Climate change and investment

By: Rebecca Thomas

It was around this time last year that I went to the movies and saw Vice, starring one of my favourite actors Christian Bale portraying Dick Cheney’s rise to Vice President under the George W Bush administration.

There was a short scene in the film that just blew me away. It was when a public focus group was asked the question: “‘Global warming’ sounds bad doesn’t it, how do you feel about the term ‘climate change’?” Everyone agreed it sounded much less scary and the next day it was adopted all over the world through a brilliant PR marketing campaign.

Call it what you like but the recent Australian bush fires have put the topic of climate change front and centre around the world. The debate on whether it’s real or not has come and gone, the key question now is what are we all going to do about it?

It’s a question that should matter to anyone who is an investor.

The United Nations is concerned that climate change could have a significant impact on financial markets and also the value of stocks you are invested in. The longer the world goes without a safe trajectory on climate change, the greater the risks for investors of an abrupt policy response.

Financial markets look forward and price in future events, which means that share prices are likely to react before the real impacts of climate change are evident.

So, it should be of great public interest that the New Zealand Government, via the Ministry of Business, Innovation and Employment (MBIE), and the Ministry for the Environment put out a discussion paper late last year on Climate-related financial disclosures.

This came about from a recommendation from the Productivity Commission’s report in 2018 calling on the government to implement mandatory (on a "comply or explain" basis), principles-based, climate-related financial disclosures for listed companies. These would be included in company annual reports, making them accessible to the general public for listed companies and financial institutions that invest in them, like Mint Asset Management.

In other words, they’d need to explain how they are taking into account the risks of climate change and what they are doing to mitigate their carbon footprint in the long term. 

This has come about because the Intergovernmental Panel on Climate Change (IPCC) has stated that achieving the Paris Agreement goal, of limiting global temperature increases to 1.5°C, will involve a wide portfolio of mitigation options, including disinvestment in high greenhouse gas (GHG)-emitting products, processes and activities, and increased investment in new technologies, energy efficiency and clean energy sources.

Our role as fund managers is to generate long-run risk-adjusted returns for our clients. Most of our clients have long-term saving or investing horizons and our job is to identify companies or securities that we believe can deliver good quality, sustainable returns for clients over these periods. We seek to quantify risks to their business models’ success and thereby likely attractiveness to investors.

Some of these risks are easily assessed, while others are not well understood or priced into future share price expectations. Geopolitical risk is an example of an investment risk which is not easily incorporated in current share prices. E, S and G risks have been assessed by our investment team over several years and climate risk is now being developed as an additional risk we look to measure as part of our environmental evaluation.

At Mint we assess these risks by ensuring stock analysts ask a consistent series of questions of the management and Boards of all our potential investee companies. We want to know that the governors and manager’s of these businesses have turned their minds to these specific risks, looked at impacts and how they can be mitigated and ultimately decided whether capital should be allocated to certain parts of the business portfolio. This is no different to any other risk that might, if not quantified or treated derail our investment thesis for any given company. 

This process is part of our screening approach across all our funds. We supplement our in house research capability with data from international ESG research specialists for global entities.

In respect of our NZ SRI Fund there is an additional tilt towards those companies that we believe manage these risks in a way which is superior to the NZ universe of companies so that we own securities which we believe are "best of breed" in respect of the management of these risks as well as meeting our targets for both qualitative and quantitative financial outcomes.

Mint Asset Management has been a signatory of the United Nations Principles for Responsible Investment (UNPRI) for five years, https://www.mintasset.co.nz/about-us/our-investment-approach/ which is the world’s leading proponent of responsible investment. This means Mint will be one of just a handful of investment managers in New Zealand adopting the new disclosure requirements on the topic of carbon emissions in 2020. 

The reporting requirements for UNPRI signatories in 2020 are in respect of the Task Force on Climate-related Financial Disclosures (TCFD) pillars relating to strategy; risk management; and metrics and targets. The first two areas fit well with our questionnaire approach but providing a target of say a carbon intensity rating across Mint’s portfolio of investments is challenging until the underlying investee companies have themselves calculated their exposures.

Mint’s focus is therefore on continuing engagement with companies about improving their disclosures as indeed it is with other E, S and G metrics to provide investors with better data for their decision making. It is likely that the TCFD will become the accepted international standard for reporting on climate risk and so we are encouraging NZ companies in particular to start the process of reporting in line with this framework.

Mint has been part of an industry working group on the topic and has provided some valuable feedback to the government to ensure we see a successful transition for all parties contributing to this important change.

Climate-related risks and opportunities are set to grow in the coming years. The impacts of an increase in global temperature of 1.5°C are now better understood with the IPCC reports stating that the world is on track to miss a manageable level of warming by a wide margin.

Behaviour has to change and having direct sunlight acting as a disinfectant based on the facts is very likely to help improve the work needed to bring down further risk of global warming.

I don’t believe that we have any other option but to face this challenge head on and stealing this brilliant one liner quote from the man himself, Dick Cheney: “I believe we can make this work.”

Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here: www.mintasset.co.nz

Rebecca Thomas is the CEO of Mint Asset Management.