The Investment Implications of Climate Risk – An Investment Manager’s View

It is widely accepted that greenhouse gas (GHG) emissions must be decreased in order to avoid a potentially catastrophic increase in global temperature.

If we also accept that a global response is required to achieve a global reduction in GHGs, but that countries will act according to their own discretion, then the next piece of information we have is the recognition that companies will face different regulatory and legal regimes depending on which part of the world they operate in.

It is a complicated set of factors to consider and it can be tempting to put off any decision making. However, the Financial Stability Board has made it clear that action is required now.

The 2017 report by the Taskforce of Climate Related Financial Disclosures (TCFD), stated: “The large-scale and long-term nature of the problem makes it uniquely challenging, especially in the context of economic decision making. Accordingly, many organizations incorrectly perceive the implications of climate change to be long term and, therefore, not necessarily relevant to decisions made today.”

In a bid to help navigate the difficult process of taking on appropriate exposure to climate risk, the TCFD recommends the implementation of tried and tested methods that financial market participants are already familiar with. Improving disclosure is a key input to supporting better management of climate risk. The TCFD recommend considering climate risk in a framework consisting of Governance, Strategy, Risk Management and Metrics & Targets.

For Cameron Hume, Governance means that there is an agreed investment policy that all stakeholders are in agreement with. Strategy should therefore support development of policy and systems which incorporate informed Risk Management. Metrics & Targets must be built into portfolio measures, client reporting and disclosures to bodies such as the PRI.

The Cameron Hume Global Fixed Income ESG Fund, launched in 2018, follows the TCFD methodology while selecting issuers judged to manage their ESG risks better than their peers.

Chief Investment Officer, Guy Cameron, explains: “In Cameron Hume’s view, a key indicator of an issuer’s sustainability is the quality of its governance and risk management framework, which we know must take into account climate risk.

“For these reasons, the Cameron Hume Global Fixed Income ESG Fund favours companies with lower net emissions currently, rather than those requiring significant changes.”