When looking at individual investments, we employ a materiality-based approach to considering ESG issues. However, certain issues and ESG mega-trends are so significant that they can have material impacts across entire portfolios and society as a whole, and this applies to climate change.
Climate change considerations feed into all three of our main responsible investment tools – ESG Integration, stewardship, and exclusions. We have also carbon footprinted a number of our portfolios since 2015.
ESG Integration: The investment risks and opportunities associated with it are taken into account as part of our investment process, especially for our actively managed funds. In seeking out value investments, we find opportunities across various sectors, and we do not only seek out companies in businesses with inherently low carbon footprints. The carbon footprint of our portfolios can be strongly influenced by our relative exposures to different industries. However, we aim to understand how companies are exposed to carbon emissions and climate change, and how they work to mitigate the risks or exploit opportunities. As we balance various considerations, our analysis can be significantly influenced by the extent to which companies are aware of, and actively addressing, the transition to a low carbon economy. This is because our investment process measures long-term risk against reward. The transition to a 2 degree compliant economy may increasingly leave some companies with stranded assets or outdated business models – and provide others with attractive growth potential.
Stewardship: We frequently vote in favour of resolutions calling for greater disclosure of climate-related risks. In addition, the global need for, and momentum towards, transition to less carbon intense energy sources is well established (and recognised in agreements such as the Paris Climate Accord (2015)). Failure to respond to this need for transition may impact companies negatively, with significant financial implications in ‘stranded assets’ or an increasingly high cost of emitting carbon. While relevant to all sectors, it is particularly material in certain sectors such as oil & gas exploration and electric utilities. Therefore, where we consider it appropriate, we engage with portfolio companies in these sectors, focussing on carbon emissions, energy transition, and climate policies. We have also joined Climate Action 100+, a broad-based collaborative engagement with strong support from institutional investors like ourselves.
Carbon Footprinting: This exercise gives an indication of the carbon intensity of our portfolios overall, and also boosts our understanding of where the greatest sensitivities are, whether in terms of emissions, or in other ways such as the risk of stranded assets. The data from our carbon footprinting also plays a key role as we continue to develop our climate related engagement programme.
We have also signed the Montreal Carbon Pledge for certain funds. Signing the Pledge commits an asset manager to measuring and disclosing the carbon footprint of some or all equity portfolios on an annual basis. The aim is that the Portfolio Manager will use this information either for engagement purposes or to set carbon reduction targets. Sparinvest signed the Montreal Carbon Pledge and produces Carbon Footprint Reports for the following four funds: