hongkongen
Understanding climate change risk in portfolios

Understanding climate change risk in portfolios

05-11-2019 | Insight

Creating portfolios that are resilient to climate change is not just an issue of decarbonizing, says RobecoSAM’s Jacob Messina.

  • Jacob  Messina
    Jacob
    Messina
    Senior SI strategist, RobecoSAM

Speed read

  • Integration of scope 3 emissions essential to decarbonization
  • Decarbonizing is only one part of making portfolios more resilient
  • Transition risks and opportunities abound, physical risks growing

Investors need to take a more rounded view of the threat that global warming poses to companies, including assessing indirect ‘scope 3’ emissions that are currently under-reported, he told delegates at the fourth annual Sustainable Investment Forum that Robeco co-hosted with Allianz Global Investors in Brussels. 

Decarbonization is just a proxy – it’s a starting point,” says Messina, Head of Sustainable Investing Research at RobecoSAM. “For an asset manager selecting securities, the footprint of the portfolio does not indicate the actual risks of those holdings.”

“Understanding the company-specific risks and opportunities, including the transition risks, are essential to understanding what the company will look like in 10-20 years from now. And opportunities abound – it’s not all doom and gloom.”

Stay informed on Sustainable Investing with monthly mail updates
Stay informed on Sustainable Investing with monthly mail updates
Subscribe

Finding the data…

RobecoSAM uses its proprietary Environmental Impact Monitoring Tool and a broad range of company data sets to assess the climate change resilience of companies, among other sustainability issues. Key factors researched are reporting levels of emissions and the company’s internal price for carbon.

It’s also not just about emissions of greenhouse gases (GHG) such as carbon dioxide which is blamed for global warming. “Looking across the whole supply chain, water-related risks will become increasingly important, and there are any number of other industry-specific questions such as fuel efficiency for airlines or auto companies,” Messina says.

“The Environmental Impact Monitoring Tool looks at four things when assessing stocks: GHG emissions, energy consumption, water use and waste generation. The aim in our sustainability focused strategies is for the resulting portfolio to have an environmental footprint that is at least 20% better than the benchmark.”

The ‘big four’: the critical elements in assessing a company’s climate change reliance. Source: RobecoSAM

… and extending its scope

Levels of emissions are also not just those belching out of a factory chimney. They now fall into three categories, known as scope 1, 2 and 3. Scope 1 emissions are those made directly by the company, while scope 2 are those that accrue from the generation of the electricity that was used to create its products. 

Scope 3 emissions are all indirect emissions that occur in the value chain; these can be produced upstream from suppliers or downstream by customers. Given their indirect nature, they are more difficult to calculate, and can also be counterintuitive. “People are often surprised how intense scope 3 emissions are in the Consumer Discretionary sector, where there is also a lot of waste,” Messina says.

“A fossil fuel producer may even have a lower impact for scope 3 emissions than a materials company, which is very labor and energy intensive, or a utilities company that generate the energy used by others. We think that scope 3 data quality is very close to the level at which we can integrate it into our portfolios systematically.”  

Source: Greenhouse Gas Protocol, www.ghgprotocol.org

Transition risks, opportunities and physical risks

This all means it is important to see the whole picture for the net contribution a company makes to global warming. “Carbon footprinting is a great place to start, but you have to go deeper and to understand specific companies and their plans for transitioning and mitigating their climate risks,” Messina says. 

“The three areas to look are finding transition risks, transition opportunities, and the physical risks. The challenge here is that it's not a linear process – in our view, we will most likely reach a tipping point where there will be a rapid escalation of different policies and regulations which companies will quickly have to adapt to.”

“Those that don’t keep up will end up with potentially a large amount of stranded assets. We want to ensure that companies are aware of the regulations and have a strategy for future-proofing their businesses.” 

  • Transition risks: an example can be seen in a fossil fuel company that has committed to reduce its carbon emissions – including Scope 3 – by 40% by 2040, Messina says. While the commitment is welcome, analysis showed that this was not in line with the 2 degrees Celsius warming scenario, and needed to go much further. This includes raising the internal price for carbon from USD 25/ton to something more in line with peers at USD 40/ton.
  • Transition opportunities: this is targeted by the RobecoSAM Smart Energy Fund, which focuses on four areas: renewable energies, energy distribution, energy management and energy efficiency. The companies in this strategy make significant contributions to the UN’s Sustainable Development Goals, particularly SDG 7 (affordable and clean energy) and SDG 9 (industry, innovation and infrastructure).
  • Physical risks: these emanate from increasingly severe weather that climate change is producing, including hurricanes, floods, droughts and rising sea levels. These kinds of risks are becoming more difficult to insure and are closer to home than many may realize, Messina says. 

Weathering the storm

“Physical risks are probably the most complicated and unclear area,” he says. “We need to understand where the assets are, what risk they're exposed to in terms of sea level rise and changing weather patterns, and what the local governments and companies are doing to defend against them.”

Mind the gap – uninsured losses from weather-related events vastly exceed insured losses. Source: SwissRe

“What was surprising for me was that in the drought of 2018, we actually had several industries shut down in Europe. Historically low water levels on the Rhine between July and November 2018 meant production completely stopped in many places, and they had to declare force majeure for certain products.”

“Germany's economy shrank by 0.2% in the third quarter of 2018, and was flat in the fourth quarter, partly due to the supply chain disruptions from the Rhine being so low. It was really quite astounding that Europe was so badly affected by this.”

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Logo

Disclaimers

1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree