For companies, this means both increased physical risk, arising from changing weather patterns, and transition risk, as economies become less carbon intensive. Both types of risk may affect firms’ revenues and expenses, asset and liability values, and/or availability and cost of capital. In response to these developments, Storebrand Asset Management has been analysing the potential impacts of climate change to our portfolios; engaging investee companies on decarbonisation; engaging with policymakers to support public policies that facilitate the accurate pricing of climate risk; and shifting capital toward lower-carbon assets and products.
We have committed to our investment portfolios having net-zero GHG emissions by 2050, at the latest. On the path to that long-term goal in 2050, we have set ourselves a short-term target of 32% reduction across our listed equity, publicly traded corporate debt and real estate portfolios, by 2025. We set these targets based on recommendations from the Net-Zero Asset Owner Alliance, which assessed the IPCC’s 1.5°C pathways and identified credible and scientific emissions reduction targets for their members. To achieve this target, and to make fixed income portfolios more climate resilient, Storebrand Asset Management uses a range of methodologies. This includes 1) negative screening, 2) fossil-free investments and carbon footprint analysis and 3) exerting influence through active ownership/dialogue.
How we conduct negative screening
Our method for exclusion of companies is defined by the Storebrand Standard, which applies to all assets we manage, including fixed income. This extensive exclusion process involves the assessment of internal and external data, as well as evaluations conducted by experts in the field. The companies that we decide to exclude are thereafter removed from Storebrand’s investment universe, an investment ecosystem of more than 4000 companies.
The Storebrand Standard defines that Storebrand will not invest in companies involved in serious environmental damage. In addition, we have also chosen to exclude investments in companies within certain single product categories or industries that are unsustainable. These products or industries are associated with significant climate risks. In these product categories, there is also limited scope to influence companies to operate in more sustainable ways.
These companies include:
- Companies with more than 5 percent of revenue from coal-related activities
- Companies with more than 5 percent of their revenue from oil sands
- Companies with unsustainable production of soft commodities like palm oil, soy, cattle products, cocoa, rubber, coffee, and mining.
- Companies that deliberately and systematically work against the goals and targets enshrined in the Paris Agreement or Convention on Biological Diversity.
- Companies with mining operations that conduct marine or riverine tailings disposal.
- Companies involved in deep sea mining.
How we handle fossil-free investments and carbon footprint analysis
All our fixed income portfolios, except for selected highyield and cross-over portfolios, are fossil-free, meaning that we are not invested in companies;
- with more than 5% of their revenue from the production or distribution of fossil fuels,
- with more than 25% of their revenues from tailormade products and services that support oil and gas exploration, production, refining, transportation and storage.
- whose fossil reserves exceed 100 million tonnes of CO2 .
We chose the threshold of 100 million tonnes of CO2 in fossil reserves because companies with larger reserves will be most affected by the implementation of the Paris Agreement. For the critical 1.5°C target to be achieved, large reserves of fossil fuels will have to remain in the ground — in other words, these reserves will become «stranded assets».
Storebrand conducts carbon footprint analyses to inform the creation and implementation of our broader climate change strategy. Our portfolio carbon footprint is calculated by multiplying our holdings percentage in an entity with its Scope 1 and 2 emissions. We use this carbon footprint calculation to guide our decisions in engaging with companies on climate change risks, opportunities, and reporting. However, the inherent limitations of carbon footprints means that these quantitative assessments need to be complemented by engaging in active dialogue with companies, particularly where data is less reliable. For example, although the carbon footprint of our fossil free fixed income portfolios is relatively low, companies' indirect emissions, those that fall under Scope 3, are not captured during the analysis and require additional assessment.
The elephant in the climate room
Scope 3 emissions, include all indirect emissions that are not owned or controlled by a company. Although Scope 3 emissions often contribute the largest part of corporate-related emissions, corporates often neglect Scope 3 for various reasons such as complex accounting methodologies, the absence of direct influence or control, and loose regulations — resulting in a lower disclosure rate than for Scope 1 and 2 emissions. This may leave investors in the dark about a company’s true exposure to climate risks.
However, with growing awareness of Scope 3 emissions and net zero commitments, regulators are taking an interest in monitoring Scope 3 emissions by implementing mandatory disclosures and target setting. As we expect to see more Scope 3-related regulations and policies in the coming years, investors should consider Scope 3 emissions in their risk models and evaluation of companies’ climate commitments.
In the financial sector, Scope 3 emissions often represent the greatest share of corporate-related emissions. CDP reported that financed emissions are over 700 times more than operational emissions of the financial institutions1 . The failure of most banks to account for such a significant portion of their Scope 3 emissions is a major challenge. Almost all financial institutions’ climate impact and risk is driven by the activities they finance in the wider economy, yet the data suggests that this is not yet where the focus is for a large number of institutions.
How we exert influence through active dialogue
Although engagement remains less common among fixed income investors as we are not having the benefits equity investors’ position as owners of the entities in which they invest, fixed income investors are still important stakeholders with clearly defined legal rights. As important lenders of capital, we can interact with issuers over how they behave and operate and encourage issuers to better manage material climate related risks and opportunities. Similarly, our experience is showing that companies are increasingly attuned to their creditors’ interests despite their limited rights as their need of debt financing is crucial.
We have designed an engagement approach to encourage companies to define and implement climate strategies aligned with the goals of the Paris Agreement and reaching net-zero emissions by 2050 or sooner. Although we pay special attention to the high emitters in our portfolios, we also engage with banks to understand their exposure to climate change. We expect banks to align their provision of finance with the delivery of the goals of the Paris Agreement and the achievement of global net zero carbon emissions by 2050. This engagement work is carried out both individually and in collaboration with other investors. As we do not have voting rights, engagement will be the key form of active dialogue.
Collaborative engagement:
- Commitment to becoming net zero by 2050, with a primary focus on ensuring indirect emissions are brought down to net zero by 2050 (Scope 3) because the bulk of banks’ emissions are associated with financial services, including commercial, project and retail lending; investment banking; securities trading; etc.
- Board accountability for, and variable remuneration aligned with, the delivery of net zero, with financial statements that reflect the low carbon transition.
- Disclosure in accordance with TCFD recommendations, reporting on greenhouse gas emissions associated with financing activities, and the incorporation of material climate risks in published accounts.
- Explicit criteria to be set for withdrawal of financing to misaligned activities that are benchmarked against sector/industry net zero pathways.
Individual engagement in the Nordic countries:
In addition to the banks targeted by the collaborative engagement above, Storebrand will engage bilaterally with several other banks, seeking to influence them to move in a more sustainable direction. We will prioritize our proactive engagement with Nordic banks, where our Nordic position and knowledge of these companies enables constructive and meaningful dialogue that creates value both to the companies, Storebrand, and our clients. In the Nordics, our financial engagement in the companies is also normally higher than in international banks. However, this does not limit us to engaging only with Nordic companies.
Engagement alternatives: If the outcome of engaging with companies fails to meet our expectations, the Storebrand Group may consider other actions. If the company is on our observation list, we will make an exclusion assessment. For other companies, our actions may include:
- Expressing our views publicly
- Proposing resolutions at the company’s Annual General Meeting, if we hold an equity position
- Requesting an Extraordinary General Meeting, if we hold an equity position
- The Storebrand Group may collaborate with other investors where we believe this is in our unit holders' best interests. ¢
References [1] CDP (2020), Financial Services Disclosure Report 2020
