Hermes Investment Management, the £30.8 billion manager1, has today published the white paper, The low carbon opportunity - and the risks of missing out, which looks at how since the Paris Accord on climate change, it has become clear that the agreement has created numerous investment opportunities.
Thanks to the Paris agreement’s focus on the need to decarbonise the economy, and subsequent initiatives such as the Financial Stability Board’s Taskforce on Climate-Related Disclosures (TCFD) and the statement by G20 countries that climate change represents a systemic risk to the financial system, the debate on the need for investors to act on climate change has clearly moved on.
At the same time, investors increasingly recognise that as part of their fiduciary duty to their clients, they have to take into account long-term issues such as environmental, social and governance (ESG) issues when they decide what to invest in.
Investors will focus on decarbonising their own portfolios when they better understand the risks to current business models the transition to a low-carbon economy will produce and the opportunities it will create.
Saker Nusseibeh, Chief Executive, Hermes Investment Management, said: “It will be easier to attract mainstream investors by showing them the value of tapping into the growth potential of the transition to a low-carbon economy, whether through new companies, innovative technologies or by adapting new business models. This transition represents a game-changing opportunity.
“We are aiming to lead the debate around institutional investors’ fiduciary responsibilities, both through our investment policies and our engagement with policymakers, the companies it invests in and its peers in the investment community. In line with the TCFD’s recommendations, we believe that both investors and the companies they invest in should assess and report on the climate risks in their portfolios. We need to challenge the current economic and financial models used by the investment industry if we are to ensure that the world does not breach the scientifically-guided objectives we have set for ourselves on climate change”.
However, the tools to analyse these risks are not yet fully established and more work is needed to make them robust and trusted.
Our approach to managing our own exposure to carbon risks and accessing low-carbon opportunities has four elements:
- Portfolio managers are aware of the carbon risks in their portfolios, which investments are the largest contributors and what are the associated risks and mitigation strategies
- Portfolio managers integrate carbon risk considerations alongside other value and risk considerations, exploiting green investment opportunities or divesting where carbon risk impacts value
- Hermes acts as an engaged steward of the investments it manages or represents on behalf of our clients. Where it holds assets with significant carbon risk exposure, it will manage directly-owned assets, and engage with public and private companies, to mitigate the carbon risk
- It engages with public policymakers and sector organisations, nationally and internationally, to encourage policy or best practice which facilitates the transition to a low-carbon economy
Furthermore, we set specific and measurable targets against which to monitor and measure progress, and report on our performance against these targets annually. However, taking advantage of the opportunities created by the low carbon transition and regulatory drivers is not always about buying best-in-class performers.
Nusseibeh stated: “Sometimes it can be better to find a laggard that has committed to change. At other times low-carbon opportunities are indirect and not captured by carbon data, such as in companies producing lightweight material for transport or service companies.”
Different asset classes require different approaches. For equities, engaging with companies is key – to enable Hermes to better understand their carbon performance, identify areas to improve and ensure that companies are properly managing climate change risks. Hermes has recently engaged companies in the oil and gas, mining, utilities, automotive and financial services sectors.
“Our proprietary tool to analyse the carbon footprint of its portfolios has revealed that emissions are very concentrated within portfolios. Across its equities portfolios, 10% of funds are responsible for 62% of total emissions. This means that engaging with the biggest emitters can have a big impact on carbon performance”, said Nusseibeh.
In assets such as real estate, infrastructure and private equity, there is more scope for innovative strategies including renewable energy, energy efficiency, demand side management and new services, technologies and products to facilitate carbon reductions.
Nusseibeh concludes: “The low-carbon transition represents a game-changing opportunity. We see growing interest for low-carbon investments reflected in the growth in low-carbon products, services and technology and a budding interest from institutional investors in investment solutions that not only account for climate risks but also tap into opportunities.“
- 1 As at 30.09.2017
Passive rise in Asia creating distortions for active managers to exploit