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ESG: A simple approach to net zero for investors

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

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:

The list goes on — and for good reason.

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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”.

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Regnan Global Equity Impact Solutions Fund

“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”.

About Alison Ewings

Alison is Head of Engagement at responsible investing leader Regnan. Regnan is a Pendal Group business.

Alison manages Regnan’s program of engagement with ASX-listed companies, which aims to help improve business performance by addressing issues such as climate change, modern slavery and Indigenous relations.

Alison has worked in sustainability for more than a decade and was formerly the Head of Sustainability at Westpac.

About Regnan

Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.

Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.

The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.

The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.

Visit Regnan.com

Find out about Regnan Global Equity Impact Solutions Fund

Find out about Regnan Credit Impact Trust

For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at May 26, 2022. PFSL is the responsible entity and issuer of units in the Regnan Global Equity Impact Solutions Fund (Fund) ARSN: 645 981 853. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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