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Climate change statement
Our goal is to achieve long-term capital growth for our clients by investing in high-quality companies that contribute to, and benefit from, sustainable development. Understanding how climate change will impact our investments is fundamental to this goal.
Climate change and our investment philosophy
Our goal is to achieve long-term capital growth for our clients by investing in high-quality companies that contribute to, and benefit from, sustainable development. Understanding how climate change will impact our investments is fundamental to this goal. This includes:
- Recognising the risks – and opportunities – that will arise from the social and economic adjustments needed in an increasingly carbon-constrained world, and the unavoidable impacts that a more extreme and chaotic climate will have.
- Investing in those companies that will prosper by supporting society through these changes and avoiding those who face unacceptable risks.
- Understanding how climate change interacts with other sustainable development opportunities and challenges, and what this means for the companies we invest in.
We believe there are opportunities for companies to benefit from these shifts in all industries and countries. Many of the companies we invest in are exposed to the growing demand for more resilient products and services that drive lower carbon footprints across the economy. We have assessed that more than 60% of the companies we invest in (at the end of 2024) are contributing to climate solutions, and disclose these for each company on Portfolio Explorer.
How the companies we invest in contribute to climate solutions
Climate change solutions
(number of contributions made by the companies to each solution)
Managing risk is as important as seeking opportunities. For example, we do not invest in fossil fuel companies in part because the energy transition puts their shareholders’ capital at risk of permanent loss.
Given the scale of the changes required, we also need to be mindful of companies’ capacity to evolve. We believe that focusing on the quality of a company’s management, its franchise and its financials is the best way to manage these risks. We believe that businesses with strong balance sheets led by long-term stewards in growing industries have the greatest ability to adapt as the economy, society and the climate change in the years and decades ahead.
Our climate commitments, targets and aspirations
We will:
- Allocate capital to high-quality companies that are developing and implementing solutions to alleviate climate change and biodiversity loss, while not investing in fossil fuel companies1.
- Provide full transparency on our investments and map them to Project Drawdown’s climate change solutions on Portfolio Explorer, illustrating how companies are contributing to reducing emissions and helping to inform and focus our engagement efforts2.
- Encourage companies to take positive action to reduce emissions and to use their influence to drive change across their value chains. We will also encourage them to ensure equitable treatment of all their stakeholders during the transition to a carbon-constrained economy3.
- Reduce emissions in our own operations and offset whatever emissions we cannot remove.
In 2022, we released our first climate report. This set a baseline for our portfolio and operational emissions and set the following four targets for improvement. We also signed up to the Net Zero Asset Managers initiative (NZAMi). Further information on our progress on these targets can be found in our Annual Review 2024.
Our climate aspirations for 2030
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 intensity4 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.
Climate change statement Q&A
What are the key climate-related risks in the team's portfolios?
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 we believe 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.
How do you identify these risks?
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.
How do you manage these risks?
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.
What are the differences between your old and new targets?
The following table summarises the key differences following our review.
Targets set in 2022 | Changes to targets for 2030 | Rationale for change |
---|---|---|
100% of investee companies disclosing emissions by the end of 2025. | 100% will be disclosing their Scope 1 & 25 emissions. | While we have seen a significant increase in the number of companies disclosing emissions, the improvement has stalled over the last two years. We will continue to ask companies to disclose their emissions but there are some companies whose size, industry or individual circumstances where we believe that our engagements should focus on other areas. We expect regulatory change to close the remaining disclosure gap. |
80% of financed emissions covered by targets by 2025 and 100% by 2030. | 80% will have emission targets. | The original target (the first part of which we met in 2024) related to the proportion of portfolio financed emissions. This percentage can change as the composition of our funds evolves – even if the number of companies setting targets remains the same. |
50% reduction in financed emissions by 2030 and net zero by 2050. | On average, the companies we invest in will have reduced their carbon intensity6 by 7% per annum over five years. | Total financed emissions are influenced by factors that are unrelated to the emissions performance of the companies we currently invest in. Our new focus is on changes in the real-world emissions performance of the companies whose shares we own at any given time. |
Targeting net-zero Scope 1, 2, & 3 (business travel) by 2030. | Our operational emissions will be net-zero (Scope 1 & 2). | A lack of low-emission alternatives for air travel means that Scope 35 emissions are, at present, less controllable than we had hoped they would be. In addition, the updated target is consistent with the target set by our parent company, First Sentier Investors. |
Why shift from portfolio footprint to emissions intensity targets?
Portfolio-level footprint emissions are influenced by fund flows and portfolio turnover. For example, only 35% of the companies whose shares we held in 20237 were held by our strategies in 2019, when we set our baseline for comparison. That means subsequent comparisons primarily reflect changes in the composition of our funds and strategies rather than actual changes in emissions performance of companies.
Instead, we now track changes the emissions intensity of our current holdings, irrespective of when we bought them, showing whether their carbon efficiency is improving.
How do you calculate carbon intensity?
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.
Why measure emissions intensity rather than absolute emissions?
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.
Why do you no longer measure portfolio emissions relative to a historic baseline?
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.
Why drop the target for Scope 3 emissions?
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.
Are these new targets less ambitious?
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.
Do you use offsets?
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.
Investment terms
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Important Information
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG) factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors, RQI Investors and Igneo Infrastructure Partners, all of which are part of the First Sentier Investors group.
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