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Generation Investment Management LLP

PRI reporting framework 2020

You are in Strategy and Governance » ESG issues in asset allocation

ESG issues in asset allocation

SG 13. ESG issues in strategic asset allocation

13.1. Indicate whether the organisation carries out scenario analysis and/or modelling, and if it does, provide a description of the scenario analysis (by asset class, sector, strategic asset allocation, etc.).

Describe At the sector level (Roadmap part of our process). We are currently working with a partner to undertake scenario modelling at the portfolio level. See further detail in comments to 13.3.

13.2. Indicate if your organisation considers ESG issues in strategic asset allocation and/or allocation of assets between sectors or geographic markets.

We do the following

13.3. Additional information. [OPTIONAL]

Explicit modelling scenarios have historically been part of our process. The scenario assessments we do occur during the Roadmap stage, where we seek to understand the long-term dynamics that are likely to impact company value in the future. We believe climate change to be a significant source of risks and opportunities and have sought to structure our portfolios to be well-positioned for this transition. In this way, carbon and environmental intensity of industries and businesses have been gating factors to companies being accepted for coverage, across all our strategies. Therefore rather than model high-level impacts on the portfolio of, for example, a 2 degree world, at the company level where it is material, analysts will model the cost curves of, for example, battery storage, or other aspects that relate to our view of the carbon transition.

We are currently conducting an assessment with an external partner that includes modelling at the portfolio level. This includes an analysis of implied temperature alignment and the value at risk (or opportunity) under different climate scenarios for each of the sectors we cover. This work focuses initially on transition risk, but we expect to add physical risk to this in future.


SG 13 CC.

13.4 CC. Describe how your organisation is using scenario analysis to manage climate-related risks and opportunities, including how the analysis has been interpreted, its results, and any future plans.

Describe

We have always incorporated transition and physical risk into our investment practice. The modelling work currently being conducted is an opportunity to explore a different methodology and work with external experts. Of course, we hope this generates interesting insights – if so, these lessons will naturally be reflected in our investment practice in future.

13.5 CC. Indicate who uses this analysis.

specify

          All the investment team.
        

13.6 CC. Indicate whether your organisation has evaluated the potential impact of climate-related risks, beyond the investment time horizon, on its investment strategy.

Describe

Our investment approach is to take a long-term view. Our valuation model is based on a 40 year time horizon.

13.7 CC. Indicate whether a range of climate scenarios is used.

13.8 CC. Indicate the climate scenarios your organisation uses.

Provider
Scenario used
IEA
IEA
IEA
IEA
IEA
IRENA
Greenpeace
Institute for Sustainable Development
Bloomberg
IPCC
IPCC
IPCC
IPCC
Other

Other (1) please specify:

          IPCC 1.5
        
Other
Other

SG 14. Long term investment risks and opportunity

14.1. Some investment risks and opportunities arise as a result of long term trends. Indicate which of the following are considered.

14.2. Indicate which of the following activities you have undertaken to respond to climate change risk and opportunity

Specify the AUM invested in low carbon and climate resilient portfolios, funds, strategies or asset classes.

Total AUM
trillions billions millions thousands hundreds
Currency
Assets in USD
trillions billions millions thousands hundreds

Specify the framework or taxonomy used.

We believe 100% of our AUM to be in climate resilient portfolios. As discussed, our asset allocation strategy is based on selecting businesses we believe are well-positioned over the long-term for the risks and opportunities posed by climate change. 

14.3. Indicate which of the following tools the organisation uses to manage climate-related risks and opportunities.

other description

          Our investment process is our primary tool in managing climate-related risks and opportunities.
        

14.4. If you selected disclosure on emissions risks, list any specific climate related disclosure tools or frameworks that you used.

We disclose climate related disclosures as part of our regular reporting to our clients. For our listed equity strategies, this includes analysis prepared by Trucost on our carbon footprints relative to the benchmark. For our private strategy, we work with Environmental Capital Group to provide impact reporting to our clients. 

14.5. Additional information [Optional]

We use many of these scenarios in our research as well as in our external publications - our annual sustainability trends report, for instance, will typically include scenarios from the IEA, BNEF and IPCC among many others.

The focus of our ongoing assessment into transition risk and opportunity IN OUR PORTFOLIO compares an extended NDC scenario with a 1.5 scenario based on ADVANCE (see citations for Luderer et al. in the IPCC 1.5 report) and REMIND (also described in IPCC 1.5 report).

(This exercise tests the impact of a high ambition outcome. For consideration of physical risk we would explore a more pessimistic outcome for the climate).

In addition to scenarios focused on energy systems, we also draw on modelling work that assesses food-land systems and nature based solutions potential to contribute to high ambition sustainability outcomes (such as the work undertaken in support of FOLU and Eat-Lancet and the IPCC land report).


SG 14 CC.

14.6 CC. Provide further details on the key metric(s) used to assess climate-related risks and opportunities.

Metric Type
Coverage
Purpose
Metric Unit
Metric Methodology
Carbon footprint (scope 1 and 2)
          Client reporting on listed strategies
        
          CO2 equivalent/$mn revenues
        
          Trucost model or company disclosure
        
Portfolio carbon footprint
          Client reporting on listed strategies
        
          CO2 equivalent/$mn revenues
        
          Trucost model or company disclosure
        
Carbon intensity
          Client reporting on listed strategies
        
          CO2 equivalent/$mn revenues
        
          Trucost model or company disclosure
        
Exposure to carbon-related assets
          Ongoing work into transition risk and opportunity
        
          Case-by-case
        
          In-house methodology
        
Other emissions metrics
          Scope 3 Emissions reported to listed equity clients
        
          CO2 equivalent/$mn revenues
        
          In-house methodology
        

14.8 CC. Indicate whether climate-related risks are integrated into overall risk management and explain the risk management processes used for identifying, assessing and managing climate-related risks.

Please describe

The investment philosophy and process we have described is the primary way that we mitigate climate-related risks across the Firm. The Firm is built on the premise that climate change will be a significant driver of economies and source of both risks and opportunities. In this way, it is built into the fabric of the firm and not a separate agenda topic, or applied to a separate proportion of our assets.

However, we do also embed climate risks into the firm's overall risk management framework which our senior partner and management committee has ultimate responsibility for. Exercise of risk oversight is through a Risk Oversight Group (ROG), which reports to the Management Committee. Generation's risk management framework and governance structure are intended to provide comprehensive controls and ongoing identification and management of its major risks. The ROG meets regularly to review internal controls, risk management processes, regulatory compliance and relevant reports received from Generation's advisors and auditors. While climate change risk is not considered a major risk given that it is implicitly managed by our overall strategy execution, The ROG will also review data on the firm's carbon footprint and carbon offsets.

 

14.9 CC. Indicate whether your organisation, and/or external investment manager or service providers acting on your behalf, undertake active ownership activities to encourage TCFD adoption.

Please describe

Climate action is an engagement priority across all the companies on our Global and Asia Equity Focus Lists. This includes progress on GHG emissions disclosure, adoption of science based targets and disclosure of (and strategic responses to) climate risk (and opportunity) in line with TCFD.

Analysts are responsible for leading the direct engagement with the companies under their coverage. We do not outsource this to a third party. Based on their knowledge and research on each company and how advanced the company is in terms of climate awareness and action, analysts engage and encourage companies to consider reporting against the TCFD framework if they are not already, or enhancing the reporting they already provide.

SBT and TCFD are both pillars of our climate engagement strategy. There are of course important linkages between them. On balance, in our engagement work over the past year we have placed more emphasis on the importance of adopting science based targets than we have on incorporating TCFD recommendations.


SG 15. Allocation of assets to environmental and social themed areas

15.1. Indicate if your organisation allocates assets to, or manages, funds based on specific environmental and social themed areas.

15.2. Indicate the percentage of your total AUM invested in environmental and social themed areas.

6 %

15.3. Specify which thematic area(s) you invest in, indicate the percentage of your AUM in the particular asset class and provide a brief description.

Area

          All of the above.
        

Asset class invested

6 Percentage of AUM (+/-5%) per asset class invested in the area

Brief description and measures of investment

Our private equity funds could be described as an environmental and socially themed strategy. They seek to identify sustainable solutions businesses and impact is assessed against material sustainability factors. We believe all sectors are ripe for disruption, but focus on transport & supply chain, agriculture & food, building & energy, enterprise & industrial, and consumer & health. We also do a full sustainability assessment and consider impact as a whole so that, for example, impact on one area is not at the expense of a negative impact on another.

15.4. Please attach any supporting information you wish to include. [OPTIONAL]



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