Climate change
Team climate change statement
At FSSA, we have always believed that looking at sustainability challenges and opportunities are a core part of investment decision-making and can have a large impact on how a company makes money. We actively seek to invest in businesses whose sustainable practices and products are able to meet the world’s changing expectations.
This matters to us because as long-term investors, we expect that companies will have to bear the costs of meeting these challenges over the course of our ownership.
Many of the countries we invest in are particularly vulnerable to climate-related risks given their geography and economy. Therefore, we expect that every company we invest in will be exposed to some form of climate risk. Specifically, we invest large amounts in financial services and companies supplying basic essential items known as consumer staples. 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 significant environmental topics are raw material use, water management and plastics pollution.
Climate risks – including those related to the transition to low-carbon economies (transition risks), the physical impacts of climate change (physical risks), reputational concerns, and regulatory and legal requirements – are all interconnected issues. Of these, we consider the biggest risks to our investments, and those that we can address directly with companies, to be transition risks and physical risks.
Transition risks are growing in consideration for investors as companies think through the societal and economic shifts which are necessary to move towards a low-carbon future. We see them as immediate challenges for companies to address. Whilst our direct exposure to fossil fuels, agriculture and mining is minimal, these businesses form a meaningful part of our investee companies’ supply chains. We therefore consider these risks from an industry perspective as well as from a 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 usual business activities or their supply chains and sales 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 process. We believe the most effective way to identify risks is through regular engagement and meetings with a company’s management. This also provides us with an opportunity to assess other 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 data from third-party providers such as Institutional Shareholder Services (ISS) and Morgan Stanley Capital International (MSCI) to provide us with a company’s historical carbon intensity and scope 11 and scope 22 emissions. Additionally, we use Sustainalytics and RepRisk, among others, to alert us of significant recent events and controversies. We use these findings 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 Task Force on Climate-related Financial Disclosures (TCFD) and the Science-Based Targets initiative (SBTi) to report on their climate-related disclosure and targets.
At this stage, we do not conduct separate scenario analyses as it relies heavily on unknowable assumptions, particularly around what are called scope 3 emissions3.
1 Scope 1 emissions are direct GHG emissions occur from sources that are owned or controlled by the company, for example, emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.
2 Scope 2 emissions accounts for GHG emissions from the generation of purchased electricity consumed by the company. Purchased electricity is defined as electricity that is purchased or otherwise brought into the organizational boundary of the company.
3 Scope 3 emissions is an optional reporting category that allows for the treatment of all other indirect emissions. Scope 3 emissions are a consequence of the activities and operation of the reporting company within its value chain.
We manage climate-related risks by looking at the companies in our portfolios individually and collectively.
We conduct fund-level sustainability reviews with environmental and social indicators to identify the companies which are significantly above or below the average, 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 review process in 2021 with an assessment of how the companies that we invest in were tackling their carbon footprint reductions. This included an evaluation of 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 carbon emissions reductions. We prioritised the lowest performing companies in our initial review for more pressing engagement.
In our approach, we integrate climate-related 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 approach, 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.
We focus our efforts on reducing the total carbon emissions of the companies that we invest in. Rather than selling our carbon-intensive assets or buying companies that rely on an abundance of carbon offsets (a way of compensating for emissions of greenhouse gases (GHG)), we seek to encourage an aggressive reduction in GHG emissions among our investee companies, as is necessary to contribute to a real world reduction. We place less emphasis on grand-gesture statements and more on action and evidence.
We launched our decarbonisation process in 2021 with an assessment of how the companies that we invest in were positioned, how they performed at that point in time, and their plans for the future. While we plan to engage with all of the companies on this topic, we started with the largest investments in regional and country portfolios and those in carbon-intensive sectors, covering 75% of FSSA’s total assets under management (AUM).
Our assessment is based heavily on the “net zero alignment maturity scale” from the Net Zero Investment Framework Implementation Guide (NZIFIG) produced by the Institutional Investors Group on Climate Change. We have assigned each assessed company to one of four tiers ranging from leader to laggard. The nuance in our tiers provides flexibility around a company’s direction of travel, resource constraints and purposefulness, which we think is essential in an emerging market context. (An emerging market is an economy that could experience considerable economic growth, but lacks some of the characteristics of a developed economy.)
| FSSA tier | FSSA definition | NZIFIG maturity scale | Differences |
|---|---|---|---|
| Tier 0 | Not applicable | Achieving net zero6 | FSSA does not define this tier level. Companies achieving net zero are included in the Tier 1 definition. |
| Tier 1 | “Leader” is defined as either achieving net zero with current emissions intensity performance at, or close to, net zero emissions; or those aligned to net zero with adequate emissions reduction performance over three or more years | Aligned to a net zero pathway | FSSA includes both those that are achieving net zero or those aligned to net zero in this category. NZIFIG only considers those with current intensity emissions at or close to net zero to be achieving net zero or aligned. NZIFIG recommends checking the proportion of green revenue and if there are relevant increases over time as part of the company's decarbonisation plan. FSSA does not include this criteria. |
| Tier 2 | “Committed” is defined as aligning with short-, medium- or long-term goals (but not all), and disclosure of scope 1 and 2 emissions data for two or more years (with an option to include material scope 3 emissions data) | Aligning towards a net zero pathway | NZIFIG recommends checking the proportion of green revenue and if there are relevant increases over time as part of the company's decarbonisation plan. FSSA does not include this criteria. FSSA checks for any combination of scope 1, 2 or material scope 3 emissions reduction targets, defines adequate progress over two or more years, and how the business model may contribute to decarbonisation or how it may be structurally challenged. NZIFIG does not state progress over a specific timeframe. |
| Tier 3 | “Laggard, Planning” is defined as committed to aligning towards a net zero pathway with the intention to set clear targets, and disclosure of scope 1 and 2 emissions data for at least one year, but with little to no progress over time | Committed to aligning | NZIFIG specifies having a long-term goal to achieve net zero by 2050. FSSA checks for a clear foundation to set a target and will engage on this. FSSA checks for disclosure of scope 1 and 2 emissions for at least one year and any progress over that period, as well as how the business model may contribute to decarbonisation or how it may be structurally challenged. NZIFIG recommends transition plan methodologies with a progress timeframe defined according to the target(s) set. |
| Tier 4 | “Laggard, Needs Support” is defined as not aligned and may have the intention to set targets but with no time frames or metrics defined. These companies have poor disclosures leading to the inability to measure progress and their business models may be structurally challenged due to a reliance on carbon intensive resources. | Not aligned | NZIFIG designates this scale for all other companies. FSSA checks for level of disclosure, the intention to set a target, history of environmental malpractice, and how the business model may contribute to decarbonisation or how it may be structurally challenge. NZIFIG does not include this criteria. |
We have set targets to achieve by 2025, 2030 and 2050. With every passing year, we aim to increase the number of assessed companies graduating into Tier 1. We will report on the progress annually, then provide a detailed report in 2025 and every five years thereafter.
6 Cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere, by oceans and forests for instance. Source: United Nations
By 2025, we aim for 25% of assessed AUM to be assigned to Tier 1, aligned to net zero by 2050.
We will engage with all companies under assessment to meet 100% disclosure of scope 1 and scope 2 emissions by 2025, and encourage the alignment of targets to the SBTi. We recognise that companies are subject to different timeframes (i.e., carbon neutrality by 2060 for China and by 2070 for India). We expect the companies we invest in to align with the Intergovernmental Panel on Climate Change (IPCC)’s recommendation of limiting global warming to below 1.5° Celsius and to reach net zero emissions by 2050.
By 2030, we aim to increase the percentage of AUM assigned to Tier 1, aligned to net zero by 2050, from the initial 25%.
Rather than penalise companies that are less advanced towards their net zero goals or those in hard-to-abate sectors, such as cement, steel, heavy-duty transport industries, we aim to make and measure progress by supporting companies in this effort. We will achieve this through frequent engagement with company management to move towards genuine reductions and meaningful targets.
We are initially committing 50% of our AUM to be aligned to achieving net zero in 2050 (assigned to Tier 1), with an aim to increase the portion of AUM towards 100% as economies gradually decarbonise.
Disclaimer
The commitments and targets set out on this website are current as of today’s date. They have been formulated by the relevant First Sentier Investors (FSI) investment team in accordance with either internally developed proprietary frameworks or are otherwise, based on the Institutional Investors Group on Climate Change’s (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets set out on this website depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. FSI will report on progress made towards achieving these targets on an annual basis in its Climate Change Action Plan. The commitments and targets set out on this website are continuously reviewed by the relevant investment teams and subject to change without notice.