Addressing climate change risks should not simply be about measuring carbon emissions, but about future-proofing business models for a low-carbon economy, Aberdeen Standard Investments’ Danielle Welsh-Rose says.
After a summer of devastating bushfires in Australia, public opinion on climate change seems to have shifted.
Last month, an Australian National University survey showed 49.7 per cent of people reported the environment as one of the top two issues facing Australia in January 2020, compared to 41.5 per cent of respondents in October 2019, before the full brunt of the bushfires descended upon Australia.
Perhaps the result is unsurprising, considering the survey also found 80 per cent of Australians have been directly or indirectly affected by the bushfires.
Aberdeen Standard Investments (ASI) has seen a similar shift in client mentality in its retail business, Danielle Welsh-Rose, Environmental, Social and Governance (ESG) Investment Director, Asia-Pacific at ASI, says.
“Anecdotally, we have noticed that there have been these conversations that aren’t necessarily driven just by us,” Welsh-Rose says in an interview with [i3] Insights.
“The advisers and adviser bodies are getting a lot more enquiries from clients during and after this bushfire season, asking: ‘Do you have options that I can invest in that are more sustainable or in some way are dealing with climate change?’”
On the institutional side, perhaps this shift in attitudes has been underway for longer, but more recently we’ve seen some of the largest players, including BlackRock and State Street, come out with initiatives to address the risks from climate change, partly through divestments.
It seems the climate debate has gained a sense of urgency.
But the debate has also changed in nature. Whereas in the past it focused largely on the measurement of carbon intensity, it has now shifted towards more proactive discussions on how companies are preparing for the transition to a low-carbon economy.
“I think the really interesting part is not so much the exclusions or understanding the carbon footprint of a company, but it is more when you look at company management and their business strategies. Are they thinking about what this new world looks like? Are they positioned to succeed in this new world?” Welsh-Rose says.
It is not about: ‘Are you a coal miner or are you not a coal miner?’ If you are a Rio Tinto or BHP Billiton, then have you modeled what your business will look like under these different policy scenarios? Do you have a plan to make sure you are fit for purpose in the future?
“It is not about: ‘Are you a coal miner or are you not a coal miner?’ If you are a Rio Tinto or BHP Billiton, then have you modeled what your business will look like under these different policy scenarios?
“Have you looked at the physical climate impact of different temperature scenarios and do you have a plan to make sure you are fit for purpose in the future? That is increasingly a discussion that is taking place in this space, which is one of the reasons we have been developing new products looking at alignment to the transition to a clean economy,” she says.
Although the ecological impact of climate change is important, the investment industry has become increasingly aware there are tangible financial consequences attached to these risks.
The financial viability of business models that have been taken for granted for many decades has come under review and Welsh-Rose says these risks should no longer be regarded as an optional part of company analysis.
“I come from the perspective that if you are not looking at all of the material risks in a company or asset that you are investing in, then you may be breaching your fiduciary duty,” she says.
“Depending on the industry sector or a company’s regional base, there are ESG issues that are material to the companies you are investing in. For example, if you are investing in the energy and resources sector and you are not looking at climate change, then that is a huge risk, because it is a material risk for companies in that sector.”
Before joining ASI in September last year, Welsh-Rose was Head of ESG at Victorian Funds Management Corporation, the asset manager for the state of Victoria.
Moving from an asset owner to an asset management organisation means Welsh-Rose has not just one but many clients with very different needs to think about. Yet, she is also backed by a much larger team.
ASI has over 20 dedicated ESG specialists in the company who think strategically about these issues, plus an additional more than 30 ESG specialists who are embedded in the various asset class teams globally.
In addition, the company has a research institute that provides insights on a variety of economic topics, including ESG.
And the members of this institute don’t tend to take the middle ground in expressing their opinions.
If you are not looking at all of the material risks in a company or asset that you are investing in, then you may be breaching your fiduciary duty
In a report from January, Jeremy Lawson, Chief Economist and Head of the Aberdeen Standard Investments Research Institute, takes a pretty frank look at how Australian policy towards climate change stacks up against other developed nations.
His assessment leaves little room for interpretation.
“The policies aimed at reducing emissions are inefficient, underlined by the failure to impose a carbon price through a tax or emissions trading scheme. And climate policy has become a political football, reducing the certainty investors need to plan and allocate capital to low-carbon projects,” Lawson writes.
“When it comes to climate policy, the country remains caught between its economic past and its economic future.”
This lack of policy action is especially baffling as Australia is on the forefront of climate change-related disasters, he writes.
“As the bushfires have so tragically demonstrated, Australia is one of the most exposed developed countries in the world to the ravages of climate change,” he says.
Asked about the no-holds-barred assessment of her colleague, Welsh-Rose laughs. “Jeremy is actually an Australian, so he is perfectly qualified to be critical,” she says.
But she is equally concerned about the lack of policy response in Australia and the uncertainty this creates for businesses, a situation which ultimately could see the country become an economic laggard.
As an investor, I look at this country and see industries that need to be phased out. Of course, this needs to be done in a way that is fair for everyone, but if we’re constantly trying to protect these industries that don’t have a future then, yes, I think we are at a real risk of being left behind
“As an investor, I look at this country and see industries that need to be phased out,” she says.
“Of course, this needs to be done in a way that is fair for everyone, but if we’re constantly trying to protect these industries that don’t have a future and we are not spending our time and money looking to where we need to be, then, yes, I think we are at a real risk of being left behind.
“For example, if you are a company that is thinking about solutions to these [climate change] problems, then why would you start here in Australia? There are better opportunities in other countries where you get support and where there are workers with the skills that you need and markets to sell into. So yes, it is a risk.”
But for Aberdeen Standard Investments to stand firm on climate change, it needs to walk the walk too, not just talk the talk. So the company has set itself some ambitious targets, including becoming carbon neutral this year.
“We are very aware that you can’t be out there asking your investee companies to do something that you are not doing yourself,” Welsh-Rose says.
“If you really think that a good ESG approach leads to better results, then obviously you can do some alpha capture yourself. Part of this, for us, is that we will be carbon neutral by the end of this year globally.
“We start with reducing carbon emissions as much as we can by focusing on the purchase of electricity from renewable energy sources. The rest, where we can’t do that, we offset. The offset projects were something that all the staff voted on.”
Sustainable Development Goals
ASI is advancing its thinking of how it can address the various sustainable development goals (SDG) set by the United Nations in its investment processes and products. This is not an easy task, Welsh-Rose says, and there are plenty of examples of how not to do it.
“I’ve heard a lot of managers and investors talking about integrating the UN Sustainable Development Goals, but I think there is still a lot of greenwashing going on,” she says.
“This is particularly dangerous on the sustainable development goal front because the whole point of these goals is to get additional capital flows to solve particular targets within a certain time frame.
“It should not be about mapping the portfolio and understanding that you have companies that already do some work around water sanitisation, that is not what the SDGs are about. It is about intentionally allocating additional capital to solve particular intractable problems.”
This article is paid for by Aberdeen Standard Investments. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.