In 2017, we started developing a new tool to support the integration of climate change into investment decision-making and enable better targeted engagements. In 2018, we launched this carbon tool that allows fund managers to assess their fund’s carbon performance, carbon risk, and corresponding engagements with investee companies in a comprehensive manner. The tool also facilitates enhanced reporting to clients to demonstrate how ESG and engagement is being credibly integrated into the firm’s fund and stewardship offerings.
We decided to develop the tool in-house because we realised that most commercially available portfolio tools were focused on reporting, as opposed to investment decision-making and delivering progress in climate related engagements. We also wanted to combine carbon data from Trucost with our own internal carbon model, QESG, financial and engagement data.
Our proprietary public markets carbon analytics tool goes beyond portfolio-level aggregate statistics and focuses on identifying patterns and outliers. In particular, we look at data with various lenses to identify companies better or worse placed to deal with climate change. In particular, the carbon tool assesses and integrates the following four key elements, making it a cutting-edge approach in evaluating the impact that investment funds have on the environment:
(1) Measuring the carbon risk of an investment fund relative to its benchmark and of listed companies relative to their peers, including Scope 1, Scope 2, and Scope 3 emissions
(2) Calculating the profit at risk for an investment fund for different carbon pricing and policy scenarios
(3) Identifying companies with which carbon-focused engagement should be initiated or intensified
(4) Gauging the level of carbon risk being engaged on within portfolios – and the progress achieved.
The tool helps our fund managers to more effectively take into account information about specific carbon risk and thereby enhance their investment decisions. This helps them identify investment opportunities and threats to value, and to begin or intensify engagements that can reduce the risk of holding exposed companies.
We report using the TCFD framework. Our latest report can be viewed at https://www.hermes-investment.com/ukw/insight/corporate-news/climate-climate-related-financial-disclosures-report-2019/
We track the carbon footprint and weighted average carbon intensity (carbon emissions divided by AUM) of our equity and credit portfolios. In addition, we compare our equity WACI with the MSCI world index. The analysis includes scope 1 and 2 emissions. Despite being backward looking data, this provides a good proxy for assessing the exposure of our assets to carbon risk. We use the market capitalization ownership and enterprise value method for calculating the carbon footprint of our equity and credit assets under management.
Our carbon tool also reveals – most importantly – that the concentration of emissions in a small number of companies makes engagement potentially very powerful. This gives a lot of leverage to push companies for better carbon performance, and more generally a coherent climate change strategy.
In our real estate funds, we mostly own and manage assets directly, and since 2006 we have had carbon emission reductions targets for those assets where we have direct management control of our investment. We have both long term targets to reduce our absolute (tCO2) and relative to area (tCO2/m2) and operational targets to reduce by 5% year-on-year the absolute carbon emissions (tCO2) of our standing portfolio and our relative energy consumption (kWh/m2).
We have an in-house energy management and data collection system based on the collection of operational data. Since 2007, we have reported publicly our performance against these targets in our annual responsible property investment report.
In 2006, we set a target to reduce the carbon emissions from our Real Estate portfolio by 40% by 2020. By the end of 2018 we had achieved but also beat this target by 2.59%, despite there being an expansion of the portfolio from 105 to 183 buildings.