Within our investment time horizon, climate risks affect all sectors and subsectors, some more directly than others. As an asset manager investing in global equities, we use a combination of ESG integration and proactive engagement to address this challenge. We incorporate climate risks and opportunities into our stock selection, portfolio construction and shareholder engagements. There are also emerging risk and opportunity dimensions, as people and planet cope with the changes. We pursue active engagement across all sectors to encourage the transition to a low(er) carbon economy.
(1) Concerns regarding stranded assets have much broader implications than the list of 200 hydrocarbon producers targeted by activists. Segments seeing direct impact include Energy services companies and electric utilities whose businesses could quickly become obsolete. We extrapolate further to industries that will be deeply affected by climate change but perhaps not cut to the core, for example: the transport and shipping sectors, energy-intensive chemicals and fertilizers, livestock agriculture, etc. If carbon were priced to reflect its true cost, we would expect to see follow-on effects throughout the economy, with the most hydrocarbon-intensive products and firms losing to more efficient alternatives.
(2) Changed economics of the business due to changes in costs, market demand, pricing power: These changes could come from regulatory changes, weather related disruptions, changes in consumer preference, social license to operate, etc. We assess the probability of these changes and their impact on the company's operations, fundamentals and valuation. On the revenue side, total demand as well as pricing power could be different as consumer preference shifts and disruptive new technologies emerge.
(3) Carbon risk and opportunity in sectors that are not traditionally carbon intensive: Examples of this are sectors like Financials and Healthcare that could face risks from their current operations if they continue with business as usual. Increasing lending to carbon intensive segments or businesses create the potential for non-performing assets, mispriced loans and less diversified portfolios as climate risks affect many different types of businesses. Healthcare challenges of air quality and natural disasters may not be fully anticipated.
(4) Sector level assessment: At the sector level, we identify risk and opportunity, and select the appropriate approach:
Risks we want to avoid (where the risks are core to the business model of the company), e.g. coal or tar sands producing companies. Companies with climate risk exposure, but where products or practices can be improved through engagement, e.g. best in class companies with modest climate-risk exposure.
Companies with contingent risks, that are traditionally not viewed as high risk, e.g. the financial sector which can also create major systemic risk for investors through their activities We seek investments in companies whose products and services are part of the solution to climate risks, provided they meet our financial quality, valuation and portfolio requirements.
(5) Seeking Opportunity everywhere: We look for providers of and leaders in energy efficiency and technological solutions throughout the economy's value chain, which will benefit competitively from the transition to a low-carbon economy.