Considering climate as part of our investment process

As a long-term investor, the Barrow Hanley team looks for opportunities to engage in constructive dialogue with companies to improve ESG performance, including on climate-related issues. Barrow Hanley believes setting a science-based target can be an important measure of the commitment a company is making to demonstrate progress toward a low carbon future.

The proprietary Barrow Hanley Composite ESG Score is a key element of their investment process, using a weighted average of the scores from the firm’s analysts, third-party ESG research and external reporting frameworks. Data on climate risks and carbon emissions informs the firm’s climate pathway analysis and reporting to clients.

The energy team at Barrow Hanley apply a discount rate of 2%, which equates to a shadow carbon price of US$50 to US$75 (A$751 to A$1131 ),* when valuing energy and utilities holdings as those sectors will be more exposed to future regulation that leads to a higher carbon price.

^{*A conversion rate of AUD:USD – 0.663 at 30 June 2023 has been used.}

For more information visit: www.barrowhanley.com/barrow-hanley-responsible-investing

At J O Hambro, fund manager independence is at the core of the firm’s culture. While climate change and the need to transition to a low carbon economy are considered in all funds, how evidence is framed, analysed and interpreted differs from one fund to another, according to their investment objective.

Tools and partnerships have, however, been developed to assist across J O Hambro’s funds, including the probabilistic emissions projection model, Horizon. The Horizon model projects a company’s emissions, after their carbon reduction pledges are accounted for, and evaluates the likelihood of reaching the target that they have set. These projections also incorporate other factors such as government regulations, industry initiatives and consumer and investor pressure. This is available to all fund managers to provide them with visibility over the carbon trajectory of their portfolios and individual stocks. This innovative model will be made available to other asset management firms in Perpetual Group over the course of the coming year.

J O Hambro also has a multi-year partnership with the University of Exeter’s Global Systems Institute and Business School, providing the latest research on global systems risks related to climate change and sustainability.

For more information visit www.johcm.com/uk/sustainability

The Perpetual Australian Equities team has developed a proprietary net zero scoring framework to assess climate-related risks and opportunities for listed companies. At a portfolio level, portfolio carbon reporting is provided to portfolio managers, and portfolio stress testing is conducted to estimate the earnings impact of different carbon price scenarios. In FY23, the team expanded the framework to cover all stocks in their investment universe as well as ASX 300 stocks. The framework now includes smaller, micro and offshore stocks within their investment universe. There is now the option to compare companies more easily and to access additional independent data sources and external ratings.

The average exposure to high carbon emissions intensive sectors of 5.1% across Perpetual’s Australian diversified equity strategies is less than the exposure for the S&P/ASX 300 index of 6.8%. This number has increased from 3.9% in FY22.

For more information visit: www.perpetual.com.au/asset-management/institutional-investors/responsible-investing/

ESG risk management, including assessment of climate-related risks, is undertaken within each investment team at Pendal. Investment teams actively consider climate-related risks and acknowledge that the escalating nature of climate change is shortening the time horizons over which many of these risks are becoming financially material. Where climate-related factors may have an impact on the financial or non-financial performance of the company, it is factored into the investment decision making.

Pendal has a proprietary climate tool, developed in partnership with Regnan. This tool aids Pendal investment teams to compare and evaluate the emissions, carbon budgets and physical risks of investment holdings. It also highlights indicators of how companies are managing climate issues, such as if a company has an emissions reduction target or if there is management oversight of climate risks. A set of scores across key climate-related areas can then be used to identify companies with higher exposure, which warrant further investigation.

For more information visit: www.pendalgroup.com/about/investment-capabilities/responsible-investing/ 

Company-level consideration of climate risks within the Regnan Sustainable Value Assessment framework focuses on a company’s exposure to transition and physical impacts of climate change, and their response to that exposure. Factors taken into consideration include emissions profile, exposure to carbon regulatory schemes, strategic recognition of transition risks and opportunities, actions taken to mitigate transition risk and pursue transition opportunities, and monitoring of the evolution of transition exposures over time.

Regnan can now also incorporate the output from the Horizon climate model in the Sustainable Value Assessment (SVA).

For more information visit: www.regnan.com

^{*Regnan's Sustainability Value Assessment is undertaken for all Regnan Sustainable Water and Waste Fund holdings and on-request for the Regnan Global Equity Impact Solutions Fund holdings.}

Trillium seeks to manage client’s assets in a way that mitigates climate change and accelerates the just transition, a key principle to ensure that the transition towards a climate-neutral economy happens in a fair way. The firm was also an early signatory of the Net Zero Asset Managers Initiative.

Trillium’s interim target is for 75% of the holdings of Trillium-advised larger cap-equity strategies to commit to set science-based targets for reducing their GHG emissions, as approved by the Science Based Targets Initiative, by the end of 2030. As at 30 June 2023, 70% of Trillium’s investments in larger cap equity strategies had committed to setting a science-based target. This is up from 15% on 31 December 2019, which is the baseline for the target.

Trillium’s investment process considers climate issues to be material across all economic sectors and incorporates analysis of these issues in the firm’s broadly diversified investment products. Climate risk assessment is integrated into the firm’s investment process at three different levels: security-specific analysis, portfolio construction considerations, and shareholder advocacy.

For more information visit: www.trilliuminvest.com

At TSW, climate risks, like other environmental and governance risks, are considered in the context of materiality and whether such risks are appropriately captured in valuation.

Similarly, as a bottom-up fundamental manager with a value discipline, the investment team often look for catalysts to help re-rate the stock where the market has not appropriately priced in such positive potential changes. If a company is engaging in business practices that are improving the climate, this could be a catalyst to unlock value and would be a consideration in the research mosaic. This would also incorporate a variety of other factors in-line with TSW’s consistently applied process and investment philosophy. Materiality of such risks and catalysts are therefore analysed where appropriate and relevant, and framed from the perspective of risk and reward.

For more information visit: www.tswinvest.com