We actively consider climate-related risks and acknowledge that the escalating nature of climate change is impacting the time horizons over which many of these risks are becoming financially material. Where any risk is deemed to be material, it is factored into investment decision making.
Transition risks centre around regulatory and policy changes; technological developments; and changing market dynamics such as consumer preferences as the global economy moves to net zero. The transition pathway (orderly vs disorderly) also needs to be considered as this is likely to result in stronger policy responses being enacted rapidly, and market forces reacting accordingly. As such, we monitor policy and regulatory developments around the world.
Further, we monitor changing market dynamics, such as demand changing in response to carbon pricing elevating costs, or consumers actively seeking climate-friendly products. Changes in both regulations and market dynamics will increase the likelihood of stranded assets; and we actively monitor this risk.
Transition risks are particularly relevant to companies and issuers from jurisdictions that are more carbon-intensive and/or at risk of increased carbon-related regulation. Companies with higher emissions, for example energy or airline companies, have a greater exposure to regulatory and litigation risks due to having direct liabilities. They are most affected by mechanisms such carbon taxes and, as they have direct operational control of emissions, any harm caused by their business can be more readily traced.
The physical impacts of climate change can have many and varied direct implications for both equity and debt investments. Extreme weather events can disrupt operations and thus destroy value - cyclones may halt mining production, floods can cut off rail supply routes. Longer term shifts in the climate - such as permanent changes in rainfall patterns and increased temperatures - can often present risks that are more challenging to mitigate against. We continue to strive to better understand country/regional and asset-level physical risk exposure. For example, our dedicated ESG research team Regnan has been working with a number of our investment teams to better understand physical related risks. Our Fixed Income team’s focus this year was on water-related risk, while our Listed Property team enhanced their framework to assess company and asset level resilience to extreme weather events.
Our climate-related research (e.g. changing policy, technology and consumer preferences) also informs portfolio construction, asset allocation (such as Australia vs international, or DM vs EM exposures) and product development processes (e.g. introducing thematic tilts in equity portfolios to renewable energy and sustainable building or active allocations to green and sustainable bonds across fixed income funds).
Further to the ESG integration undertaken across all our asset classes and strategies, we also offer low-carbon and impact investment products. Within these products, a greater emphasis is placed on identifying climate opportunities as well as companies whose products and services positively contribute to the transition or adaptation efforts.
Some of these opportunities and climate-positive activities include energy efficiency initiatives; R&D into lower carbon products; renewable energy; water security; low carbon transport; and sustainability-linked lending.