We fundamentally accept the science of climate change and that a transition to a low carbon global economy is underway. We understand this will impact different assets in different ways, both in relation to their contribution to climate change in the form of greenhouse gas emissions, but also their exposure to the physical impacts of a warming climate.

In addition many companies are well positioned to provide the solutions needed to reduce emissions and adapt to a changing climate. Our Global Listed Infrastructure team's case study on NextEra Energy is a good example of this.

We also accept that as allocators of capital, stewards and shareholders, the individual and collective decisions investors make will influence the nature of the transition. The wicked challenge of climate change is that no individual or group are solely responsible, and so without good faith efforts by governments, companies, investors and individuals the best solutions will come too slowly to mitigate the worst impacts.

This shared responsibility requires transparency from all stakeholders so that each group can see and gain confidence in the actions of others. In this light we have been following the growing trend towards improved climate change disclosure, including for example the changes to French law and - various investor led initiatives.

However, as a relatively new form of investor disclosure we have also been concerned with the way it has been provided by some investors, in particular the almost exclusive focus by some on 'carbon footprinting'. We believe that carbon footprinting without contextual information on how carbon emission intensity influences investment decision making, or around limitations with the footprints themselves can be misleading.

For this reason we are not disclosing a carbon footprint at this time and have instead elected to have a number of our teams provide an additional statement on their approach to climate change and their exposure to fossil fuel companies.

When considered alongside the substantial disclosure we already provide on the ESG integration and engagement approaches of each team we believe this will provide the foundational context which clients and other stakeholders require.

In terms of carbon footprinting, we believe that within the right context it will be a useful information set for clients, and we will be assessing how we can include this and other forms of climate related disclosures (for example 'green' vs 'brown' disclosures).

Current Limitations with Carbon Footprinting

We currently see the following limitations with carbon footprinting and therefore disclosures which do not provide sufficient contextual information.
  • Data quality and availability issues - These can be split into the quality and timeliness of collection by providers, the number and quality of company disclosures, and the quality of the processes which providers use to estimate emissions for non-disclosing companies. As a result of these issues, reports from different providers can provide significantly different results.

    We believe investors must adopt disclosure practices which avoids the risk of some investors 'forum shopping' for the provider that calculates the lowest emissions for their portfolio.

  • Emissions over Revenue is not always the best intensity measure - Revenue is the standard intensity measure used to normalise emissions so comparisons can be made between different sizes and types of companies. However, it is not always the most relevant. For example, revenue can be significantly affected by commodity prices for resources companies even though the carbon efficiency of the company is better determined by tonnes of output. Similarly for office based enterprises, the number of employees or square metres of office space are more useful than revenue to determine relative efficiency.

  • Stranded asset risk not captured - The term 'Stranded Assets' refers to assets which carry a value today but which are at risk of being heavily written down or written off due to market or other changes. For fossil fuels this has been focused on resource reserves (still in the ground), which carry a value but which may not be extracted due to a shift away from carbon-intensive energy sources. Stranded assets can also be used to describe electricity generators, ports, pipelines and other supporting infrastructure. These risks are not covered by carbon footprints.

    One way to consider this from the investment perspective is that carbon footprinting only covers actual emissions relevant to the P&L (if including a cost of carbon), but does not capture stranded asset risks which are more relevant to the balance sheet. For some sectors, stranded asset risks are as important as carbon intensity.

  • Other risks not captured - Footprinting also does not capture risks to industries where the carbon emissions occur up or downstream. Examples include auto manufacturers who will be impacted by vehicle emission standards and shifts towards alternative fuels, even though the emissions being targeted occur in the products' use phase rather than during the manufacturing process. Carbon footprinting also does not capture geographic and structural issues, for example the costs, ability to be substituted and availability, which vary between countries and activities. An example of this is the different between thermal coal used for electricity generation and metallurgical coal used for steel making where the former is far easier to substitute with low emission alternatives than the latter.

For these reasons we are concentrating on building the contextual base for our disclosure and will only include a summary of our carbon footprint once we believe it can be assessed in context. We expect this will be within the next two years and in the interim are happy to discuss issues related to climate change with our clients and other interested stakeholders.