ESG | Feature


energy becomes dispatchable, it’s game over.”


This disruption could be driven by techno- logical advances or new regulation. There are two other ways that climate change manifests itself as a financial risk. The first is physical, which is predominantly an issue for insurers and companies where property is a large part of their value as they are exposed to extreme weather events. Then there is liability risk where compa- nies are vulnerable to being sued, just as we have seen in the tobacco industry. A farmer in Peru, for example, is suing Ger-


This opportunity might be why the E in ESG is so high profile. Environmental fac- tors being more economically quantifiable than the social or governance pillars could be another reason. “Now that you can put a price on carbon you can quantify the impact it has on companies’ revenues and costs,” Lewis says. Pricing may help investors assess the potential future impact of climate change on their portfolio, but it appears that there is a still a need for education in this area to stress its importance. Tim Manual, Aon’s UK head of responsible investment, says


COME TOGETHER


There are several routes that investors can take to increase their chances of avoiding such an outcome.


Asset owners could add factor strategies to the mix, buy a passive index tilted towards cleaner companies, appoint an impact-fo- cused manager or look for a fund designed to contribute to building a greener economy. Institutional investors could also exclude heavy greenhouse gas emitters, such as oil and gas companies, from their portfolios, but this strategy needs a lot of thought.


Investors should be concerned from a


holistic and existential perspective because the whole point of institutions investing is that they are investing for the future, for future generations. Victoria Barron, Newton Investment Management


man energy giant RWE. He claims that the carbon dioxide it pumps into the atmos- phere is causing snow and ice to melt in his hometown, putting a local lake at risk of overflowing. If he wins, many more energy companies may have to prepare for similar litigations.


TESTING TIMES Yet climate change is not just about protect- ing your portfolio against risk; there is also the potential to benefit from the new prod- ucts and services needed to manage chang- ing weather patterns and tackle their causes. “From a company perspective, climate change is a risk and an opportunity,” says David Czupryna, an SRI senior client port- folio manager at Candriam, an asset manager.


Also seeing two sides to this issue is Lewis at BNP Paribas AM. “You have got to be alive to the risk and aware of the opportuni- ties,” he says.


that for many trustees these impacts seem a long way away from the decisions they are making today, but there are things that they can do.


“Scenario analysis puts it into the context of their scheme and the decisions they need to make.


“That is capturing broad macro themes and is proving to be an important part of the education piece, getting it up the agenda and helping trustees realise the degree of priority that they need to have,” he adds. One asset owner who has looked at the impact a four-degree temperature rise could have on its portfolio is the HSBC Pension Scheme. “It’s not pleasant,” chief investment officer Mark Thompson said at a recent portfolio institutional event. “The investment returns members were getting in that scenario were terrible. “So, it’s consistent with our fiduciary responsibility to stop that outcome happen- ing at a policy level,” he added.


“If you chose to exclude fossil fuel compa- nies then there is an opportunity cost,” says Mette Charles, senior investment research consultant at Aon. “There is a performance implication that you need to think about.” Oil majors invest billions of dollars in developing cleaner sources of energy and some have, thanks to pressure from inves- tors, set targets to reduce their carbon foot- print. So if investors had boycotted these companies 20 years ago the fight against climate change would be much harder today.


The strategy for many investors has been to invest in these businesses and then per- suade management to change their corpo- rate practices or behaviour.


“It is about


keeping a seat at the table and pushing through change. It is what is happening through groups such as Climate Action 100+,” Barron says.


“Exclusion is a blunt tool that people can use,” says Peter Walsh, head of asset man- ager Robeco’s UK business. “We are advo- cates for engagement rather than divest- ment. As a shareholder, if you divest a company then you have not changed their practices. Someone else has bought that share, possibly at a discount, and the com- pany is still doing what it does. “So it might avoid the headline risk of being criticised by lobbyists for owning that name, but the company is still doing what it does,” Walsh says. “You haven’t changed anything.” Working with the Church of England, Robeco persuaded oil major Shell to set and put deadlines on achieving carbon targets,


Issue 84 | May–June 2019 | portfolio institutional | 27


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44