PLSA


term climate-related risks inherent in this asset are too great for us, do we (a) disin- vest to remove the risk or (b) remain invested but use our powers and influ- ence as an asset owner to reduce it to an acceptable level?”


Richard Butcher is chair of the PLSA


CLIMATE INVESTING: IN OR OUT?


I have been chairing a number of remote roundtable discussions lately on climate investing as part of the PLSA’s Investing for Good project which will conclude this October.


One of the recurring debates has been whether to be in or out.


Climate change is a systemic risk that, in its extreme forms, will impact every sin- gle business. As such, depending on the extent of the form it eventually takes, it impacts every one of the portfolios we are responsible for. Quite simply, we cannot afford to ignore it. In fact, if we did it would be a dereliction of our duty. Climate investing is all about analysing a portfolio or opportunity to identify the long-term risk that climate change pre- sents to it. It is exactly the same process you might go through with any other form of risk: What are the long-term pros- pects for this business? Can this business generate the cash-flows it needs? What are the long-term prospects for this sector of the economy? It is not, inherently, an exclusive process. It is simply about knowing what risks are there, trying to understand them, their potential impact and how to mitigate them. Irrespective of whether you are an ethical investor or not, climate investing is simple investment common sense, hence the dereliction of duty if we ignored it.


The in or out debate is a polarising one and follows the analysis. In its expanded form, the question it asks is: “If the long-


There is no right answer to this question although there does seem to be a consen- sus view (so far anyway). More on that in a moment.


If the decision is to stay in, there is an important second line of defence to miti- gating the risk. It is the ‘use our powers and influence’ part of the expanded ques- tion or, to use its more common moniker, stewardship.


Stewardship can be defined as ‘preserving and enhancing the value of assets with which one has been entrusted’. Stewardship is not just about exercising voting rights on equity investments. Instead, it is a process of engagement (which might include voting) alone or with others. At a simple level, it is about clearly explaining your objectives and ask- ing asset managers to behave in a way consistent with them.


Stewardship is not the preserve of large funds. Smaller funds, albeit with less weight of influence but still with influ- ence, can exercise stewardship. Stewardship is not just about direct investment. It can be exercised indirectly, through the manager of a pooled invest- ment fund, in exactly the same way: clearly explain your objectives and ask the manager to take them, along with the views of their other investors (we have remarkably similar objectives so this isn’t as difficult as you might think), to the asset manager – asking them to behave in a way consistent with them.


Stewardship is not just about equity investment. The process of explaining objectives


and asking estate, for consistent


behaviour can be done just as easily with bonds, real


infrastructure and,


well, any other asset type. Nor is stewardship just about active investment. It has an equal application,


Issue 96 | September 2020 | portfolio institutional | 17


arguably with greater imperative, in pas- sive investment. One of the PLSA’s contributions to this has been to publish a guide, jointly with the Investor Forum: Engaging the engagers. At 21 pages it’s a quick, yet invaluable read. So, if the decision is to stay in, a steward- ship process is vital to mitigating risk. I mentioned earlier there was a consen- sus view on the in or out question. I appreciate not everyone will agree with this, in fact, some will take exception to it, but the consensus is to stay in. The rea- sons are multiple and complex; personally, however, I agree with it.


Provided I use my powers of stewardship, I can get the return I need for the savers I’m responsible for and help to make the world a better place.


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