We identify, assess and manage material climate-related risks through the processes described in SG 01.10 CC, 07.6 CC, 07.7 CC, 13.4 CC and 14.6 CC. For example, our investment screening and company engagement guides us to sectors and companies which are aligning their businesses with the transition needed to limit global warming to well below 2 degrees. Aligned companies are better positioned than non-aligned companies to manage many climate-related risks, such as the risk of introduction or increase in carbon pricing. However, the effects of climate change will be felt across the economy and society. Higher global warming threatens to disrupt trade and financial markets and carries significant risk of loss to all investment portfolios.
The work of our ethics research team monitors developments in:
- scientific understanding of the rate and impacts of global warming
- domestic and international climate policy and regulation
- technological innovation in climate mitigation and adaptation.
Developments in these areas are factored into ongoing review of our ethical screening frameworks for different industry sectors. Reviews consider direct and indirect emissions (scopes 1, 2 and 3) for the sector; susceptibility to the impacts of global warming; and facilitation of climate action and inaction. Climate risk is investigated in more detail for high risk/opportunity sectors, including energy, food, transport, real estate and banking. Banking is assessed to be high risk because of the huge shifts in capital needed for climate change mitigation and adaptation, and the risks of climate harm from bank lending which is not aligned with the 2 degree transition.
As an example of this process, our periodic ethical review of a carbon intensive sector like the energy sector takes into account changes in renewable energy and energy efficiency and storage technologies and their social and environmental impacts; changes in levels of atmospheric carbon; changes in scientific understanding of the pace, extent and impacts of global warming; changes in energy infrastructure such as the grid; and changes in energy market supply and demand. Consequential changes to our ethical framework for the energy sector and engagement and advocacy objectives are prepared by the ethics research team and reviewed and approved by the Ethical Advisory Group (EAG). These changes may include additional investment exclusions or inclusions (e.g. a change in our screening of biofuels), or a change in our engagement and advocacy objectives and priorities for companies in the sector or related sectors. The changes to our energy sector framework may then have flow on effects to other frameworks (e.g. to the way we assess the 2 degree alignment of banks' lending under our banking framework).
We use climate performance data from a variety of sources to assess the alignment of company businesses with a 2-degree transition, which in turn is a key component of our investment screening and engagement and advocacy.