We work with our external managers, which is part of the monitoring process – understanding how they assess climate risk within portfolios and expecting them to report to us as well. We also need to support our partner funds in their climate change commitments.
What are your short to medium-term goals in addressing the climate crisis without putting a firm commitment on being net-zero by 2050, given there is an information gap – and what type of information would you like to see?
As we invest on behalf of 11 partner funds, we need to have a common understanding from all those funds on climate risk and the implications of target-setting. We’re working with the offices and pension committees to understand their challenges, and where commitments are being made by partner funds to support them as to how they’re going to achieve that across their investment portfolios. We’re not like an asset manager that develops a product and asset owners then invest in it – our products are developed in response to our partner funds’ needs and requirements. One option is assessing benchmarks as some traditional benchmarks look to be running at 3-4-degrees of warming. That’s one area to consider without going down a full low-carbon passive product route. We also think that managing it actively rather than passively is a way that you can achieve that transition while still retaining outperformance as well.
What do you see as the top ESG risks from an investment perspective?
We have three main overarching engagement themes that have been in place since we launched. Governance, as this is the most important, because if a company has good governance, then everything tends to flow down from there – management of environmental and social issues. A broad theme for us is transparency and disclosure – that covers a multitude of areas. We need companies to disclose data on carbon emissions, that includes listed companies and private markets, which is a challenging area. We also want companies to disclose workforce data, which is important considering how company responses have varied in light of the pandemic. Diversity is the other key engagement theme, so gender and ethnic diversity as well as broader diversity.
Climate change is possibly the biggest risk for investors and society, so we’ve seen that move up the agenda for our partner funds over the last six months. The new elephant in the room is biodiversity – climate change, the pandemic and biodiversity are all systemic risks and the dialogue around biodiversity has generally increased since the pandemic. Investors are now appreciating what the potential financial and economic impact is of biodiversity loss. Even if we manage to stem climate change and limit the impact of it, we’re still looking at huge biodiversity loss and extinctions, the impact on entire ecosystems and how that impacts economies. Investors are now starting to understand that more from a financial perspective, which hasn’t been the case before.
How has data improved in reliability and granularity to enable you to make investment decisions with confidence and where would you like to see improvement?
Data disclosure and quality is getting better. We have to be conscious that even though we want companies to disclose this information – and we’re encouraging them to do that – we don’t want them to be overloaded by requests. Sometimes when we’re requesting information from companies, we see that they’ve been asked for information from a number of different organisations. There is also a challenge for smaller and medium-sized companies compared to large companies as they may not have the same resources to report. Even though they may be doing great things, that doesn’t get captured anywhere, so they can be penalised by the ESG data providers. There needs to be a more joined-up and standardised approach to companies disclosing and reporting ESG and non-financial information, with both companies and investors wanting standards for non-financial information reporting. Even though we want data disclosure and verifiable information, there needs to be more standardisation in getting that information.
Overall, are you optimistic or pessimistic about the ESG landscape over the next five years?
I’m relatively optimistic and that’s because the pandemic has really demonstrated the impact of systemic risks and importance of ESG. It’s not something extra and just another box to tick, it’s about understanding all the risks and opportunities associated with a company and part of that overall risk-assessment framework.
Climate change is the biggest risk facing us as long-term investors and a society and can’t be put on the back burner by either companies or investors. Although the short-term focus for governments is to deal with the pandemic, the steps they take to rebuild can accelerate the transition to a low-carbon economy. The next decade is going to be pivotal for us in how we address climate change and also biodiversity loss. There has been a realisation of the urgency and a renewed focus.
It’s essential for investors to have focused collaborative engagement with clear asks of companies and policymakers, with asset owners and asset managers working together, because we’re not in competition – we’ve all got the same aim. That’s why the big collaborative initiatives such as Climate Action 100+ have had such success. We still need to be wary, though, and be able to sort out the ESG ‘washers’ from those who are actually doing it. The expectations of the UK Stewardship Code will really differentiate the leaders from the laggards.
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