Assessing climate risk in equity investing
- In evaluating climate risk in a potential equity investment, we consider both the physical aspects of climate change and the implications of the ongoing energy transition to a low carbon economy.
- Our analysis includes three key components: materiality, governance and disclosure.
- We look beyond carbon footprint metrics. Two companies with an identical carbon footprint today can have completely different strategies for managing emissions in the future.
- Several case studies illustrate how we assess climate risk and identify climate change opportunities in equity investment.
As a long-term active investor, we look to weigh all the factors that could impact a company’s future cash flow and sustainable value. As part of that process, we aim to identify companies that are well positioned to manage the investment risks and opportunities associated with climate change, noting that environmental policies and practices can impact financial performance in both the medium and long term. Climate change is an important consideration as we try to generate the best possible risk-adjusted returns that align with our clients’ objectives.
We take an integrated, proprietary, research-driven approach to evaluating climate risk. We incorporate environmental, social and governance (ESG) factors in our research where material, and this informs the way we construct our portfolios. In the following pages, we explore how we assess and evaluate climate risk in a potential equity investment, considering both the physical aspects of climate change and the implications of the ongoing energy transition—the transformation of the global energy mix from a fossil fuel to a zero/low carbon energy source. We engage regularly with the companies in which we invest—it is central to our investment process—as we continually reassess their climate risk exposure. Several case studies illustrate our perspective on climate risk analysis in equity investment.