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As we look ahead to the second half of 2021, we plan to continue with the following:
- Make progress toward interim targets for our net-zero commitment
- Advocate for the enhancement of company climate disclosures, including location data
- Finalize preparations and transition select investment strategies to comply with the European Sustainable Finance Disclosure Regulation (SFDR)
In December 2020, Wellington became a founding member of and signatory to the Net Zero Asset Managers initiative. This commitment reflects two of our core beliefs. First, that climate change poses material risks for companies, economies, and society, and therefore, our clients’ investment portfolios. And second, that supporting the transition to a low-carbon economy is in the best long-term financial interests of our clients.
As of this writing, 128 signatories representing nearly US$43 trillion in assets under management have signed on to the initiative.1 We are aligning strategies with a net-zero-by-2050 trajectory and defining climate-action strategies consistent with each investment team’s philosophy and process. This November, we will announce initial assets under management that have been committed, in partnership with our clients, to be managed in line with the attainment of net zero by 2050, with the expectation of increasing these assets over time.
We intend to use engagement as our primary tool to facilitate portfolio decarbonization under the net-zero commitment. As an active manager with direct access to company management teams and boards of directors, we believe engagement is our most productive means of expanding decarbonization efforts that serve our clients’ best long-term interests.
Today’s regulatory environment is shifting in favor of climate-risk transparency. The Biden administration has reframed climate policy as an economic development strategy and is urging US regulators to place climate at the top of their agendas. Following the Securities and Exchange Commission’s (SEC’s) recent solicitation for comments on Biden’s proposed changes, we expressed support for mandatory, standardized reporting of greenhouse gas (GHG) emissions (inclusive of Scope 1, 2, and 3 emissions) and other sustainability metrics. We also advocated support for qualitative discussions of issuers’ climate risks, climate mitigation and adaptation strategies, and capital allocation plans. We encouraged the SEC to align with existing disclosure frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).
In the United Kingdom, we expect economy-wide climate-risk disclosure to be in place by 2025, with other regulatory regimes already following suit. As an example, the Monetary Authority of Singapore has issued guidance for the evaluation of environmental risks via TCFD disclosures in 2022.
Call for location data
In our engagements, we have long encouraged companies and issuers to enhance their climate-related disclosures in accordance with TCFD recommendations. We believe this information is critical to our investment research and understanding of companies’ exposure to climate-related risks.
While more companies are taking steps to disclose their GHG emissions and strategic approach to climate-risk management, a missing piece of the puzzle for investors is information on the physical location of corporate real estate such as headquarters, manufacturing plants, or distribution centers. Earlier this year, after reviewing 10-K filings from a cross-industry sampling of 100 companies in the S&P 500, we concluded that over 90% of issuers disclosed insufficient location data for us to fully assess climate-risk exposure.
In an effort to change that, we recently updated our 2019 Physical Risks of Climate Change (P-ROCC) framework, which is designed to help company executive teams assess and disclose the potential effects of physical risks of climate change on their business. In partnership with Woodwell Climate Research Center, we encourage companies to disclose the physical location of assets and operations to help investors make more accurate climate-risk assessments.
Sustainable Finance Disclosure Regulation (SFDR)
The pace of change in Europe on sustainable finance continues to accelerate. In March, the Level 1 requirements of the SFDR went into effect. Wellington has complied with these requirements through disclosures, including on new firm policies and processes, on our website. We have also transitioned 26 of our investment strategies to meet the regulation’s Article 8 (“light green”) requirements and four strategies to comply with Article 9 (“dark green”).
Since March, we have continued to work with investment teams to identify whether it is appropriate to transition their approaches in similar fashion, to meet the SFDR’s “green” standards. We expect this effort will extend into next year, as we communicate with portfolio managers about their funds and directly with clients about separately managed accounts.
We are actively reviewing the updated guidance on the SFDR’s Level 2 requirements regarding EU Taxonomy alignment and Principal Adverse Indicators (PAIs). We aim to capture new data, enhance reporting, and consider the research implications of the broader data set necessary to assess PAIs. Finally, new guidance on the delegated acts for MiFID II, UCITS, and AIFMD has provided detail on how to assess, manage, and monitor sustainability risks and evaluate ESG product suitability.
Given the pace of these evolving regulatory directives, our Sustainable Investment Regulatory and Third-Party working group will continue to work over the balance of the year to ensure that we are prepared to comply with all these new directives and to collaborate with our clients as they, too, seek to meet the new requirements.