FCLTGlobal: Climate risk visible in all transactions

A recent webinar hosted by FCLTGlobal, the not-for profit that aims to focus capital on the long-term to support a sustainable economy, urged investors to allocate more to emerging markets to solve the climate emergency and consider climate risk in every transaction.  Investors should include climate impact and a just transition into their traditional risk and return framework, said panellist David Blood, founding partner and senior partner at Generation Investment Management.

Dow, the global materials science company, has introduced a range of measures to achieve climate neutrality by 2050, said Jim Fitterling, chairman and CEO of the company. Dow has reduced its emissions by 15 per cent over the last decade and is targeting another 15 per cent reduction by 2030 driven by a sweeping investment program, he said. The company is increasing renewables in its power mix, as well as focusing on carbon capture, advanced nuclear and hydrogen strategies.

Most importantly, Dow’s decarbonisation strategy also allows the company to grow. “Investors understand you can grow and get your footprint down,” he said. “Investors want us to succeed and see us as part of the solution.” He noted how investors increasingly dig down into the company’s climate strategy details and like to see commitments and results.

Fellow panellist Kim Thomassin, executive vice president and head of investments in Quebec and stewardship investing at Caisse de dépôt et placement du Québec, said CDPQ uses engagement as a key lever of influence. The asset owner considers the ambition and potential of each investee company to reduce its carbon footprint, negotiates governance rights when it invests and measures progress.

For example, since CDPQ invested in India’s Apraava Energy in 2018 with the ambition to support the company’s transition, Apraava’s renewable energy mix has increased by 25 per cent. She said that CDPQ plans to exit oil investments by 2022. “Our capital remains available to energy companies that have a transition project.”

Giant asset manager Fidelity Investments’ fiduciary duty to maximise returns sits within the company’s sustainable strategy, said Pam Holding, co-head of equity and asset management lead on sustainable investing at Fidelity. Assessing corporate climate strategies is critical to understanding the long-term return profile of Fidelity’s investment. The asset manager determines where the risks are most material, and rank orders companies using a proprietary evaluation process drawing on quantitative and fundamental insights. Fidelity also actively engages with companies. “Every company is on a journey,” she said, adding that tomorrow’s climate winners maybe only just starting out. “Assessing climate strategies and risk is good business, and the right thing to do.”

ISSB

Panellists also noted progress on disclosure, namely the COP26 announcement from the IFRS Foundation that it would form the International Sustainability Standards Board (ISSB), tasked with creating a single set of standards to meet investors’ information needs. However, disclosure in private markets is a growing concern. “How we manage disclosure in private markets is critical,” said Blood.

Thomassin noted that although public companies are in the spotlight, investors also scrutinise private companies; the same ESG rules apply to public and private companies, she said outlining how CDPQ works closely with private companies and that private companies increasingly “ask for help” to adapt and transition. She added that CDPQ  now ties a portion of its own variable compensation to climate change targets.

Challenges accessing corporate data risks investors making the wrong judgements. It also introduces the risk of greenwashing in the asset owner and manager community. Companies and investors need to demonstrate they are not just talking about net zero commitments, but put in place actions to prove it, said panellists.

Fidelity is constantly trying to find new ways to access data, working with industry peers. “There are instances where data is sparse and not comparable from company to company,” said Holding. She spoke about the consequences of getting climate analysis wrong; incorrectly assessing the impact of climate change could mean investing in a company that fails to change or understand climate risk, she warned.  Investors need to be wary of double counting and additionality.

Fitterling said that a carbon price is preferable to government taxes. Taxes raise revenue for the government, but it’s not clear if they are redistributed to reduce emissions. Holding added that because data and comparability is still low, investors need confidence that credits are offsetting environmental damage.