Approach to responsible investment

A focus on Environmental, Social and Governance (ESG) issues can be particularly important when investing in credit markets. Companies’ management of ESG-related issues has a direct impact on their risk profile and, in turn, the probability of default. We believe that climate-related risks are as important as any other financial risk factor. These risks have additional emphasis in a world that needs to decarbonise rapidly.

Our Short Term Investments portfolios predominantly invest in the financial sector, which, we believe, also faces very real transition risks as the focus on decarbonisation increases substantially. Across our portfolios, we want to avoid the risks associated with exposures to stranded assets. Our stranded assets toolkit has been in place since 2013 to assist in monitoring this. We expect the transition to a lower carbon economy to require widespread changes in how companies operate, service and manufacture. Companies that do not transition in an orderly manner are at risk of being left behind, subjected to penalties and with stranded assets. Market pricing for climate risk is already starting to increase. We expect this to grow exponentially as we approach 2030 and beyond. As it pertains to default risk, we believe that companies that are not adequately addressing climate-related risks will face a reduced ability to refinance.

If climate change continues to evolve without sufficient mitigation, we would expect company financial performance to be negatively impacted by growing physical risks including natural disasters, supply chain disruptions, extreme temperature changes, employee safety and disruptions to operations. Alongside these risks however, we see opportunities for companies to try to mitigate the impact of these disruptions by developing resilient assets and supply chains. In particular, we believe our exposures to issuers in the Utilities and Financials sectors are most at risk of potential adverse financial implications as a result of fires, floods and other extreme weather events worsened by climate change.

While many of these risks may impact a company’s day to day operations, the regulatory environment surrounding climate-related financial risks is rapidly evolving. These regulations will continue to try and discourage companies from participating in activities that adversely affect climate change. Companies that do not comply could be open to litigation, which could pose negative implications for portfolios that hold such companies. The changing regulatory environment accompanies the prospect of reputational risk. Companies that continue to exacerbate climate change, due to their connections to fossil fuels and other high emitting activities, will lose their social licence to operate over time. Similarly, it is and will continue to be important to our portfolios for us to monitor this and our exposures to issuers that are not transitioning to a low carbon economy.

A product of the credit research process is an ESG risk rating, which includes climate-related risks. Climate-related risks are identified as part of our Environment pillar, along with other environmental risks such as waste management, pollutants, water, biodiversity impact etc. As part of this risk identification process, we assess whether the company has made long-term as well as short/medium-term decarbonisation targets, the level of emissions data disclosed, as well as the capital expenditure that the company has dedicated towards transitioning to net zero. Our analysts not only look at how management manage downside risks but also how they capitalise on the upside risks.

The portfolio managers consider climate-related opportunities as part of any new product design process. As part of this process, we have access to ESG data providers to access carbon analytics, climate scenario-analysis, physical and transition risk tools. In particular, the climate scenario-analysis tool provides us with an indication of the net zero alignment of our portfolios. It also allows us to assess the exposure of our portfolios to climate change mitigation activities, which can be useful when designing products in a world that needs to rapidly decarbonise.

For our Short Term Investments & Cash portfolios, we have focussed on portfolio level targets as opposed to company level. We have set quantitative targets for our portfolios, based on thresholds of the portfolios’ alignment status with to net zero. These targets apply to eligible proportions of our portfolios (portfolio eligible AUM). The eligible proportion of the portfolios exclude cash at Bank, Derivatives, Government-related issuances and Funds, and may be susceptible to periodic fluctuations. Our targets cover all of our active, publicly available portfolios. These targets focus on the proportion of the portfolios either committed to aligning, aligning or aligned to net zero by 2050. Over the short (2025), medium (by 2030) and long (by 2050) term, the targeted proportion of the portfolio aligned to net zero significantly increases. The criteria for committed to aligning, aligned and achieving net zero is based on the framework developed by the IIGCC.

The criteria for committed to aligning, aligned and achieving net zero is based on the framework developed by the IIGCC. For more information on what aligning, aligned and achieving net zero means please see Our climate metrics and target.

Short term (by 2025)

Portfolio level

• 75-100% of portfolio eligible AUM “committed to aligning” with net zero
• 25-50% of portfolio eligible AUM aligning to net zero
• 0-25% of portfolio eligible AUM aligned to net zero

Medium term (by 2030)

Portfolio level

• 100% of portfolio eligible AUM “committed aligning” with net zero
• 75-100% of portfolio eligible AUM aligning to net zero
• 50% of portfolio eligible AUM aligned to net zero
• 0-25% of portfolio eligible AUM achieving net zero

Long term (2040-2050)

Portfolio level

• 100% of portfolio eligible AUM aligned to net zero by 2040.
• 50% of portfolio eligible AUM achieving net zero by 2040, with 100% of portfolio achieving  net zero by 2050