How we are mobilising investors and industry on climate change

Climate change and the need to reorient the global economy towards decarbonisation is a key global challenge. In 2015, national governments from 196 countries committed to reducing emissions in line with temperatures rising by 1.5°C by 2050 as part of the Paris Agreement. Governments cannot achieve this target alone: cities, businesses, investors and asset owners must help mobilise the real economy to meet these targets.

The next 10 years will be a decade for delivery as regulatory, transition and physical climate risks increasingly become investment risks. For example, if governments agree to implement a global carbon price on all sectors – a key topic for COP26 later this year – of $100/tonne in line with 1.5°C scenarios, approximately 12-16% of global equity earnings are at risk, according to our research.

US$/tonne

^{Source: Schroders}

Total EBITDA at risk from higher carbon prices

^{Source: Schroders}

Additionally, for those businesses which are harder to decarbonise, the risk of “stranded assets” turning into liabilities on balance sheets, could be a significant factor in eroding a company’s value and impacting performance.

Finally, the physical cost of climate change has the potential to be significant for companies. Our research suggests that the cost to some companies of insuring their assets against the impacts of climate change could equate to more than 4% of their market values – for example in the case of utilities, oil and gas. 

Sector exposures tend to vary according to the capital intensity of the business

Adjustment of companies' total value for physical climate risks (%)

^{Source: Schroders. Based on most recent data available in March 2018. We have excluded financial sectors from this summary given the low direct exposure of their fixed assets understates the risk embedded in their assets or liabilities.}

We believe investing in companies that do not make this transition and do not act to reduce these risks could have material negative financial implications for our clients. Conversely, investing in companies that are transitioning and innovating should provide investment upside over the longer term. This is why in December 2020 we joined 30 other asset managers, representing $9trillion in total assets under management, in making a net zero commitment. This commitment supports the goal of net zero greenhouse gas emissions by 2050 or sooner.

At the start of this year, our parent group Schroders wrote to the UK’s 350 largest companies asking them to publish detailed and fully-costed transition plans on climate change. The detail is crucial. We want to see exactly how each company will play its part as the UK economy re-orientates towards the government’s target of net zero greenhouse gas emissions by 2050. We have started by contacting companies in the FTSE 350 index but, looking ahead, we will expect the same progress beyond these shores. We would like to see all medium and large companies, public and private, and regardless of where they are listed, publish their plans.

At Cazenove Capital, more specifically, our net zero ambition is made even more challenging by the fact that we are significant investors in other managers’ funds, as well as investing directly in companies. However, this means we have an opportunity to shape the wider investment community and use our influence to create change. As part of our net zero approach, we have therefore committed to:

1. Transitioning our assets under discretionary management to achieve emissions reductions by 2030, consistent with a fair share of 50% global reduction in CO2.
2. Work in partnership with our underlying asset managers on decarbonisation goals consistent with an ambition to reach net zero emissions by 2050 or sooner, engaging with them on these goals at both a corporate level and with the individual managers of the strategies we hold.
3. Report to The Task Force on Climate-Related Financial Disclosures and publish an annual climate action plan from January 2022, reporting on our progress through 2030 and beyond.

We are able to understand the extent to which other investors incorporate climate change and more broadly where they are on their sustainability journeys, thanks to our proprietary annual ESG questionnaire. Last year, we sent the questionnaire to 140 investment managers, responsible for the management of £39 trillion in assets. These are managers that we have chosen to invest with on behalf of our clients.

As part of our ongoing engagements with managers and our net zero commitment, in December 2020 we contacted all 140 of our managers to ask if they have, or intended to make, a net zero commitment. Over 50% have now responded – of those, 14% have made a commitment, 10% intend to make one before COP26, and 62% are considering one, whilst only 14% have not considered one yet. These initial findings are encouraging and we will continue to use our influence to push for change.