Unlisted Infrastructure climate change portfolio assessment
In 2020, our Unlisted Infrastructure team conducted an assessment of climate change risks across the portfolio. With assistance from expert advisors, we conducted an initial, high-level portfolio scan. Infrastructure investing is a non-homogenous asset class and this held true again with our assessment of climate change impacts. The chart below summarises the results of our Climate Change Portfolio Assessment.
- The physical exposure rating quantifies the low to extreme rating scale and is then averaged acrossthe list of identified perils for each business. The exposure rating isconsidered ‘unmitigated’, i.e. it doesnot consider any resilience measures planned or in place at any business.
- The number of transition risks is shown along the X axis. These wereidentified in the portfolio assessment and First Sentier Investors workshops. It is important to note this scale only considers the absolute number of risks identified and not their relative impact. There were also a large number of opportunities identified (and not shown in the chart): in addition to downside risks faced by businesses, there are potential value creation opportunities for those moving ahead of the curve and tackling climate change.
- Organisational maturity in respect of climate change impacts was assessed on a numerical scale, with 1 being the highest and 4 being the lowest maturity level. Our investigations revealed a good base level understanding of near-term risks and opportunities and a level of disclosure typical of the industry. However, these colour-coded maturity scores shown in the chart below demonstrate a range of outcomes and we are striving to improve value-adding governance and disclosures across the portfolio.
- Our work on climate change investment impacts is just the start of our work in this area and we will continue to seek ongoing and further improvements. This Climate Change Portfolio Assessment project provided a good base level of information and acts as a springboard for further action, where we work with our portfolio companies to improve their governance of climate change impacts, integrate their business plans with the transition to a low carbon economy, and improve climate related disclosures to be best in class.
Multi-Asset Solutions fossil fuel divestment
In 2020, after robust analysis, our Multi-Asset Solutions team made the decision to divest from direct fossil fuel assets in our objective-based portfolios. The chart below shows the tracking error and carbon footprint reductions of various approaches we examined before confirming our current approach.
In the below analysis, we looked at the number of stocks excluded from the MSCI All Country World Index (ACWI) as a percentage. Secondly, we measured tracking error1 to ensure it fits within our portfolio construction process. Then we examined the relative reductions of the carbon emissions from the portfolios, both current and potential emissions from reserves2. The reserves are important for assessing the stranded asset risk, wherein if the world transitions to renewable energy, these assets may become worthless.
The analysis started with the first three exclusion sets from the left side of the chart, from which we implemented some simple exclusions to set a baseline. The Energy and Utilities sectors are excluded because they have the largest carbon footprints according to research by MSCI. This research showed the Utilities sector was the largest consumer of fossil fuels currently, but the energy sector had the largest potential consumption of fossil fuels (i.e. fossil fuels not yet extracted from the ground).
The next three indexes were constructed by MSCI (shown with ‘MSCI’ in the headings) by removing companies with higher carbon footprints. Each index excluded a different number of companies, then used multiple approaches to reweight the stocks within the portfolio, in order to reduce the tracking error with respect to the traditional ACWI index.
In the final three (on the right) we looked at baskets of stocks created using the ‘carbon risk’ data provided by Sustainalytics3.
We excluded stocks with carbon risk related to their operations and carbon risk related to their products (two separate data points). We excluded companies based on Sustainalytics’ classification of carbon risk levels, beginning by only removing companies with a severe level of risk, and then progressively removed more categories such as high and medium levels of carbon risk.
1 Tracking Error calculated using Bloomberg Risk Model (Global), with index holdings snapshot as at 19/6/2020.
2 Carbon emission data produced by MSCI, total emissions per company. Each basket was then reweighted relative to the MSCI ACWI benchmark.<
3 Defined by Sustainalytics as the degree to which company value is at risk, driven by the transition to a low-carbon economy.