Climate change

Many of the countries we invest in are particularly vulnerable to climate-related risks given their geography and economic sensitivity. Therefore, we expect that every company we invest in will be exposed to some form of climate risk. Specifically, we have large exposures to financial services and consumer staples companies in our portfolios. To assess climate risk in the finance sector, we focus on lending practices and the impact this has on climate change. For consumer staples, the most material environmental topics are raw material use, water management and plastics pollution.

Climate risks – including those related to the transition to low-carbon economies, the physical impacts of climate change, reputational concerns, and regulatory and legal requirements – are all interconnected issues. Of these, we consider transition risks and physical risks to be the most significant to our portfolio and those that we can address directly with companies.

Transition risks are growing in consideration as companies think through the societal and economic shifts toward a low-carbon future. We see them as immediate challenges to address. Whilst our direct exposure to fossil fuels, agriculture and mining is minimal, we acknowledge that these businesses form a meaningful part of our investee companies’ supply chains. We therefore consider these risks from a top-down industry perspective as well as from a bottom-up, company-by-company point of view.

Physical risks refer to the impacts of a changing and volatile climate on existing business practices. As such, we believe this affects all companies – either through their primary business activities or their supply chains and distribution activities.

Beyond these two primary risks, companies also face more stringent regulatory and legal risks, which increases the risk of reputational damage. The governments of countries in which we invest have begun to implement penalties for non-compliance. We fully expect these risks to increase over time.

We identify climate-related risks throughout the research process, from the initial company assessment to the ongoing monitoring and review. We believe the most effective way to identify risks is through regular engagement with company management. This also provides us with an opportunity to assess other “soft factors” and determine whether a company’s efforts to manage climate risks are genuine.

To evaluate a company’s climate-related risks and opportunities and to prepare for these conversations with management, we review company disclosures and note the adherence to the Task Force on Climate-Related Financial Disclosures (TCFD). We also review data from third-party providers such as ISS and MSCI to provide us with a company’s historical carbon intensity and scope 1 and scope 2 emissions. Additionally, we use Sustainalytics and RepRisk, among others, to alert us of significant recent events and controversies. These findings are used to augment our engagement with companies.

Throughout the engagement process we identify areas where companies could improve and offer external resources that may assist in the process. For example, we encourage companies to utilise established frameworks like TCFD and the Science-Based Targets initiative (SBTi) to report on climate-related disclosure and targets.

We do not, at this stage, conduct separate scenario analyses as it relies heavily on unknowable assumptions, particularly around scope 3 emissions.

We manage climate-related risks from both a holistic portfolio perspective and in a bottom-up manner.

From a portfolio perspective, we conduct fund-level sustainability reviews with environmental and social indicators to identify the outliers and laggards, which then focuses our engagement efforts. Specific to climate risks, we review total carbon emissions, trends in emissions intensity, quality of disclosure and alignment to SBTi. We launched a decarbonisation process in 2021 with an assessment of how our holdings were positioned, how they performed at that point in time, and their plans for the future. With our engagement-led process, we started with an assessment of our largest positions, with the aim of driving multi-year emissions reductions. The lowest performing companies in our initial review have been prioritised for more pressing engagement.

From a bottom-up perspective, we integrate climate considerations throughout the research process. With every potential investment, we consider the business model and its exposure to climate-related risks, and decide whether we are comfortable with the level of risk the company faces. Assessing the quality of management is a critical component of our investment process. We look for signs that there is a long-term owner/manager who is passionate about climate issues – or is incentivised to care about this multi-decade challenge.

We may further express our views through votes on company proposals. Whilst we subscribe to proxy voting services such as Glass Lewis and Ownership Matters as a guide, the ultimate decision on how we cast our proxy votes lies with the respective investment analyst.

Our funds tend to have significantly lower carbon intensity than their respective benchmarks. However, we believe this data is best viewed as an output of our investment philosophy, which is centred on assessing the quality of companies holistically rather than selecting only those that perform well on this metric. We are hopeful that as the broader corporate world decarbonises, the gap between the benchmark and our portfolios will gradually close – and improve together.

Our efforts to decarbonise are focused on reducing the total carbon emissions of our holdings. We remain committed to increasing our engagement on climate change matters and to underscore the importance of having credible transition plans. Through our ongoing engagement with management, we aim to reduce the absolute amount of carbon emitted by companies in our portfolios and have short-, medium- and long-term goals with this in mind. 

We launched our decarbonisation process in 2021 with an assessment of how our holdings were positioned, how they performed at that point in time, and their plans for the future. 

In 2024 we enhanced our net-zero assessment model to align with the criteria set forth in the Net Zero Investment Framework 2.0 (NZIF), an update on the Net Zero Investment Framework Implementation Guide from the Institutional Investors Group on Climate Change. We refined the qualitative questions in our original assessment to include capital expenditure, social impact (just transition) and the calculation of absolute emissions relative to targets. 

From 2026, we will fully adopt the NZIF and end our customised assessments. While NZIF was heavily skewed towards developed markets when we launched our decarbonisation goals in 2021, it is now considered industry standard. By adopting the framework, we can channel our resources into more effective engagement activities, where we can have a much larger impact.  

Our climate goals

For details on the progress we have made towards our climate goals, please see our latest FSSA Sustainability Report 2025. 

As we move towards the NZIF framework, we have opted to set two new short-term targets to be applied to our AUM¹, and achieved by 2030 and 2035, as the old FSSA tiering system will no longer apply. To do this we have simplified the NZIF bands into two buckets – AAC (Aligned², Aligning³, or Committed to Aligning⁴), and AA (Aligned or Aligning). All AA companies are by default also Committed. 

We are still aiming for 50% of our AUM to be aligned to net zero by 2050, with the goal of increasing that towards 100% as economies gradually decarbonise.⁵

In considering these climate goals it is important to remember that they are based on:

• information provided by, and representations made by, investee companies to us, which may ultimately prove to be inaccurate; and

• reasonable assumptions in relation to future matters such as government policy implementation in ESG⁶ and other climate-related areas, enhanced future technology and the future actions of investee companies, all of which are subject to change over time and are not guaranteed to occur. 

As a result, achievement of these goals will depend on the ongoing accuracy and representation of this information as well as the realisation of such matters in the future.

¹ Assets Under Management (AUM): The total value of investments that we manage on behalf of our clients.

² Aligned: Companies whose current emissions reduction targets are consistent with achieving net zero emissions by 2050 or sooner.

³ Aligning: Companies that are making progress towards net zero and have credible plans and targets in place, but are not yet fully aligned.

⁴ Committed to Aligning: Companies that have publicly committed to setting net zero targets and developing a credible transition plan, but have not yet demonstrated sufficient progress to be considered aligning.

⁵ This may differ between portfolios as our climate goals are set at the team level and not at the strategy or fund level.

⁶ ESG (Environmental, Social and Governance): Factors used to understand how a company manages its impact on the environment, its relationships with people and how it is run.