Climate integration philosophy

Introduction

At Wellington Management, we believe that material climate risks and opportunities can affect the long-term value of the assets in which we invest; therefore, it is in our clients’ best interests for us to analyze and consider these issues as part of our investment mosaic. As active investment managers, we view the analysis and integration of material climate considerations as both return-enhancing and risk-mitigating. We approach climate integration in accordance with each team’s investment philosophy and process (P&P). Our climate integration philosophy outlines how climate considerations, supported by research and analytical tools, can inform investment decision making.

Structure

Wellington’s “community of boutiques” investment model fosters collaboration and constructive debate among approximately 50 independent investment teams, rather than a top-down CIO structure. Each investment team develops its own P&P, aligned with the outcomes it pursues for clients, and integrates climate considerations as relevant to its investment approach. We believe this type of bottom-up assessment supports more authentic climate integration within the investment process.

Research collaborations, tools, and analytics

Wellington’s climate approach is underpinned by a longstanding focus on scientific research. Grounded in bottom-up analysis and a culture of independent thinking and rigorous debate, our approach to climate research is further strengthened by firmwide collaboration. For example, our Climate Research Team works closely with many of our investment teams and the ESG Research Team, supported by our research collaborations with Woodwell Climate Research Center and the MIT Center for Sustainability Science and Strategy. This multidimensional research enables investment teams across asset classes to evaluate investment opportunities in the context of climate change and assess the effects of climate-related physical and transition risks on securities.

Our proprietary tools support investment teams’ issuer-level research and portfolio-level monitoring. For more information, please refer to our Climate Report.

Framework for P&P integration

The integration of climate risks and opportunities into P&Ps, where relevant, supports informed investment decision making. There is no single prescriptive method of integration; instead, the investment strategy’s objectives, universe, style, and time horizon shape the approach. Integration can include embedding climate considerations into issuer evaluation, investing in climate solutions, and/or engaging to identify and manage climate risks and opportunities.

Embedding climate considerations into issuer evaluation

Investment teams may integrate material climate risks and opportunities into their due diligence. Climate considerations can inform issuer analysis — often via valuation assumptions — and/or portfolio construction. For example, some teams assess transition risk as part of credit risk within carbon-intensive industries, avoiding issuers with higher potential transition risk, where valuations fail to compensate for that risk.

Other teams that invest in asset-heavy industries reflect additional expenditures needed to adapt to damage from physical risks in their valuation assessments. Still other teams seek to allocate to climate leaders, for which carbon-efficient operations or product innovation is expected to enable fundamental improvements over time.

Investing in climate solutions

Some investment teams may seek to identify and invest in companies providing solutions that support climate mitigation or adaptation. These opportunities may arise where markets underappreciate the long-term demand for such products and services. Climate investing enables markets to funnel capital toward such solutions, while gaining access to segments of the market that are potentially inefficient and, therefore, ripe with investment opportunities that span sectors and asset classes.

Climate solutions may include issuers that generate revenue from products or services that reduce their customers’ emissions or help them promote resiliency to physical risks. Examples include low-carbon electricity and transport, utility and grid resilience, sustainable infrastructure and agriculture, water and resource management, cooling systems, flood control, backup power, and many others.

Engaging to identify and manage climate risks and opportunities

Where climate-related factors are potentially financially material to the issuer, investment teams may engage with issuers to understand physical- and/or transition-risk management. Given that disclosures may lag practice, engagement can provide forward-looking insights that inform an investment team’s assessment of an issuer’s long-term competitiveness and resilience.

Engagement can help companies appreciate the potentially wide-ranging effects of the energy transition or the increasing frequency and severity of extreme weather events on security valuations, and it can help investment teams better understand a business’s operational and supply chain footprint and management. The scope of these discussions varies by issuer, industry, and geography and may include topics such as enhanced climate-related disclosures, implications of national or cross-border policies, risk-management practices including emissions-reduction targets, and indicators of credibility or a defined risk-management strategy including plans for capital expenditures. Please refer to our Engagement policy for details.

Insights gained through engagement may contribute to changes in an investment team’s fundamental view of an issuer, potentially resulting in more exposure to issuers with improving trajectories or less exposure to issuers without appropriate risk management. This intelligence may also lead to the use of additional stewardship tools such as proxy voting to continue issuer dialogue. For more information, please refer to our Proxy voting policy and procedures and Proxy voting guidelines.

Reporting

To provide additional transparency on the practical application of our research and integration, we publish an annual Climate Report. Upon request, we also provide clients with portfolio-level reporting to help them monitor relevant climate-related metrics. Our reporting is designed to align with best practices as defined by regulators and industry initiatives. Report availability and applicability vary by investment strategy.

Consistent with our ongoing commitment to climate research, Wellington participates in certain industry initiatives and organizations where we believe this participation helps us gain knowledge, stay current on key issues, and share our perspectives in pursuit of better investment outcomes, in keeping with our fiduciary duties to clients. Please refer to our Sustainability Report for details. Some initiatives have additional reporting expectations, which support dialogue with clients about climate integration within the portfolios we manage on their behalf.