRisk, which provides us with a company’s historical carbon intensity, absolute scope 1 and scope 2 emissions, and the significance of recent events. We use these findings to enhance our engagement meetings.

Throughout the engagement process we encourage companies to enhance their climate-related disclosure and utilise established frameworks such as TCFD and the Science-Based Targets Initiative (SBTi).

We do not, at this stage, conduct separate scenario analyses as it relies heavily on unknowable assumptions, particularly around Scope 3 emissions, and detracts from our focus on genuine and immediate emissions reductions. 

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 absolute emissions, trends in emissions intensity, quality of disclosure and alignment to SBTi. We have also begun a decarbonisation exercise across our holdings. This is engagement-led and 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 manager.

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 absolute carbon exposure in 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.

Our decarbonisation process includes an assessment of how our investee companies perform today. While we engage all of our companies on this topic, we started with the most urgent – our largest positions in regional and country portfolios and the highest emitters, covering 75% of FSSA’s total assets under management (AUM).

Our assessment framework 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, with Tier 1 comprised of leaders with a net zero commitment, short-, medium-, and long-term targets, and evidence of progress (these are the companies that would meet the “aligned” scale according to the NZIFIG). Tier 4 includes those with little to no disclosure or targets but may have announced a net zero ambition. While our tiers align closely with NZIFIG’s guide, we have developed a system that focuses more on a company’s direction of travel and acknowledges the potential crossover in companies “aligning” and “committed to aligning” to net zero. 

We have set targets to achieve by 2025, 2030 and 2050. With every passing year, we aim to increase the number of assessed companies moving progressively into Tier 1.

By the end of 2025, we aim for 25% of AUM to be in 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 SBTi.

For companies to be considered aligned to net zero, they must disclose their emissions performance and have short-, medium- and long-term targets. We recognise that companies in our portfolio are beholden 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 assess 100% of AUM after the initial 75% of AUM assessed. We also aim to improve on the percentage of AUM assigned to Tier 1 (aligned to net zero by 2050), from the initial 25%. We will report on the progress made by 2030 and subsequently every five years.

Rather than penalising companies that are less advanced towards their net zero goals, we aim to make and measure progress. We will achieve this through frequent engagement with company management to move towards genuine reductions and meaningful targets.

By the end of 2050, we aim for 50% of AUM achieving net zero.

This portion of AUM is subject to change as economies decarbonise over this time frame.