08 Dec 2020

Investing in the 1.5°C scenario with Paris-aligned portfolios

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FOR QUALIFIED INVESTORS ONLY– This document is reserved and must be given in Switzerland exclusively to Qualified Investors as defined by the Swiss Collective Investment Scheme Act of 23 June 2006 (as amended from time to time, CISA).

What does it mean to align your business with a 1.5°C scenario?

The Paris Agreement provided for the limiting of global warming to 1.5°C above the pre-industrial level, with an absolute maximum of 2°C. As market participants increasingly adopt the ambitious 1.5°C target as their central scenario, more and more companies must urgently address the logistics of putting this major change into effect.

If you’re an asset manager, an insurer, or an energy provider, the questions are the same: how can you halve greenhouse gas emissions by 2030? How do you move on to achieve ‘net zero’ by 2050? And just as importantly, what steps can you take to bring investors on the journey? Or, as an investor, how can you encourage your portfolio companies to take that journey themselves?

On 18 November 2020, Lyxor ETF sought to answer these questions. In a panel with some of Europe’s top asset managers, insurers and energy providers, we debated this central issue of climate investing in 2020.

Looking for a replay? Scroll down to the bottom of the article to watch the video. Otherwise, keep reading to catch up on some highlights.

Panellists

Dr. Marc-Gregor Czaja, CFA – Global Head of Equities and Derivatives - Investment Strategy (Allianz Investment Management)

Erick Decker – CIO Southern Europe and New Markets & Head Responsible Investment (AXA)

François Millet – Head of Strategy, ESG & Innovation (Lyxor ETF)

John MacArthur – Vice President Group Carbon (Shell)

Liza Jonson – Chief Executive Officer (Swedbank Robur)

Moderated by Matthieu Mouly – Chief Client Officer at Lyxor ETF

The following excerpts have been edited for clarity.

Matthieu: How far has carbon reporting come, Marc-Gregor? Is It still a bit ‘wild west’ out there?

Marc-Gregor:

“My assessment is that we are heading in the right direction but we’re not there yet. Carbon reporting is past the stage of the ‘wild west’, but it’s still not a completely established business. Reporting on client carbon data is still voluntary, and has some holes – especially for forward-looking data.

If we look at global large-cap companies: 10% have set SBTs [Science Based Targets], 10% have other types of quantitative targets, and another 30% have what I call ‘qualitative statements’. So, around 50% of large-cap companies say something about forward looking plans – that’s simply not enough. Forward-looking data matters more to investors than backward-looking carbon data.

The progress is there. The Greenhouse Gas Protocol is a good basis. The Task Force for Climate-related Financial Disclosures (TCFD) is excellent. The UK has recently announced mandatory reporting according to TCFD standards – that’s what we need, to move firmly from wild west into established territory.”

Matthieu: Erick, how does AXA use the TCFD recommendation framework and Science Based Targets?

Erick:

“We are all facing the same question – how to get information we can compare across corporates, and how to use that information to make investment decisions. At AXA, we merge the TCFD recommendations with the obligations of Article 173* in France.

What we must describe in the TCFD are the strategy, the risks, the KPIs [Key Performance Indicators] and the reporting framework. What is most important? For us, the KPIs.

Looking at ex post carbon footprint doesn’t really help in terms of investment strategy and where you need to go to meet a net zero objective. You need forward-looking data, forward-looking indicators, and forward-looking commitments.

Everything starts with the corporates. If there are no commitments, it’s hard to have a forward-looking KPI. KPIs must be calculated using information that corporates can provide.

We like SBTi [Science Based Targets initiative], and we would like as many companies as possible within the SBTi framework – a convergence of providers using that kind of data to provide some kind of KPI, rating, or message for investors like us to understand whether specific companies are on a transition path to net zero.”

Matthieu: Liza, at Swedbank Robur you are well ahead of the curve, targeting Paris alignment by 2025 and net zero by 2040. How have you approached this challenge?

Liza:

“I agree with Erick – it’s all about having forward-looking data. Our approach at Swedbank Robur is to have these ambitious strategies and targets, based on a central thesis that climate change poses the greatest financial risk to the global economy. We are one of the largest asset managers in the Nordic region and we have set a clear mission – if you need to align an asset manager you need to have the PMs [Portfolio Managers] and entire company behind you to make this huge shift.

I have spent the last three weeks with each of Swedbank’s portfolio managers, the head of investment and head of sustainability. Each of the portfolio managers has presented their strategy for being Paris-aligned by 2025.

It won’t be an easy step. We have been disclosing CO2 footprint for several years, but as the others have mentioned, that’s in the past. It doesn’t measure the future path, nor Scope 3 and 4** emissions.

In future, we need metrics from companies: sustainability reports and Science Based Targets. If we don’t get these, those companies won’t be investable for us. We can’t assess your company unless we know which path you are on, or heading for.

The TCFD framework is great because it brings attention to the four components of climate reporting. To make it relevant, we really need the SBTs, where we see you are really committed to one path.”

These are edited highlights of the panel discussion. You can listen to the full debate, including speakers from Shell and Lyxor ETF, by watching the video below.

*Article 173-VI of the French Law on Energy Transition for Green Growth came into effect in January 2016, and covers ambitious targets around GHG emissions reductions, energy consumption and share of fossil fuels versus renewables
**’Scope 4 emissions’ is a proposed term for ‘avoided emissions’.

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