Climate-related risks are fully integrated into overall risk management but at the same time we ensure that all of our investment staff are empowered to identify, assess and manage climate-related risks on an individual issuer basis. We believe that this top-down/bottom-up combination creates the most constructive and collaborative environment within which to manage these risks.
From a bottom-up perspective, all of our investment analysts and portfolio managers are equipped with the training and the on-desk tools to identify climate-related risks in their investment analysis, because the greatest risk to our business is a material destruction of value in the underlying companies to which we allocate our clients’ capital. We have been integrating broad ESG analysis across all of our investment teams since 2012 but have developed specific tools more recently to address climate risk. These include our Climate Risk Tool which aims to highlight portfolio companies whose value chains are exposed to the low carbon transition and to the physical risks of climate change. As with any investment or risk metric, the absolute and relative carbon numbers are not an end in themselves; they are a stimulus for further analysis. We have also developed a number of Macro Risk tools to help our investment professionals understand systemic climate risk more fully, particularly with regard to the impact on sovereigns.
The other vital risk tool for our analysts and portfolio managers is engagement: we engage with companies and sovereigns to understand their climate-related risks more fully and where we can to drive positive change. The overarching objective is that every analyst and portfolio manager integrates climate risk fully in the investment decision-making.
From the top-down, we have a number of key structures in place. At a Board level, the Sustainability, Social and Ethics Committee has responsibility for all aspects of responsible investing. Within the Executive Committee, the Internal Governance Committee is the custodian of Ninety One’s approach to Stewardship. The Committee ultimately bears the responsibility for the application of Ninety One’s across all of its investments.
However, the main oversight function for climate-related risk in investment portfolios sits with our independent Risk team. Along with conventional measures of risk in portfolios such as liquidity, volatility and tracking error, the Risk team can monitor the absolute and relative carbon intensity of portfolios. While we recognise that these carbon intensity numbers are subject to data variability, consistency and coverage, they do enable the Risk team to prioritise and flag outliers and issuers for further analysis and interrogation. We believe that it is important that oversight and management of climate-related risk sits within the Risk team – this ensures that it is in the heart of the investment function and is considered alongside mainstream financial risk considerations.