Companies are increasingly disclosing their exposure to climate risks. But those disclosures often do not give the investors the full picture. Regnan’s ALISON EWINGS explains

• Climate disclosures too narrow
• System-wide effects of climate change often ignored
• Find out about Regnan Global Equity Impact Solutions Fund
• Find out about Regnan Credit Impact Trust

IT’S been five years since the Task Force on Climate-related Financial Disclosures began trialling voluntary, consistent climate-related financial risk disclosures for use by companies.

While take-up has been good, investors still need to see a lot of improvement in ESG-related disclosures, says Alison Ewings, who engages with ASX-listed companies for sustainable leader Regnan.

About 80 per cent of big global companies now disclosed in line with at least one of the taskforce’s 11 recommendations.

But most companies are still taking too narrow a view of climate risks and failing to consider the underlying, system-wide interdependencies and economics risks of climate change that will impact their operations, says Ewings.

A Regnan assessment of disclosures shows they are often narrow in scope and place climate transition risks ahead of considering system-wide interdependencies and different potential economic scenarios.

Regnan is a leader in sustainable investing and an affiliate of Pendal.

“Look at what’s happened in Australia lately — fire, fire, flood, flood, flood — everyone who’s dependent on the Australian economy has been affected by those things,” says Ewings.

“But when you look at an individual company you see ‘well we’re fine’. But you’re not fine. You’re not an island. You’re part of the broader economy.

“We think about this as an additional risk that climate change is going to add for every business.

“Some businesses are more leveraged to economic activity than others, so they’re more exposed, but they’re all exposed to some extent.

“So instead of saying there’s no climate risk, internally we talk about it as there being a background level of risk that is not nil.

“This is something that’s not being explicitly considered by companies in their TCFD disclosures and we’re not sure that it’s really being explicitly considered by investors, insurers and banks.”

Five underlying climate risks for investors

Ewings says underlying climate risk can take five main forms.

First, general consumer behaviour will likely change as temperatures rise and extreme weather events become more common.

This could include changing preferences for food, clothing and holiday destinations, to the need to rebuild after natural disasters or even relocate for more favourable climatic conditions.

Second, businesses are all reliant in some way on the underlying infrastructure around them, from roads, telecommunications and power to access to water. Changes to the availability of infrastructure can have profound implications for a business’s operations.

Third, disruptions in supply chains due to extreme weather, shifting demand or interrupted transportation.

Fourth, businesses rely on the resilience of the communities they operate in to maintain their workforce and customer base.

Assessing the health of the community should form part of a business’s risk assessment.

And finally, with extreme weather no longer an infrequent, temporary phenomenon, overall economic growth is likely to be lower.

Businesses should reflect this base level reduction in demand in their planning.

“The key thing is the interdependency,” says Ewings.

“Once you get outside of your organisational boundary, that’s where things start to fall apart.

“For instance, companies do a good job of site-by-site analysis of the impacts of climate change to physical locations.

“But it is very rare to see consideration of the infrastructure on which they also rely on like the transport networks that move things to and from those sites.

“It’s rare to see anything about the resilience of the communities in which their employees work — it might well be that your factory is fine, but nobody can get there or nobody’s feeling like coming to work.

“All of these factors should be considered.”

Sustainable investing leader Regnan is exploring new approaches to ESG engagement. Regnan’s ALISON EWINGS explains

• Systems-wide engagement is needed to drive change
• Download Regnan’s 2022 Australian engagement report, From stock to system (PDF)
• Find out about Regnan Global Equity Impact Solutions Fund
• Find out about Regnan Credit Impact Trust

THESE days it’s a basic expectation that active managers will meet regularly with investee companies and issuers to drive behaviour that benefits shareholders and the community.

“Engagement”, as it’s known in the investment industry, is usually undertaken on a one-to-one basis between an investor and an investee.

For example, sustainable leader Regnan last year engaged with 40 ASX-listed companies – some on multiple occasions – as part of its Australian program. Engagements aimed to reduce economic, social and environmental risk to client portfolios.

Regnan’s 2022 engagement report From Stock to System (PDF) shows demonstrated progress in 98 per cent of engagements.

But as interest in ESG snowballs — and the complexity of issues increases — engagement must evolve to ensure continued effectiveness, says Regnan’s head of engagement Alison Ewings.

Engagement can be more successful — particularly on portfolio-wide risks — if it shifts away from a company-by-company approach and evolves into collaborative, systems-wide activity, says Ewings.

Evolution of engagement

Regnan’s latest report sets out the changing nature of engagement amid worsening greenhouse gas emissions, rising inequality and repeated examples of poor corporate practice.

It’s becoming clear that we need to look beyond closed-door, direct engagement with directors and company leaders to truly tackle these systemic risks, says Ewings.

“Historically, we’ve engaged in a very bottom-up fashion, looking at the ESG risks to an individual company.

“While there is still a role for this kind of engagement, we must acknowledge that individual companies are limited in the actions they can take on some ESG issues.

“For these multifaceted, system-wide issues, one-to-one engagement will not be enough to reduce the risks to portfolios.

“Climate change is a classic example.

“You can divest your way out of the risks to a certain point. But if climate change is left unchecked, it will still create risk in portfolios and the potential for associated economic shocks.”

New models for engagement

As a result, Regnan is making changes to its activities and investigating new models for engagement.

“We are approaching engagement in two ways.

“One is to engage right along the value chain to achieve system change and reduce portfolio risks from major ESG trends.

“The other is to look at opportunities to bring companies together to address these issues.”

Ewings points to Regnan’s establishment of a roundtable on sustainable agriculture , which brings together senior executives and directors to identify barriers to shifting to more sustainable agricultural and food production practices.

“The full impact is still unknown but it’s proving an effective way of raising awareness and developing a deeper understanding of these issues among market participants,” she says.

Progress on diversity, equity and inclusion

Regnan also had success during the year with its work on diversity, equity and inclusion, including a research paper that explored why companies struggle to make meaningful progress on diversity.

“We looked at how organisations can achieve their diversity goals in a meaningful way — both for individuals and for organisational value creation,” says Ewings.

Regnan’s research found that diversity strategies must include a conscious focus on inclusion and equity to reap the upside of a diverse workforce.

Other engagements during the year focused on issues ranging from the financial service sector’s exposure to carbon emissions, the physical risks of climate change and how companies can reduce the risk of exposure to modern slavery.

“These are significant changes to the way that we undertake our engagement activities,” says Ewings.

“Our ability to make positive change by engaging with single actors is becoming limited as the issues become more complex.

“We have to be actively exploring new models for engagement to address these system-wide challenges.”

A more intentionally inclusive approach to problem solving also enhances the pool of ideas for how to tackle major societal challenges, she says.

Investors should look for evidence of inclusion right across a business — even in product design, says Regnan’s head of engagement ALISON EWINGS

• Inclusion leads to better product design
• Look for companies with equitable employment practices, supportive culture and inclusive decision-making
• Find out more about sustainable leader Regnan

IN 2019, NASA planned one small step for women: the first all-female space walk from the International Space Station. But it did not go as planned.

The problem? There weren’t enough medium-sized space suits to go around.

“Truly inclusive decision-making goes beyond the workplace,” says Regnan’s head of engagement, Alison Ewings.

“By broadening the approach to consider customers and society at large, you’re more likely to have products and services that meet the needs of a wider range of people.”

Ewings says it is not uncommon for products and services to be designed without proper consideration of inclusion.

“We’re seeing companies talk about their experience of employing more women only to come across things like no availability of uniforms suitable to be worn when you’re pregnant.

“We’ve seen personal protective equipment the wrong size for women. We’ve seen machinery that cannot be operated by people under a certain height.

“These are product and service decisions made well before a company discusses how to implement a diversity and inclusion program.”

Beyond employee experience

Taking inclusion beyond the day-to-day employee experience is an important insight for investors.

“Can the impact you have be improved by thinking about how you deliver that more inclusively?” says Ewings.

“So, if you’re a health company, who are you including in your trials?

“For an education provider — if you can reach a broader audience in a developing country, the impact of what you can do about changing those people’s lives is far more significant if you approach the delivery of your product and service with an inclusion lens.

All companies can benefit from taking an inclusion approach to product and service design, says Ewings.

“It can be simple things like supermarkets offering quiet hours for people with autism or older people who find loud noises and bright lights an overwhelming experience.”

And while diversity has been the watchword for businesses seeking to bring broader talent into an organisation, research shows equity and inclusion are the critical factors in realising the performance potential of a diverse workforce.

Regnan’s award-shortlisted research report Beyond diversity: Equity and inclusion as an overlooked opportunity for investors (PDF) found that a focus on diversity without equity and inclusion can undermine the very benefits offered by diversity.

Three inclusion factors

Regnan’s research outlines three inclusion factors that investors should take account of when assessing companies:

• Equitable employment practices
• Supportive culture
• Inclusive decision-making

The benefits of focusing on equity and inclusion within the workplace is equally relevant to the experience of customers and the broader community and is therefore of interest to impact investors, says Ewings.

“A true focus on inclusion thinks about what it means for decisions that these organisations make and the products and services that they offer.”

Organisations that embrace equity and inclusion can apply these skills to their core operations unlocking opportunities to positively impact a wider constituency, and potentially with greater potency.

A more intentionally inclusive approach to problem solving also enhances the pool of ideas for how to tackle major societal challenges, she says.

Engaging with investees is at the core of ESG. But the issues are now so complex that we need another approach. Regnan’s ALISON EWINGS explains

• Investors need to rethink how they engage with companies
• A system-wide approach is needed
• Find out about sustainable investing leader Regnan

COLLABORATION and co-ordination among all parts of society are needed if sustainability goals are to be achieved, says Alison Ewings.

Company-specific engagement remains important for driving direct outcomes. But many aspects of meaningful change can only come when businesses, not-for-profits, researchers and governments share information and co-ordinate action.

That’s the approach Regnan’s head of engagement Alison Ewings is increasingly taking.

Sustainable investing leader Regnan last month hosted its first Director Roundtable on Sustainable Agriculture, bringing together senior executives and directors to identify barriers to sustainable agricultural and food production.

“There’s still a role for company-specific engagement, but the complexity of many of the ESG issues we’re facing means there are a host of instances where this approach is limited,” says Ewings.

Part of the problem is that individual companies are constrained in the sustainability outcomes they can achieve acting alone, she says.

Case study: agriculture

Agriculture is a case in point, with complex sustainability issues across the value chain including climate change, soil health, pollution, water scarcity, food waste and biodiversity and eco-system loss.

Growers can be limited in what they can do because they need to meet the specifications of supermarkets and food manufacturers.

There is evidence they are struggling to invest in sustainability because lenders and investors may not ascribe a value to improvements, says Ewings.

“You can go to a lot of effort to improve your soil health, but if that doesn’t show up in the value of your asset then you might question the investment,” she says.

Sustainability is further complicated by the many small companies operating in agriculture.

By their nature, many small companies also have lower capacity to invest in sustainability and may not benefit from the same technology and advice that scale allows larger companies enjoy.

“And of course, not all of these entities exist in the listed space, so engagement sometimes means going beyond your investment universe, for instance engaging with private companies or industry associations representing these smaller groups,” says Ewings.

The waste industry is another example, requiring partnership across industry, regulators and academia to understand the full lifecycle impacts of the waste cycle.

Laws, regulations and practices differ from state to state and even between local councils, says Ewings.

“A system-wide approach is going to be required in order to change complex value chains,  that stretch across our entire economic and social system. For instance energy, finance and manufacturing.”

What needs to change

So, what are the barriers stopping Australia taking such an approach?

For starters, different levels of government are posing a challenge.

“There can be a need to harmonise state and local legislation where it creates inefficiencies or barriers to scale for solutions. The recycling space, for instance, comes up quite a lot.”

But business also needs forums away from the competition of business-as-usual where executives and directors can reflect and collaborate with suppliers and customers.

“A good example is the steel sector and ResponsibleSteel, an association across the supply chain that acknowledges the R&D challenge for low carbon steel are significant and therefore difficult for any single company to be able to invest enough to bring the change that is needed.

“Many of these challenges are multidisciplinary and so require a multi-stakeholder response, within and across sectors, as well as from consumers, governments and the right scientific minds.

A bewildering array of net zero frameworks can seem daunting for investors, but the underlying principles are straightforward, says Regnan’s Alison Ewings. Here’s what to know

• Every increasing array of net zero frameworks and guidance
• Underlying aim needs to be practical action and meaningful change
• Find out about Regnan Global Equity Impact Solutions Fund
• Find out about Regnan Credit Impact Fund

ASSESSING climate risk in a portfolio can be a daunting proposition.

There’s a bewildering array of frameworks available to help companies and investors set net zero targets, says Alison Ewings, who heads up engagement at sustainable investing leader Regnan.

Asset managers and owners can use a wide range of initiatives and protocols to help assess climate risk and establish plans to achieve net-zero.

Here’s just a few:

• Net Zero Asset Managers initiative
• Paris Aligned Investment Initiative’s Net Zero Investment Framework
• Science Based Target initiative for Financial Institutions
• UN Net Zero Asset Owner Alliance Target Setting Protocol, and
• Partnership for Carbon Accounting Financials

The list goes on — and for good reason.

The sheer scale of action needed to tackle climate change — and the important differences between sectors, asset classes and countries — means the finance industry must take a nuanced and targeted approach.

But how can investors get their heads around the complexity of the net zero problem?

Net zero for investors

Superficially, getting to a net-zero portfolio is simple — “you simply divest things”, says Ewings.

But that simplistic approach misses the point: not only can it come with important implications for returns, it also fails to manage the risk to a portfolio if climate change continues unabated, she says.

“It is not just about managing for net zero in portfolios. What we want to bring about is a net zero world,” says Ewings.

“Increasingly the frameworks are focused on driving meaningful change in the economy, not just in the individual portfolios of investors.”

Ewings says understanding the ever-increasing array of net zero frameworks is not as complicated as it looks. For all the apparent complexity in the frameworks, “most of them work together”.

“What looks like nine different things is actually much simpler — there are two key frameworks you can sign up to if you’re an asset owner, and another if you’re an asset manager. And then there’s a series of methodologies and tools to use to help you implement it.”

Three areas of focus

There are fundamentally three distinct activities at the heart of all these types of protocols, says Ewings.

• “The first is around the decarbonisation of portfolios and moving away from emissions intensive activities, including where they may have stranded asset risk attached to them.
• “The second is about directly investing in climate solutions that will reduce emissions.
• “The third is stewardship, which includes engaging with companies and influencing them to become Paris-aligned, factoring climate considerations into voting and supporting public policy outcomes that address climate risk.

Stewardship also includes engaging throughout the investment value chain — engaging with data providers on the types of information that you need or with rating houses on the types of assessments that you are interested in.

These frameworks emphasise the need  for asset owners and managers to work together to support net zero outcomes, Ewings says.

“It’s also around public policy discussions. There are many aspects of climate change that are not well handled by engaging with individual companies.

“This is partly because it’s not the most efficient way of doing it, but also because there has been a tendency in stewardship to focus primarily on listed equities, and that’s not the whole economy.

“In fact, what you might be doing is creating an uneven playing field. The good news is that as the frameworks evolve we’re seeing greater focus on a range of different asset classes and greater prominence of policy advocacy.”

The ultimate lesson for investors?

Regardless of the framework, the systemic nature of climate risk means that “unless the way you’re approaching net zero is aimed at bringing about meaningful change in the real economy, you’re not actually reducing your long term risk at all”.

The tight labour market demonstrates how ESG-related policies such as diversity and inclusion impact “real-world” business functions. Regnan’s ALISON EWINGS explains

• Tight labour markets make it hard to hire
• Refocusing on inclusion can raise the number of applicants
• Regnan report: How companies fail at diversity and why investors should care

WHETHER it’s a Great Resignation, a reaction to pandemic lockdowns or the product of border closures and low migration, one thing is true: it is harder than ever to find staff.

If that sounds familiar, you’ve probably been considering a variety of ways to improve your success in recruitment.

You may not have considered how an Environmental, Social and Governance lens can help.

Earlier this year responsible investing leader Regnan published an investor’s guide to diversity, equity and inclusion (DEI) — an ESG-related issue that’s especially relevant right now for employers battling to attract candidates.

Consider, for example, that more than two-thirds of Australian financial planners are men — but 60 per cent of graduates coming into the industry are women.

“The future of financial advice is absolutely female-led,” says Benjamin Marshan, Head of Policy, Strategy and Innovation at the Financial Planners Association.

DEI can help recruitment

What are recruitment’s best practices post-pandemic? How can you ensure you’re not inadvertently putting off potential candidates? How can you benefit from what a truly diverse workforce can offer?

A well-considered diversity, equity and inclusion program can help, says Regnan’s Alison Ewings, a co-author of the Beyond Diversity report.

Employers can improve their hiring practices by rethinking the process end to end — from job descriptions and competencies through to the advertising process, candidate selection and interview, says Ewings, who leads Regnan’s program of ESG engagement with ASX-listed companies.

“Minor tweaks can change the pipeline of applicants dramatically.”

Diversity in hiring matters. It widens the pool of candidates available for a role and so can help avoid inflating labour costs by artificially narrowing the number of applicants.

And when coupled with an inclusive and equitable work environment, it also drives improved business performance by harnessing new ideas and perspectives.

But much of the traditional hiring process can get in the way of hiring for diversity.

Take care with language

“The starting point is the job description and advertisement itself. You need to think quite carefully about what competencies are really required to do the job well,” Ewings says.

“Even in our own team, we drafted a job advertisement recently where we initially included a requirement for ‘superior project management’.

“That sounds like they need a formal qualification or have done major projects — but what we were really looking for was someone who’s highly organised.”

Careful use of language can broaden the pool of applicants.

“A study of 4000 job ads found that women were put off from applying for jobs that used wording associated with masculine stereotypes such as ‘aggressive’, ‘ambitious’ or ‘persistent’,” she says.

Significantly, women did not consciously note the language or realise it was having this impact and when asked why they did not apply for a role, they cited personal reasons.

“It’s similar with imagery. Who you show in photos of your workforce can be a natural screen for people that they aren’t even aware of.”

Rethink the interview process

Ewings also suggests rethinking the interview process itself.

“Not many job roles require someone to be good at being interviewed,” she says, saying some employers are now using a task-based approach for hiring that checks whether people can actually perform a role’s functions rather than whether they can perform well in an interview.

“It often started as a diversity, equity and inclusion initiative, for instance to recruit people on the autism spectrum who may not interview well. But in fact, they discovered it’s a better predictor of job performance in many roles across all hires,” she says.

Where interviews are the best way to screen people or as used as a final check in the process, Ewings suggests ensuring the same questions are used in the same order and that interview panels themselves are diverse.

“You’re trying to sell the job and build rapport, so you don’t want to be too dogmatic about it, but there’s a balance — you need to be able to look back and evaluate each candidate against what you’re looking for.”

She also says the interview question themselves need to be linked to the role’s competencies.

“You’ve got to benchmark the questions you ask back to the requirements of the job. It’s not just a matter of going for coffee with someone for a general chat.”

And what about de-identifying resumes to avoid bias in the recruiting process?

That can be a good idea, says Ewings, but it depends on your objective.

“If you set a target of having shortlists with a specific percentage of, say, women or people from multi-cultural backgrounds, then de-identification won’t help.”

Trade restrictions on Chinese cotton due to human rights concerns demonstrate how modern slavery issues directly affect investors. Regnan’s ALISON EWINGS explains

THE price of cotton is near a decade high as surging demand and lower supplies threaten to raise the price of our t-shirts and jeans.

Making matters more complicated for fashion producers, governments are increasingly implementing restrictions on cotton imports from the Xinjiang region in China, which accounts for around a fifth of the world’s cotton supply.

For the past five years China has faced international allegations of forced labour and worse abuses against the Uygur Muslim population in Xinjiang province. Beijing denies the allegations.

These modern slavery concerns mean manufacturers and retailers — and their investors — have to rethink supply chains, manage cost pressures and consider different products.

In Australia a Modern Slavery Act has been in force since 2019, covering “situations where offenders use coercion, threats or deception to exploit victims and undermine their freedom”. It includes forced labour, human trafficking, child labour, debt bondage and forced marriage.

Impact on investors

Trade restrictions on Xinjiang cotton demonstrate real-world consequences for investors.

“We are seeing a number of apparel companies pull their supply and production out of the Xinjiang region in China in response to concerns about potential forced labour activities,” says Alison Ewings, Head of Engagement at responsible investing leader Regnan.

Pendal’s small cap team recently engaged with ASX-listed fashion retailer City Chic Collective (ASX:CCX) which has moved to ban raw materials sourced from high-risk regions such as Xinjiang.

“The remaining global cotton supply is in high demand.”

Over this time the price of cotton has jumped sharply. Cotton futures are trading close to $US1.20 a pound. It was last that high in 2011.

Governments and corporates have stepped up efforts to address human rights concerns in Xinjiang in recent years.

For example, imports of tomatoes and cotton from Xinjiang province has been banned in the United State since January 2021 and in Canada since July.

The Better Cotton Initiative — a global organisation of more than 2000 suppliers, manufacturers, retailers, traders and community groups — has driven change in the industry.

The flow-on from the disruption is widespread across industries using cotton and other similar fibres.

“There is an opportunity for some businesses to rethink the materials they use,” Ewings says.

“They can consider the extent in which they use recycled fibres or alternatives, such as more sustainable fabric solutions including bamboo or other tree fibres.

Risks and opportunities

“It means solution providers with an alternate for cotton are a potential investment option. It also means there’s a potential risk to a company currently held that use cotton in its supply chain.

“If you’ve already got cotton in your supply chain, you’ve got higher risks, you’ve got greater regulation around modern slavery and greater expectations that you will be vigilant around it.

“You really want to be looking for companies that are managing that risk well and you want to look for companies that are looking for alternate opportunities,” she says.

Australia and the rest of the globe is only at the beginning of the journey on modern slavery, says Ewings.

“There’s much greater awareness as a result of modern slavery regulation around the world, including the Modern Slavery Act in Australia.

“Most companies have now done at least a cursory look through their supply chains. Better practice companies have gone deeper looking at their suppliers.

“But it’s still an area where many companies haven’t made a lot of meaningful progress.

“It’s a story where we expect to get more bad news before it gets better. And that, in fact, is a sign of progress. After all, companies can only act on issues once they have identified them.”

Investors need to work together to drive positive change since many pressing problems can’t be solved at a portfolio or company level, finds Regnan its annual Engagement Impact Report

• Climate change, modern slavery and Indigenous relations top issues
• 92% of Regnan’s active engagements demonstrate progress
• Download Regnan’s Engagement Impact Report 2021

RESPONSIBLE investing leader Regnan undertook 87 engagements with 44 ASX-listed companies over the past year, aiming to help improve business performance by addressing issues such as climate change, modern slavery and Indigenous relations.

Regnan supports some of the world’s most influential investors, investor networks and responsible investment initiatives in a number of ways, including via a company engagement program.

Regnan’s just-released Engagement Impact Report 2021 [PDF] shows that the 44 companies represented more than half the market capitalisation of the S&P/ASX 200.

“A quarter of the companies engaged were new to the current program — we continue to refresh and expand our influence, focusing on companies with material issues rather than relying on existing relationships,” says Regnan’s head of engagement, Alison Ewings.

Regnan says the COVID-19 pandemic has revealed the interconnectedness of the world and highlights the vulnerabilities faced by a globalised world.

The insight for investors is the need to consider not only risks to their own portfolios, but also work to understand and have an impact at a systemic level.

For example, feeding a growing global population in a sustainable way, tackling climate change and modern slavery are all examples of issues that cannot be solved by a single company or at a portfolio level.

“Our engagement efforts are focused on key participants within the value chain,” says Ewings.

“The need to collaborate to enhance impact has always been a part our collective engagement model. But this year has seen us change the way we work with clients, increasingly working more closely together on issues of importance.”

Top issues ASX investors should look out for

What are some of the material ESG issues that Regnan finds most prevalent in its engagement work with ASX-listed companies?

This year saw a continued rise in social issues become part of engagements including political lobbying, cultural heritage and stakeholder relations.

Among key focus areas, Regnan highlighted cultural heritage and indigenous relations as important issues this year after Rio Tinto’s destruction of cultural heritage at Juukan Gorge exposed questions about the relationships between companies and Indigenous communities.

Regnan has been working with HESTA, the $60 billion health and community services superannuation fund, to engage mining companies facing similar issues. Companies engaged included Rio Tinto, BHP Group, Fortescue Metals Group, Alumina, Newcrest Mining and Evolution Mining.

The focus has been on the effectiveness of internal reviews and the need to include traditional owner groups in reviews of company performance. The approach recognises that communities are also impacted by unlisted and global stocks and therefore the role of both companies and investors in the public policy process is also an important one.

Other engagements over the past year included sustainable agriculture, climate change, modern slavery and the role of board overseeing the conduct of executives and culture more broadly.

Regnan is now widening its engagement focus to cover the perspectives of debt holders as well as equity investors.

“This has included seeking enhanced ESG performance from issuers, as well as the quality of disclosure and performance within sustainability bonds issued by ASX200 companies,” said the report.

Regnan is also expanding engagement to selected ASX300 companies where there are risks for investors and a strong case for change as many of them grow.

Here’s are some of the most common topics covered in Regnan’s company engagements:

• Climate Change
• Social (eg political lobbying, cultural heritage and stakeholder relations)
• Disclosures
• Human capital
• Remuneration
• Workplace safety
• Diversity
• Board issues
• Modern slavery
• Conduct

Read the Engagement Impact Report 2021 here.

The latest UN climate change report offers important clues for investors seeking to understand portfolio risks and investment opportunities. Pendal’s Edwina Matthew explains

Key points

THE UN’s latest Climate Change report made headlines this week with predictions of irreversible global warming, rising sea levels and climate change affecting every corner of the planet.

But it also provides evidence-based information to help investors better understand portfolio risks and identify investment opportunities such as carbon capture and methane-reduction technologies.

The 3900-page report from the UN’s Intergovernmental Panel on Climate Change (IPCC) — the United Nations body for assessing the science related to climate change — is the gold standard for research on the science of climate change and options for adaption and mitigation.

Government and corporate decision-makers worldwide rely on the IPCC’s findings to inform their climate risk assessments and emissions reduction strategies

The report — which was unanimously endorsed by the governments of all 195 country members including Australia — is based on a three-year analysis of 14,000 peer-reviewed scientific studies.

It will be the central terms of reference later this year at COP26 — the upcoming United Nations climate conference in Glasgow.

The report shows unequivocally that human activities are responsible for the warming world. This warming is increasing the frequency and severity of extreme weather events such as heatwaves, droughts, cyclones and heavy rain.

Global temperature rises of between 1.5 and 2 degrees Celsius are expected unless deep reductions in greenhouse gas emissions occur in the next few decades. Regardless of action, changes already occurring due to past emissions are now likely to be irreversible for thousands of years.

Low likelihood, high-impact events such as ice sheet collapses, ocean current changes or Amazon dieback cannot be ruled out.

“It’s a sobering read,” says Edwina Matthew, Head of Responsible Investments at Pendal.

“And remember that these are averages – different regions, different countries, even different states will be impacted to a greater or lesser degree than this average.

“For example, the report finds that average global warming is 1.09 degrees Celsius above pre-industrial temperatures. Australian land areas are already 1.4 degrees Celsius above pre-industrial averages.

“This is going to increase the probability of extreme weather events, heatwaves, sea surges and drought.”

Risks and opportunities for investors

What should investors take out of the IPCC report? What does it mean for portfolio construction?  And how can investors ensure they understand the risks and opportunities posed by global warming?

Matthew identifies three headline risks and opportunities for investors to consider:

1. The IPCC report increases the risk of climate activism or litigation against companies and governments

The most high-profile litigation so far has been a Dutch court ruling that the multinational oil giant Royal Dutch Shell must reduce its emissions because its contribution to global warming violates human rights.

Previous IPCC reports were referenced in the court case and this latest one will likely be used in the appeal hearing.

A number of Australian cases have also referenced IPCC findings.

Sharma v Minister for the Environment [2021] found the federal environment minister owed a duty of care to children who might suffer potential “catastrophic harm” from the climate change implications of approving a NSW coal mine extension.

Investors also need to watch for governments being the target of litigation which could affect regulatory approvals and business permissions in their investments.

2. The report’s heightened focus on methane is of interest for investors

A “strong, rapid and sustained’ reduction in methane emissions is required to help reduce greenhouse gas emissions and hopefully avoid the catastrophic impacts of climate change, the report finds.

Methane is not only a vastly more potent greenhouse gas than carbon dioxide, but its concentration in the atmosphere has been increasing rapidly.

Importantly, it is short-lived in the atmosphere meaning controls on methane can rapidly reduce atmospheric concentrations.

Governments are already acting on methane. The EU is proposing curbs on methane emissions while the US is planning tighter emission rules.

But it’s a tricky problem to solve. Some gas production emits methane. Raising livestock for meat and nitrogen-based fertilisers are major sources. Rotting waste in landfill also emits methane.

“All of these are important challenges that investors can play a part in,” says Matthew.

“Investors can engage with companies to better understand how they’re thinking about these issues, what they’re doing to mitigate the risks and how they’re transitioning to thrive in a low-carbon economy.

“Investors can also direct funds to solutions. For example, CSIRO is working with the private sector to commercialise a livestock feed additive made from seaweed, which has been shown to reduce methane emissions in cattle by up to 80 per cent.”

3. Carbon removal solutions can also play a role in investor portfolios

“Carbon removal is a vital net zero tool which has a place alongside absolute emissions reductions,” says Matthew. “It covers a range of investable methods, from afforestation to wetland restoration to carbon capture and storage (CCS) and ocean fertilisation.”

However carbon removal technologies such as CCS need more development to work at the scale required. We need more co-ordinated efforts to advance these sorts of emissions reduction solutions in sectors with harder-to-abate industrial processes such as cement and steel production.  

Future climate scenarios are becoming clearer

We now know more than ever how possible climate futures could play out.

The report is very clear that without “immediate, rapid and large-scale reductions” in emissions, curbing global warming to below 2 degrees Celsius — the Paris Agreement goal — will be “beyond reach”.

These findings call on us all to accept and act on the reality of the situation, including policymakers, investors, businesses and consumers.

In the words of the UN Secretary-General Antonio Guterres the report is a “code red for humanity”.

Download the sixth assessment report from the IPCC here

About Edwina Matthew and Pendal

Edwina Matthew is Pendal’s Head of Responsible Investments. Edwina is responsible for maintaining our leadership position in the provision of sustainable and ethical investment products.

Edwina is actively involved in the implementation of the UN-supported Principles for Responsible Investment. She also represents the company in working groups with a number of industry associations and initiatives relating to responsible investment.

Pendal Group is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

We believe sustainability considerations ultimately drive higher and more stable investment returns over the long term.

Pendal Group has a proud heritage in responsible investing, extending back decades. Our specialist responsible investing business Regnan includes highly experienced ESG research and engagement experts and offers a growing range of investment strategies​.

Find out about some of Pendal Group’s responsible investing strategies:

• Pendal Sustainable Australian Fixed Interest Fund
• Crispin Murray’s Pendal Horizon Fund
• Regnan Global Equity Impact Solutions Fund
• Regnan Credit Impact Trust

Contact a Pendal key account manager here.

Emerging markets investors need to take great care when choosing tech-related stocks right now. Here, Pendal’s EM team JAMES SYME, PAUL WIMBORNE and ADA CHAN explain why

• Find out about Pendal Global Emerging Markets Opportunities fund

JULY was a strong month for emerging market equities.

The MSCI EM index returned 6.2% in USD terms, with strong gains from some major groups of stocks.

Chinese internet names performed well, including some key portfolio holdings.

Some emerging market banks rose strongly, including portfolio holdings in Mexico and South Africa. Turkish (not held) stocks rose strongly on hopes for more orthodox economic policies.

By far the strongest gains, though, were in parts of the broader technology sector — especially stocks with exposure to electric vehicles or batteries, and stocks that are possible artificial intelligence beneficiaries.

We see multiple signs that there may be excessive optimism in some of these stocks.

We’re not taking a view on particular companies or business models — and we’re not saying these upward moves are finished.

But it’s worth highlighting some of the market dynamics we saw in July:

1. Huge volumes and parabolic price moves driven by retail investors

This has particularly been the case with the Korea EV and battery sector.

These stocks represented nearly half the total Korean stock market turnover on some days in July, driven by retail investor leverage rising to a record 10 trillion South Korean won.

Key to stock selection has been a Korean YouTube presenter Park Soon-hyeok, better known as ‘Mr Battery’.

Six of his eight recommended names rose more than 40% in the month. The strongest of them, Ecopro (not held), was up 1059% this year at the time of writing.

There have also been a raft of new issuance in Korean EV/battery ETFs in recent weeks.

2. The strongest moves are in names that might have quality challenges

Chinese online education play New Oriental Education (not held) returned 49.8% in July. It’s previously been the subject of short-seller allegations of dishonesty and a crackdown on online education by the Chinese government.

NIO (China, EV, not held) lifted 58% in July, though it’s forecast by consensus estimates to have a net loss of US$2 billion on $8.9 billion of sales this year.

Nio underperformed XPeng (China, EV, not held), which rose 74% in the same period, despite expectations it will lose $1.2 billion on $4.5 billion in sales.

Oh, and in May of this year Lee Dong-chae, chairman and biggest shareholder in Ecopro, was sentenced to two years in prison for violating South Korean capital market laws.

3. We’ve seen parabolic moves in stocks that aren’t pure-play tech names:

Posco Holdings (Korea, steel, not held) is one of Asia’s biggest steel producers, with 30,000 employees producing 32 million tons of steel every year.

The company has made some smart investments in green steel technology, and has ongoing investments in EV battery components.

A management update in July was material in driving Posco’s market cap from $24.9 billion to $42.5 billion in the month.

Similarly, exceptionally strong monthly gains (50% plus) were seen in some Taiwanese computer hardware makers, even though they have been reporting declining PC, laptop and server volumes this year.

Investors are hoping server orders from artificial intelligence (AI) businesses are about to follow — even though volumes and margins at this point are unclear.

4. High-quality, large-cap companies with proven track records and technologies were laggards in July

TSMC (Taiwan, tech hardware, held) is widely recognised as the world’s dominant producer of the high-performance semiconductors that are key to AI.

The stock fell 2.8% in July.

Samsung Electronics (Korea, tech hardware, held) is TSMC’s nearest challenger in high-end semiconductors, as well as a major producer of computer memory, including the HBM type used in AI servers.

The stock fell 0.4% in July.

Technological revolutions in AI and EV are changing the world, but equity markets will not price that opportunity with perfect efficiency.

We are concerned that some parts of the EM equity space look particularly inefficient right now.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here