LPPI is committed to the integration of material ESG considerations within investment decision-making. We have identified climate change as a material, systemic and idiosyncratic risk and have begun to identify and consider transition and physical risks as part of our investment procedures.
Internal definitions of transition and physical climate risks based on Bank of England, TCFD and other industry reports have been produced and presented to our Investment Committee. We recognise transition risk will primarily impact transport, buildings and industries with high carbon emissions, and will also arise where alternative technologies exist and where there are existing regulatory mechanisms. Physical risks arise from where assets are located and on the stability of the markets they serve. They feature flooding and the consequences of extremes of temperature and are lower (in the short term) than within medium and long term scenarios,
Our overall approach is to integrate climate change consciousness into all our investment products, reflecting that climate change will affect all markets, sectors and asset classes and cannot be avoided through tilting, exclusion or sectoral divestment, though there are some obvious areas facing a more significant impact. The identification of sectors most likely to be negatively impacted by climate change led us to focus first on the traditional energy sector and specifically our portfolio's exposure to extractive fossil fuels.
For our Global Listed Equities Fund we have placed restrictions on investments in thermal coal and imposed qualitative conditions on investments in extractive fossil fuel companies, requiring managers to be able to evidence companies are demonstrably planning for the global transition to a low carbon economy and have a strong strategy in place to manage the physical, regulatory and transition risks faced from climate change. We are significantly underweight in Energy versus the benchmark.
We have introduced an approach to extractive fossil fuel companies within our private market asset classes which excludes new investments in thermal coal, favours a progressive reduction in existing exposure and requires managers to provide reporting on remaining exposure to fossil fuel extraction.
For direct investments in real assets (real estate and infrastructure) our approach to climate change risk management focuses on detailed context specific due diligence which incorporates physical, transition and regulatory dimensions as part of the consideration of location, market, sector, product and company fundamentals.
Within Real Estate our Investment Adviser is including green lease clauses within new leases to increase the number of properties reported upon and is also developing a long term work-plan to bring the portfolio up to the energy efficiency standards expected to be mandatory by 2030.