True engagement will move the dial on climate targets
A growing number of financial institutions have made, or are planning, commitments to reduce emissions. How they reach that destination is key to the value those commitments will create. The journey we have chosen reflects our understanding of the ways we can best ensure portfolios are able to benefit from the value transition can unlock.
Almost 90% of global emissions come from countries that have committed to reaching net zero in the next few decades.1 Global policy makers are taking steps to meet that goal. While progress toward that destination is neither smooth nor linear, and tougher policies will be needed, we believe a decarbonisation journey lies ahead. Business models will need to respond and react to that, and the companies that do so will be stronger.
As active managers we are participants in that transition and have choices over how we reach the net zero destination. There are many routes to decarbonise portfolios; the path we select will determine whether it creates or constrains the investment returns we deliver to our clients.
We have established a climate change strategy that we expect will allow the investments we manage to benefit from the value that can be unlocked as companies cut emissions. Instead of avoiding companies with higher emissions, we identify them and encourage them to establish and deliver their own transition plans.
Our own analysis has shown that companies able to reduce their emissions quicker than peers have typically outperformed in recent years.2 As policy measures intensify to encourage decarbonisation and penalise emissions, we expect that performance tailwind to continue.
To benefit from that, during 2022, we embarked on our largest engagement exercise yet. We engaged over 700 companies, responsible for around half of the financed emissions of the asset classes in scope of our targets. This is a whole-firm effort, with analysts and fund managers across Schroders’ global offices speaking to hundreds of companies to explain our views and goals. Our engagement has proven successful; the companies we engaged on climate since 2021 have been almost twice as likely to set a new below 2°C target than those we did not.
Beyond driving transition in the investments we manage, we are also seeking ways for our clients to invest in portfolios focused on assets with low carbon exposures, which are transitioning quickly or which provide solutions to the climate challenge. That spectrum of investment products provides a strong platform to support our clients on their own journeys and with their own investment goals.
Underpinning investment decisions, engagement and new products, we continue to invest heavily in developing proprietary analysis and tools that help our analysts and fund managers to integrate climate factors into investment decisions. That analysis also benefits significantly from their insights and input.
Taken together, our group portfolio targets are a natural outcome of an investment approach that focuses on delivering value through transition, rather than an end in themselves.
The same perspectives, commitments and action applies to the way we manage our own business and is reflected in our operating and supply chain emissions reduction programmes and targets.
As an active investment manager, climate risk is an investment problem that we are in a strong position to help solve for our clients, using our expertise in investment as well as our influence on the companies in which we invest. By pursuing our main purpose – excellent investment performance for our clients – we are accelerating positive change for people and planet.
2 Based on Schroders analysis of listed companies in the MSCI ACWI IMI index. We examined changes in companies’ emissions over the last five years, relative to sector peers, and compared the total shareholder returns delivered by companies in each quintile of emissions reductions.
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