“The decade of delivery” – the Fiduciary Manager’s role in combatting climate change
A year into what the UN has called the ‘decade of delivery’ for its 17 sustainable development goals, one goal, in particular, stands out: #13 Climate Action. The UN PRI names climate change as the highest priority ESG issue facing investors today.
We recognise this as a firm, with the Group once again independently certified as carbon neutral by Natural Capital Partners.
While this is testimony to the steps we have taken to reduce carbon emissions, we understand there is more to be done and will set out further commitments in the future. But it also extends to our clients’ portfolios and financed emissions. Climate change and the energy transition will change the global economy. Therefore, assessing climate change risks and opportunities is a key part of our role as fiduciary manager.
Climate change will affect investment returns
When most people think of climate risks, physical risks spring to mind. They can range from uncontrollable fires, such as those that recently devastated Australia, to ruinous tropical storms like Hurricanes Maria, Katrina, and Harvey. But beyond physical risks, climate change will change the global economy. Creating low-carbon societies will upend some industries and provide opportunities in others (“transition risk”). Successfully managing the transition requires an understanding of these economic changes.
Under the 2015 Paris agreement, global leaders adopted a goal of limiting warming to well below 2°C. With the planet currently at 1°C, this is a challenging goal. Success will have far-reaching consequences for companies across all sectors. For example, the energy company whose assets become “stranded” because of regulatory change versus its competitor who benefits from embracing green alternatives. Put simply, there will be winners and losers from the transition to a lower-carbon economy. Assessing climate change risks (and opportunities!) is therefore a key part of our role as fiduciary manager. We want to ensure portfolios are resilient against climate risks and have the chance to benefit from the transition to a low carbon economy.
So, what are we doing about it?
Responsible capital allocation
The allocation of capital is an important lever in encouraging companies to move in the right direction. Ultimately, we want to reduce the cost of capital for carbon reduction market leaders, and to increase it for those who are not stepping up to the mark.
To facilitate this one of the things we do is apply a climate change screen to our core equity portfolio (c.50% of our growth portfolio). Evaluating not just a company’s carbon emissions today, but also their direction of travel is important. Companies achieve a higher score from our screen if they are proactively improving their carbon efficiency and investing in low carbon technology. This will have a direct impact on their future revenue-generating abilities so it’s important on two counts.
You can see the results below–a portfolio with lower emissions than the benchmark today.
Source: River and Mercantile, MSCI, 31 March 2021
As stewards of our clients’ capital, we have responsibilities–including pushing others to improve.
Before we allocate to external managers, for example, that involves:
- Rigorous questioning of managers on whether climate considerations are fully integrated into investment processes
- Assessing whether they have appropriate tools and processes to measure and evaluate climate risks
- Going “under the bonnet” to ensure portfolios reflect what we are hearing, and interrogating them on divergences and weaknesses
- Questioning their corporate approach, evaluating the firm’s environmental footprint.
Where managers do not meet our standards and engagements do not result in positive change, we are prepared to divest.
We also recognise the power of collective engagement–there is power in numbers! In 2019, we joined a group of over 200 investors urging companies to act against the escalating crisis of Amazon deforestation. We followed this up with another collaboration last year, calling on major meat processors in Brazil to ensure their supply chains are deforestation-free.
We believe trustees should hold their fiduciary manager to account. That’s why clients receive reporting on the carbon footprint of their portfolio as standard. And looking ahead, we are preparing to make our reporting even more detailed. The Task Force on Climate Change Disclosures (TCFD) has made important recommendations for reporting and we fully support and intend to report in line with these this year. This includes scenario analysis for clients’ assets and our corporate TCFD disclosure.
Climate change can affect all asset classes. Whether it is natural disasters impairing insurance-linked securities or carbon taxes affecting the creditworthiness of high yield bonds. We recognise this and are continually enhancing our approach across all asset classes, for example:
- We are extending our comprehensive climate screen to our credit portfolio. Given the fundamental differences in investing in different parts of the capital structure, we have developed a climate change framework specifically for credit markets.
- We allocate to investments that are direct beneficiaries of the transition to a low carbon economy and assets with a positive environmental impact. Infrastructure is a good example, in particular renewable-power assets such as energy from waste.
We also know the importance of practising what we preach. The environment is one of our five corporate sustainability pillars, and we are continuing to reduce our environmental impact. This includes exploring industry collaborations (like Climate Action 100+), setting targets for future low carbon investment, and supporting environmental initiatives.
Transitioning to a low-carbon society will transform the global economy – and pension schemes must be prepared for the risks and opportunities that this will create. Change is taking place rapidly from both a regulatory and client preference perspective. Fiduciary managers are a major player in this transition, and we would encourage trustees to rigorously question and challenge their Fiduciary Managers about their approach to this very important challenge.
This article constitutes a financial promotion and has been issued and approved by River and Mercantile Solutions, a division of River and Mercantile Investments Limited which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is a subsidiary of River and Mercantile Group Plc (registered in England and Wales No. 04035248).
Please note that this communication is directed at, and intended for, the consideration of Professional clients. Retail clients must not place any reliance upon the contents.
The value of investments and any income generated may go down as well as up and is not guaranteed. An investor may not get back the amount originally invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments.
Registered office: 30 Coleman Street, London, EC2R 5AL
Registered in England and Wales No. 3359127
FCA Registration No. 195028
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