With an international transition to a lower-carbon economy underway, Wellington is focused on our responsibility to understand the potential effects of climate change on our clients' investment portfolios.
Climate change considerations are embedded in our environmental, social, and corporate governance (ESG) integration process. Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital -- financial, physical, and human -- is helpful in framing an investment thesis, and examining ESG issues, including climate change, gives us a more complete picture.
Our ESG Research team provides our investment professionals with proprietary ESG ratings on companies, incorporating a range of ESG factors, including climate-change topics such as greenhouse gas emissions reduction targets, renewable energy use, and water scarcity management. Our team also works closely with our industry analysts to analyze sector-specific ESG risks including climate-change implications for more carbon-intensive industries.
Engaging with portfolio companies on the impact of a changing climate to their business and strategy is a key input to the process, and climate risk is among our top 3 engagement priorities in 2018. Our ESG Research team and investors engage with hundreds of company management teams on ESG topics each year. We believe that engaging with the companies we invest in plays a critical role in helping to identify, understand, and appropriately consider ESG risks such as climate change. As part of this process, our firm speaks with companies to gauge their exposure to climate-related events, assess management's awareness of this topic, evaluate their risk-management approach, and encourage adoption of best practices. Sample engagement questions include:
- How does the board evaluate risks associated with climate change?
- Are there individuals at the company who are specifically responsible for addressing issues associated with climate change?
- What is the company doing to mitigate its own GHG emissions? Are there reduction targets and, if so, how did the company arrive at them?
- How does the company consider climate-related opportunities such as product development and innovation?
- Does the company conduct regular scenario analyses to understand the risks that climate change poses to the business?
As we continue to conduct research and develop tools to analyze climate-related risks for our client portfolios, insights gained can also be used to inform our operational risk management processes. As described previously, the Risk Management Committee (RMC) has primary responsibility for managing enterprise risk, including climate-related risks, and for evolving the firm’s risk management framework, as appropriate, to changes in the industry, our business, and the regulatory environment. It also is responsible for oversight of and coordination with the Operational Resilience Committee (ORC).
Please refer to SG 07.1b CC for a discussion of how we manage climate-related risks.