Approach to responsible investment

Transition risk is a key climate-related risk that can impact our portfolio, as changes in policy, regulations, technology and behaviours can have financial implications for companies as we shift to a low carbon economy. As a result of these changes, companies may find that they are unable to generate an economic return, resulting in stranded assets. Further, companies that are perceived to be detracting from the transition to a low carbon economy may be exposed to reputational risk and the risk of losing their social licence to operate. This risk is high for companies who operate in carbon intensive industries, particularly where they fail to reduce emissions or expand carbon intensive activities.

As the economy moves away from fossil fuels to more renewable sources of energy, this will present key risks for traditional sources of energy generation. Utility companies have already begun their shift away from coal with many operators moving forward their plant closure dates. As coal withdraws from the grid, we think gas is likely to play a key role as a transition fuel to provide firming capacity to the grid in addition to providing grid stability and security. The decarbonisation of the electricity grid also presents key opportunities for investment in renewable generation, storage and electricity infrastructure and emerging technologies. For miners, we believe the transition also presents significant opportunities, as demand increases for key materials such as copper and lithium which are needed to underpin the build out of energy assets, energy storage and electricity transmission infrastructure.

We also assess the physical risks associated with climate change upon companies within the portfolio. These physical risks can stem from the increased severity and frequency of extreme weather events or arise from longer-term shifts in climate patterns. Mining and energy companies rely on large physical asset bases, and extreme weather events have the potential to damage assets or disrupt operations representing a key financial risk. Hence companies will have to make sure that their assets are resilient and invest in ensuring the reliability of their assets under various conditions.

Robust analysis of a company’s climate-related risks in the small and microcap universe can be hampered by the lack of data and limited public releases. For this reason, our deep understanding of our companies and high degree of interaction with management and the board often leaves us well placed to identify climate related risks within the companies we invest in.

The team is working on a portfolio assessment template to enable us to track a number of Environmental, Social and Governance (ESG) issues including climate-related risks. Key company data metrics we seek to track include Scope 1 and 2 carbon emissions, carbon footprint and carbon intensity. We also assess which companies are aligned or misaligned to a net zero climate commitment. We keep a working file on our engagement with companies including the suggested or agreed steps to address any climate related risk and we will track companies’ progress over time on their commitments and ESG policies and procedures.

The team also utilises ESG risk reports provided by Sustainalytics (where available) which helps us to identify and understand what financially material ESG risks the company faces and how well management is managing these risks. These reports are tailored to match the company’s unique business model and considers their product portfolio, financial strength, geography and historical controversies. In regards to climate-related risks, the reports provide a comprehensive overview and risk rating for the categories of: carbon-own operations, carbon-product and services, emissions effluents and waste, and land use and biodiversity.

The carbon dashboard also provides us with a portfolio level view of our carbon footprint and includes a number of key carbon metrics. This includes enabling us to compare our portfolio’s emissions intensity over time to the benchmark, including on a sector view and viewing our portfolio’s total carbon emissions, carbon footprint and carbon intensity.

We believe that active ownership and engagement is the most effective tool for addressing climate-related risks. Upon the identification of climate-related risks the team seeks to engage the company management and board to ensure that they are aware of and addressing the issues. Active dialogue with companies provides us an ability to participate in a collaborative discussion with management and the board to persuade and influence the company to drive improvements. Where we feel material climate-related risks are not being addressed, this is a factor we consider when making portfolio investment decisions and can lead to divestment. If engagement is not successful, proxy voting is also another tool we can use to convey any climate-related concerns and can be an avenue to hold companies accountable.

Our targets and objectives have been set in reference to the Institutional Investors Group on Climate Change (IIGCC) Net Zero Investment Framework. These include:

By 2025

• 90% of AUM is invested in companies disclosing scope 1, 2 and material scope 3 emissions
• 40% of AUM is invested in companies aligned or aligning to net zero
• 40% of AUM is invested in companies with net zero by 2050 targets
• 55% of AUM is invested in companies with data coverage for an alignment score.

By 2030

• 80% of AUM is invested in companies aligned or aligning to net zero
• 100% of AUM is invested in companies with net zero by 2050 targets
• 100% of AUM is invested in companies with data coverage for an alignment score.

By 2040

• 100% of AUM is invested in companies aligned to net zero by 2040.

By 2050

• 100% of AUM is invested in companies achieving net zero by 2050.