Climate change statement

Climate change risks and opportunities are relevant to all companies, albeit in different ways, to different extents, and over different time horizons. These risks can be ‘direct’ (related to a company’s operations) or ‘indirect’ (related to a company’s supply chains or demand for its products and services).

Our investment process focuses on the specific risks and opportunities facing individual companies. These include physical, transition, regulatory, fiduciary and reputational risks. We provide detailed descriptions of every company we invest in on Portfolio Explorer. It also sets out key risks, areas to improve and a description of any climate change solutions the company is contributing to.

While physical, transition and regulatory risks facing companies are often apparent (depending on the industry or location of a company’s direct operations) indirect risks can sometimes be more difficult to ascertain. Fiduciary and reputational risks pertain to the stewardship, competence, integrity and vision of a company’s management and board, and so can relate to almost any company.

Our investment philosophy seeks to invest in companies which both contribute to, and benefit from, sustainable development, achieving positive social and environmental outcomes.

Every investment decision we make assesses the sustainability positioning (both risks and opportunities) of the companies that we invest in from multiple perspectives. That assessment includes:

• Detailed company analysis – including a quality and sustainability assessment.
• Discussion and debate among the investment team.
• Meetings with company management and key stakeholders, including competitors and Non-governmental organisations (NGOs).
• Weekly team and strategy meetings.
• Commissioning independent, third-party research to enhance our understanding of various aspects of a company’s quality, including climate risks.
• Utilising third-party frameworks and external research to supplement and/or validate our own research.
• Ongoing monitoring (using internal and external research) to check company exposure to harmful or controversial products, services or practices.

We incorporate climate-related risks and opportunities in our company-level analysis. This can include examining the sustainability positioning of a company’s product mix and its end markets alongside the emissions intensity of its operations and its supply chains. We avoid companies who we believe face significant risks in these areas.

We recognise, however, that it is impossible to reduce systemic risks – such as climate change – to zero. Physical risks such as extreme weather events can have negative impacts on a company’s assets, employees, essential infrastructure, and its supply chains.

International Financial Reporting Standards for climate-related disclosures (IFRS S2) include a recommendation that companies perform climate-related scenario analysis. While we don’t believe undertaking broad scenario analysis is particularly effective in helping us to understand climate change-related risks on a portfolio level, we do consider the impact that a range of different scenarios (not just climate scenarios) would have at a company level.

Investing in quality companies

We only invest in what we believe to be high-quality companies. These are companies that have:

• Exceptional management teams and cultures.
• Enduring franchises with strong market positions and reputations.
• Sound financials with low debt, sustainable margins and free cashflow.

We believe that quality companies like these are in a better position to make the long-term investments needed to transition to net zero emissions.

Engagement

Company engagement is a critical part of the way that we invest.

Engagement helps us build confidence in company’s management and is the means through which we encourage companies to improve. We believe constructive engagement is vital for the success of long-term investors with a 10-year plus investment horizon.

We encourage companies to take positive actions and to use their influence across their value chains to drive reductions in emissions, while also striving to ensure equitable treatment of all their stakeholders in the transition to a carbon-constrained economy.

Our investment philosophy focuses on investing in high-quality companies contributing to sustainable development. This approach – and our engagement efforts – remain the primary means by which we can make a positive difference on climate change. Quality, sustainability and valuation are at the core of our investment philosophy and we will not compromise on any of these aspects in pursuit of our climate goals. 

No single measure or set of targets can fully capture the challenges posed by sustainable development. Some measures, however, are better than others. So, in 2024 we reviewed our climate-related targets with three intentions:

• To simplify and better align them with our investment philosophy.
• To use measures that better reflect real-world emissions performance.
• To focus on those areas where we can have the greatest influence.

Following our review, we have updated our aspirational targets as follows:

·     On average, the companies we invest in will have reduced their carbon intensity by 7% per annum over five years.

• 100% will be disclosing their Scope 1 & 2 emissions.
• 80% will have emission targets.
• Our operational emissions will be net-zero (Scope 1 & 2)

We recognise that our ability to influence company behaviour is limited and that whether we hit these targets is not wholly within our control. Equally, we believe setting these targets supports our engagement efforts and sends a positive signal to companies and other stakeholders. 

This is simply a company’s Scope 1 and 2 emissions divided by its revenues (USD millions), using the most recent available data. Companies with poor-quality past estimates are excluded until full data is reported.

Emissions intensity is a measure of a company’s carbon efficiency. Our focus on quality means we are always looking for companies that are improving over time. An improvement in emissions intensity suggests that a business is generating more revenues without creating more pollution. When intensity falls to zero, so do emissions.

Like all climate metrics, emissions intensity has its drawbacks. We accept that for some companies, denominators other than revenue (such as emissions per tonne of production or per employee) are more appropriate measures of efficiency. But because revenues are something that all companies report, they give us a useful common denominator.

The limitation of individual metrics is why we provide detailed information on the investment case and sustainable development contributions of all the companies we invest in on Portfolio Explorer.

Although we will continue to report on portfolio-level footprint emissions and other standard measures, our new target focuses on the change in emissions intensity for the companies we currently hold. The proportion of our funds that are invested in a particular company or sector changes over time as we find new investment opportunities. Focusing on a historic baseline might discourage investment in companies with greater potential to reduce their emissions if they have higher starting emissions than companies they are replacing. 

Our Scope 3 emissions arise from business travel, which remains essential to our work as global investors. A lack of low-carbon international travel options means we are not able to materially reduce these emissions – but we will continue to work on ways to make our business travel more carbon efficient. Scope 3 goals may be reinstated once lower-carbon travel options improve.

Not in our view. We have learned lessons since setting our original targets and believe our updated targets better reflect real-world company improvements. Portfolio-level footprint emissions and changes in its average carbon intensity are not directly comparable metrics. We believe a 7% reduction in intensity per year is meaningful. 

Yes. We offset all operational emissions (Scope 1, 2 and 3). This helps us to incorporate a cost of carbon into our business while supporting the transition to a carbon-constrained economy. We prioritise high-quality offsets (Gold Standard, Plan Vivo) and treat offsets as a business expense.