Sustainable Portfolio Management – Annual Report 2022
22 April 2022
In the face of the climate emergency, we can help drive climate repair by allocating capital to innovative companies most likely to succeed in eradicating pollution, phasing in cleaner alternatives, and developing low-carbon products and services.
It is our responsibility to do this thoughtfully and patiently, empowering our investee companies to take the tangible steps needed to move to net-zero emissions. This involves spending considerable time deepening our understanding of companies’ internal operations, investigating their supply chains, and reviewing their transition plans.
Our work is ongoing as scientific guidance develops, but throughout we remain committed to having a material influence on the transition that lies ahead. It is our planetary imperative.
Our sustainable strategy1 emits 96% less carbon per $1 million invested than the wider market2. There are several factors driving this comparatively low carbon risk:
Our strategy is well-positioned for the transition to net zero. An encouraging 78% of our investee companies have net-zero targets in place4, a large majority of which are ambitious and science-based. This means they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement, limiting global warming to well below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
At the time of writing5, eight of our 37 investee companies have yet to publish comprehensive net-zero plans or targets. While the majority of these are already doing better than the market average on carbon abatement given their capital-light business models, we are concerned that they do not have formal strategies in place to prove that they are limiting the worst impacts of climate change and future-proofing their business growth. As we intend to have a net-zero investment strategy, we are actively engaging with these businesses – via EOS at Federated Hermes, in the UK and Jersey – to encourage the adoption of science-based targets6.
ESG data risk: Some positions within the strategy may not have an ESG rating due to the nature of their asset class (e.g. government bonds, gold, hedging derivatives). Should a position not be covered by MSCI (or an equivalent provider) due to lack of coverage, the Portfolio Manager will determine the position’s equivalent rating.
Market risk: The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called “systematic risk”, cannot be eliminated through diversification, though it can be hedged against. Sources of market risk include major natural disasters, recessions, political turmoil and geopolitical tension.
Liquidity risk: The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimise a loss.
Derivatives exposure: The use of these instruments can, under certain circumstances, increase the volatility and risk profile of the strategy beyond that expected of a strategy that only invests in equities. The strategy may also be exposed to the risk that the company issuing the derivative may not honour their obligations which could lead to losses arising.
Currency risk: An investor will be exposed to currency fluctuations between their domestic currency, a fund’s holding currency, and the local currency of an investment.
Interest rate risk: An investor will be exposed to interest rate risk. Changes in interest rates will impact the performance and/or value of instruments. Interest rates tend to change suddenly and unpredictably.
Inflation: Inflation will reduce the real value of your investments in the future.
Taxation and tax relief: Levels of taxation and tax relief are subject to change.
Returns are not guaranteed: Past performance is not an indication of future performance. The value of investments, and any income, can fall as well as rise, so you could get back less than you invested. Neither capital nor income is guaranteed.
In this year’s report, we focus on some of the exciting new technologies that could meaningfully improve sustainability outcomes, from precision manufacturing and measurement, to genomic sequencing, to digital infrastructure. And we’re delighted to feature an article from Sir David King on the strategies urgently needed to ensure climate repair.
For Accredited Investors in Singapore
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Please note that the sustainable strategies referenced in this report are not available to Private Clients in India. For more information, please contact your local office, or visit our Important information page.
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