Why we are committed to supporting our clients’ net zero goals
Aiming to achieve competitive long-term outcomes
Our core commitment is to aim to deliver superior investment results and exceptional service for our clients. Through our research partnership with Woodwell Climate Research Center, we have come to appreciate that the physical consequences of climate change will be felt sooner and be more disruptive than markets expect. As policymakers and markets increasingly recognize and respond to this, the transition to a low-carbon economy is likely to transform certain business models. As a result, we believe actively considering transition-risk management at the company and portfolio levels can help us deliver better financial outcomes for our clients.
Companies will face many climate-transition-related challenges
To remain competitive, companies need to address transition risks that may affect asset valuations and risk profiles. While the transition will be uneven across geographies and over time, new regulations and shifting consumer preferences away from high-emitting companies may lead to rising expenses and falling margins from carbon taxes, litigation fees, capital costs, and loss of business. We believe a credible decarbonization strategy will help attract stakeholders seeking to reallocate capital toward companies embracing the low-carbon transition.
Client-directed glidepath implementation
For those asset-owner clients who have requested implementation of a decarbonization glidepath in the portfolios we manage on their behalf, we developed two standard approaches: a bottom-up glidepath based on holdings’ transition alignment and a top-down glidepath based on the portfolio’s overall emissions footprint. The tool(s) selected by each portfolio management team and the resulting measurement is driven by client objectives and each team’s investment philosophy, style, time horizon, concentration, and name-based turnover rate. We recognize that there is no one-size-fits-all metric, and we continue to evaluate additional metrics that may be added to our glidepath implementation toolkit.
Bottom-up glidepath: Increasing exposure to aligned issuers
Client objective: Increase the proportion of the portfolio invested in net-zero-aligned companies.
For certain clients’ investment mandates, the investment team pursues implementation with a glidepath that outlines an increasing percentage of portfolio exposure invested in companies that have set science-based emissions-reduction targets.
This approach is philosophically aligned with the Science Based Targets initiative’s (SBTi’s) Guidance for Financial Institutions’ Portfolio Coverage. We currently use SBTi-validated targets as our standard metric to measure portfolio exposure. Our approach to evaluating targets, including the use of our proprietary transition alignment assessment, may evolve in response to improvements in data availability and evolution in client expectations.
The glidepath shown in Figure 1 starts with a 2019 portfolio baseline (or later inception date), as measured by market-value exposure to companies with SBTi-validated targets. From there, an interim 2030 target is set, consistent with a linear increase to 100% portfolio exposure to companies with targets or the equivalent by 2040, and a 2040 target of 100% exposure to companies with science-based targets. (The target date for this glidepath is 2040 because portfolio decarbonization relies on underlying holdings executing against their final decarbonization targets to achieve net zero by 2050.)