Seeing the bigger picture over planet earth

This mental state has been described by astronauts as a wake-up call to realise the damage we are causing the earth.

As investors, rather than space travellers, we realise the fragility of the environment, communities, and the companies we invest in.

Just as the recent pandemic exposed, companies’ vulnerabilities to external shocks can test the resilience of long-term business models.

Climate change plays out over many years and may not (yet) be an immediate threat to many of us. As a result, it would be easy to derail commitments and shelve climate ambitions in the face of more immediate issues.

Channelling private capital to businesses that can demonstrate their commitment to moving away from the most polluting resources is a task we take seriously

We think otherwise. As long-term investors, we have the ability to support companies in their climate transition ambitions.

We do this not only because it may be the ‘right’ thing to do, but also because more resilient companies will survive in the long term and deliver more sustainable returns.

We focus on: the ways climate change could affect the business, and how effective the business is in addressing these issues.

We are particularly interested in companies that can demonstrate that they have embarked on a journey to decarbonise operations.

As a bondholder, a viable decarbonisation strategy would help to reassure us the business is resilient and it can generate cash flow, repay its debt, and continue to access capital markets at a reasonable cost of funding.

Channelling private capital to businesses that can demonstrate their commitment to moving away from the most polluting resources is a task we take seriously.

As well as our carbon risk assessments at a stock level, we also start at the top.  

C-suite oversight tells us whether there is a board-level committee in charge of sustainability and whether key performance indicators for the energy transition are tied to executive remuneration.

We also assess the level of effort made by the company to communicate with investors, such as through sustainability reports and/or by joining global disclosure initiatives.

Lobbying activities can also be an indicator of whether the company is supporting the ‘right’ causes that align with its carbon vision and whether it is truly ‘walking the talk’.

We also assess whether the company has committed to decarbonisation targets and timelines, and whether it discloses the types of projects that will bring it closer to the achievement of those targets.

For instance, a company may commit to an early retirement of 50 per cent of its coal units by 2025. It could also embark on a radical fuel mix change from coal to gas by the construction of a new gas-fired power plant by the mid-2020s.

It could disclose the amount of emission reduction that it would achieve from the change from coal to gas-fired power generation. Finally, it could be a target to increase the share of renewable energy in its generation mix from minimal to 30 per cent by 2030.

Our assessment enables us to have a more holistic view of the risk and opportunities of our investments by considering their exposure to emerging climate risks.

It also helps us to make our portfolios more climate-resilient by investing in companies whose business model will indeed be viable and sustainable in the long term. 

Based on our assessment of current carbon exposure and strategy for future decarbonisation, we are encouraged by those companies that can play a key role in the climate transition.

The ‘overview effect’ prompted space travellers to look at the world in its entirety.

The climate transition should have the same effect on investors by helping to develop a planetary, multi-generational investment framework, and financing a sustainable world so that many more astronauts in future generations can admire the ‘overview effect’: our planet.

Petra Daroczi, investment analyst — ESG, fixed income at Aberdeen Standard Investments