Why should it matter to investors?
The negative impacts of climate change - warmer temperatures, rising sea levels, extreme weather patterns - 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 infrastructures and the valuation of companies.
For example, extreme weather patterns, such as mega-droughts, would impact agriculture production levels, cause water shortages by drying up water reservoirs and disrupt hydroelectric supply.
Lower production levels could in turn inflate prices, impacting the profitability of businesses across supply chains and increasing the cost of living for communities.
The urgent need to transition to a low-carbon and more resilient economy require companies to adjust their business models. Those that fail to take action on climate change will face increased transition risk such as regulatory and reputational risk as governments, communities and market players shift towards a low-carbon future.
What is First Sentier Investors doing?
Over the course of 2021, our investment teams and broader business built on the extensive climate related work already undertaken to assess our portfolios’ current alignment to net zero. We mapped out the steps that would need to be taken to make and achieve a commitment to reduce greenhouse gas emissions across our portfolios in line with a target of net zero emissions by 2050 (or sooner).
At the firm level, we built a flexible framework that allows investment teams to make their own commitments for transitioning to net zero. This approach enables the teams to maintain their autonomy while ensuring integrity and accountability in a firm wide net zero commitment. It is based on the guidance provided in the IIGCC Net Zero Investment Framework Implementation Guide.
Investment teams across the firm have developed a range of targets that they have committed to pursuing. These include short term targets for 2023 to 2025 as well as medium term targets for 2030. These targets have been developed with a view to contributing to the 50% global reduction in CO2 required to reach a net zero target by 2050. Performance against these targets will be monitored by our Global Investment Committee.
This work substantiates our firm-wide net zero commitment announced in early 2022.
For further information on the respective team’s progress on climate change, read our Responsible Investment Report 2021.
Igneo Infrastructure Partners’ net zero commitment
In 2021, Igneo infrastructure Partners set a target to achieve net zero portfolio GHG emissions across all funds by 2050 or sooner. They aim to achieve this through:
- All portfolio companies setting targets and a plan to reduce emissions as far as technologically and financially viable.
- Portfolio companies offsetting any residual emissions that are not financially or technologically viable to eliminate.
- Increasing investment over time in businesses that help meet the goal of global net-zero emissions by 2050, such as renewable energy and other assets that contribute to climate change mitigation or adaptation.
Climate Action 1, 2, 3!
The team devised an action plan for all portfolio companies to be implemented by 2023. This will achieve progress towards the team’s net zero target, alongside strengthening governance and the assessment and management of climate-related risks and opportunities within the portfolio.
Reporting on progress
This table shows the following key carbon metrics for all investment 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
The chart below shows the change over five years in Weighted Average Carbon Intensity for all our Listed Equities portfolios vs the benchmark (aggregated).
Listed Equities Wtd. Avg. Carbon Intensity
Source: First Sentier Investors, MSCI Data as at 31 December 2021.
Listed Equity Teams Emissions Profile
Source: First Sentier Investors, MSCI Data as at 31 December 2021.
The key challenge we faced in 2021 was how to create a robust net zero target which covered the highest possible proportion of assets under management. The IIGCC net zero implementation framework was central to this work, however we found it challenging to implement across certain asset classes where there is currently no guidance.
We ultimately chose to take a conservative approach, and look forward to expanding our commitment over time and contributing to the conversation on this important topic.
Data reliability and availability continue to be a challenge, however company disclosure is improving with the introduction of mandatory climate disclosure across many of the jurisdictions we invest in. We were able to invest in additional data sources this year. We worked closely with our data provider to ensure that all relevant parts of the business were well informed on how to use the data and what its limitations are.
Another challenge is the rapidly evolving regulatory environment across all markets. This applies to a number of ESG issues, but particularly in relation to climate change, where we have seen consultation papers, regulation and guidance issued and/or enter into force in Australia, Hong Kong, Singapore, Europe and the UK, in addition to updated TCFD implementation guidance.
In response to regulation coming into force in 2022 and beyond, we developed a comprehensive Climate Risk Management Plan, which we will be implementing in 2022. This will be followed by updated TCFD aligned disclosure, which incorporates the recommendations in the revised implementation guidance. We will regularly report on our progress against our net zero commitment at firm and investment team levels, and finalise and release additional detail underpinning the commitment as part of our Climate Action Plan.
At First Sentier Investors, our commitment to RI research and analysis enables us to make more informed decisions that not only benefit our clients, but our environment and our society. To do this, we use a wide variety of tools and resources some of which are listed below.
We believe that society must drastically reduce emissions if we are to avoid the worst consequences of the climate crisis. For this reason the First Sentier Investors Group including its branded investment teams, support the global transition to net zero emissions in line with the goals of the Paris Agreement. As allocators of capital, stewards of our clients’ assets and as active shareholders in companies on their behalf, the individual and collective decisions we make as investors will influence the nature and speed of this transition. We recognise that we have a wider responsibility to contribute through our investment activities and business operations to a sustainable economy and society.
In response to this, 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 five 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
Building on this work, in early 2022, First Sentier Investors made a commitment to reduce greenhouse gas emissions across our investment portfolios in line with a target of net zero emissions by 2050 (or sooner) and across our business operations in line with a target of net zero emissions by 2030 (or sooner). Read our commitment here.
We have sought to align our Climate Change Statement with the Task Force for Climate Related Financial Disclosure's recommendations.
Also released is a series of white papers (below) 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.
Physical risks of climate change
- First Sentier Investors - The physical risks of climate change whitepaper
- Centre for climate and energy solutions: Extreme Weather and Climate Change: Understanding the Link and Managing the Risk
- 2015 Corporate Adaption Survey
- European Commissions Joint Research Centre Projection of Economic Impacts of Climate Change
- Investor Group on Climate Change
- Mercer Climate Change Study
Business transition and stranded asset risk
Director duties and legal risk
- First Sentier Investors - Climate change fiduciary and directors duties whitepaper
- AICD Climate Change & Directors Duties
- Centre for Policy Development Updated Legal Opinion on Climate Change and Directors’ Duties
- EU Directive 2014/95/EU on non-financial disclosures
- Sustainable Stock Exchanges Initiative
- Grantham Institute on Climate Change and the Environment Climate Change Laws of the World
License to operate/reputational risk
- United Nations – https://news.un.org/en/story/2021/08/1097362
- United Nations – https://unfccc.int/news/cop26-reaches-consensus-on-key-actions-to-address-climate-change