ASSESSING climate risk in a portfolio can be a daunting proposition.
There’s a bewildering array of frameworks available to help companies and investors set net zero targets, says Alison Ewings, who heads up engagement at sustainable investing leader Regnan.
Asset managers and owners can use a wide range of initiatives and protocols to help assess climate risk and establish plans to achieve net-zero.
Here’s just a few:
The list goes on — and for good reason.
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The sheer scale of action needed to tackle climate change — and the important differences between sectors, asset classes and countries — means the finance industry must take a nuanced and targeted approach.
But how can investors get their heads around the complexity of the net zero problem?
Superficially, getting to a net-zero portfolio is simple — “you simply divest things”, says Ewings.
But that simplistic approach misses the point: not only can it come with important implications for returns, it also fails to manage the risk to a portfolio if climate change continues unabated, she says.
“It is not just about managing for net zero in portfolios. What we want to bring about is a net zero world,” says Ewings.
“Increasingly the frameworks are focused on driving meaningful change in the economy, not just in the individual portfolios of investors.”
Ewings says understanding the ever-increasing array of net zero frameworks is not as complicated as it looks. For all the apparent complexity in the frameworks, “most of them work together”.
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“What looks like nine different things is actually much simpler — there are two key frameworks you can sign up to if you’re an asset owner, and another if you’re an asset manager. And then there’s a series of methodologies and tools to use to help you implement it.”
There are fundamentally three distinct activities at the heart of all these types of protocols, says Ewings.
Stewardship also includes engaging throughout the investment value chain — engaging with data providers on the types of information that you need or with rating houses on the types of assessments that you are interested in.
These frameworks emphasise the need for asset owners and managers to work together to support net zero outcomes, Ewings says.
“It’s also around public policy discussions. There are many aspects of climate change that are not well handled by engaging with individual companies.
“This is partly because it’s not the most efficient way of doing it, but also because there has been a tendency in stewardship to focus primarily on listed equities, and that’s not the whole economy.
“In fact, what you might be doing is creating an uneven playing field. The good news is that as the frameworks evolve we’re seeing greater focus on a range of different asset classes and greater prominence of policy advocacy.”
The ultimate lesson for investors?
Regardless of the framework, the systemic nature of climate risk means that “unless the way you’re approaching net zero is aimed at bringing about meaningful change in the real economy, you’re not actually reducing your long term risk at all”.
Alison is Head of Engagement at responsible investing leader Regnan. Regnan is a Pendal Group business.
Alison manages Regnan’s program of engagement with ASX listed companies, which aims to help improve business performance by addressing issues such as climate change, modern slavery and Indigenous relations.
Alison has worked in sustainability for more than a decade and was formerly the Head of Sustainability at Westpac.
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.
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For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at email@example.com.
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