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Turning the heat on

28 May 2019

How do investment companies engage with their investee companies on climate change?

With thousands of British children skipping school to protest about climate change in February and Extinction Rebellion occupying iconic sites in London and Edinburgh last month, public concern about global warming has never been greater.

Investment companies engage with businesses every day, deciding which ones to invest in and which ones to avoid. How are investment company managers approaching the issue of climate change in their portfolios and how are they engaging with investee companies on the subject?

Positioning portfolios for climate change

Mark Whitehead, Portfolio Manager of Securities Trust of Scotland, said: “Whether we like it or not, every investment decision we now make needs to account for the effects of climate-related change. For long-term investors like us, modelling climate-related impact becomes even more relevant considering the multi-decade trajectory of global warming.

“Widespread scientific consensus acknowledges that within the next 30 years global temperatures will be higher than human beings have ever experienced. Meanwhile, CO2 concentrations are at levels last seen over three million years ago and it is currently possible that by the end of the century the world will be 4°C warmer than pre-industrial levels.”

Paul Niven, Fund Manager of F&C Investment Trust, said: “Environmental, social and governance issues present both opportunities and threats to the long-term investment performance we aim to deliver to our shareholders. As stewards of over £3.7 billion of shareholder assets, and a voice as a shareholder in many companies, we have a duty to influence and support positive change. Of all the ESG issues we consider, climate change is one of the most important, both in terms of the scale of potential impact and in how widespread this impact could be across sectors and regions.

“In 2018 F&C Investment Trust disclosed its carbon footprint, in line with the recommendations of the Task Force on Climate-related Financial Disclosures. This measures the amount of greenhouse gas emissions produced by each investee company, per US$1m of revenue they generate. This is then aggregated for the trust as a whole, using the portfolio weights of the companies, and compared with the benchmark. The carbon footprint is a measure of the carbon intensity of the companies we invest in. Whilst it does not provide a full picture of climate risks, it is a valuable starting point both for analysis and for shareholder dialogue.”

Andrew Bell, Chief Executive of Witan Investment Trust, said: “Although our stock picking is outsourced to external managers, we monitor and question those managers’ policies in the areas of environment, social and governance effects. We expect our managers to take full account of ESG risks in their assessment of the prospective returns when selecting investments. Whilst our priority is to deliver good investment returns to our shareholders, this needs to factor in the threats and opportunities from the growing body of evidence of climate change and the political and regulatory response to it.”

Craig Baker, Chairman of Alliance Trust’s Investment Committee and Global Chief Investment Officer of Willis Towers Watson, said: “At Alliance Trust we believe that sustainable investment is central to generating successful long-term investment outcomes, and that climate change is a major part of that. The scale and systemic nature of climate change dictates that it is an important consideration for us when managing the trust portfolio.  Engaging with companies to improve their standing on ESG and sustainability issues is a vital part of our role as investors.

“When selecting managers for Alliance Trust, we believe the best stock pickers are integrating ESG (environmental, social and governance) factors, not least climate change, into their investment processes. This not only applies when they pick their stocks, but also covers how they steward those investments on an ongoing basis. We interrogate their processes and portfolios to ensure that their ESG policies get put into practice, and that sustainability is a very real part of their decision making.”

Engaging with companies

Mark Whitehead, Portfolio Manager of Securities Trust of Scotland, said: “We see the necessary change towards a lower-carbon environment as enabling opportunity for many businesses. The response to climate change, either through the need to mitigate the emissions of greenhouse gases or simply the adaptation to the increasing consequences of a warmer planet, are providing innovative companies with the scope for future development. From an investment perspective we view this as an area of significant structural growth.

“For instance, take the research work that Dutch nutritional company DSM (held within our portfolio) is carrying out on animal feeds. Livestock accounts for between 14.5% and 18% of human-induced greenhouse gas emissions. Staggeringly, if cattle were a country, they would rank third behind China and the United States as the world’s largest greenhouse gas emitters1.

“In response to this problem, DSM has developed a feed additive which aims to reduce methane created through the digestive process of cattle. The product, called ‘Clean Cow’, is currently in registration phase and testing in New Zealand, and could create a market worth €1–3 billion2. The potential for uptake here is significant. Not only are more subsidies becoming available for farmers to reduce their greenhouse gas emissions, DSM also believes its methane-blocking product should boost efficiency and reduce costs, as less energy is used during the digestion process requiring less outlay on feed.”

Paul Niven, Fund Manager of F&C Investment Trust, said: “Royal Dutch Shell is one company we have engaged intensively with, holding ten meetings with its board and senior executives over the past three years. In 2018 we saw significant progress, with the company adopting strong ambitions to cut the net carbon footprint of its operations and its products and committing to link this to its pay policy.”

Craig Baker, Chairman of Alliance Trust’s Investment Committee and Global Chief Investment Officer of Willis Towers Watson, said: “We expect all of our stock pickers to undertake effective engagement and voting, and climate change is an obvious issue to be on their stewardship priority lists. But we recognise they have limited resources to do this, so we don’t stop there. With the pending appointment of Hermes Equity Ownership Services (HEOS), we will be able to enhance the stewardship applied to the Alliance Trust portfolio with HEOS’s industry-leading experts. Climate change continues to be one of HEOS’s top priority engagement themes, exemplified by their efforts as part of the Climate Action 100+ initiative where they are the lead or co-lead on 27 of the targeted companies. The appointment of HEOS will add a further layer of expertise and oversight, helping to enhance the application of ESG and sustainability principles.”

Increasing interest from investors

Paul Niven, Fund Manager of F&C Investment Trust, said: “Our shareholders have told us they are increasingly interested in this topic, and in response we have taken the step this year of publishing our portfolio carbon intensity figures. In 2018 F&C Investment Trust’s carbon intensity was 30% below the benchmark, the main reason being its smaller overall exposure to two sectors which have higher emissions intensity – energy and utilities.”

Outlook

Andrew Bell, Chief Executive of Witan Investment Trust, said: “It is important that we remain attentive to both the risks and the opportunities. We expect the degree of political and regulatory scrutiny in this area to increase. On the one hand, this will create financial and operational risks for established companies, as society moves towards a more concerted approach to reducing the impact of pollution, in all its forms, on the environment. On the other hand, climate change, and the reaction to it, will open up opportunities for companies to benefit by providing solutions to mitigate or reverse its effects.”

Craig Baker, Chairman of Alliance Trust’s Investment Committee and Global Chief Investment Officer of Willis Towers Watson, said: “We have developed portfolio management tools that allow us to assess the resilience of the Alliance Trust portfolio to a range of sustainability issues, including the impact of specific climate change scenarios. We can also use this data as part of our continual monitoring of the stock pickers, challenging them on their holdings and ensuring that they are thinking about all the risks in their portfolios, as well as the potential opportunities out there.  We strongly believe that all of our work on integrating sustainability in general, and climate change in particular, will help deliver better returns for Alliance Trust investors. Crucially, it will also help shape a better world in which to enjoy those returns.”

-Ends-

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Notes

  1. Source: World Resources Institute. This work is licensed under the Creative Commons Attribution 4.0 International License. To view a copy of the license, visit http://creativecommons.org/licenses/by/4.0/
  2. Source: FactSet and Martin Currie, from company meeting.
  3. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 359 members and the industry has total assets of approximately £191 billion.
  4. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.
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