As professional investors our objective is to achieve the best risk adjusted returns for our clients. This objective is clear and enduring but the framework that we operate in is constantly evolving. The rules and regulations around investing are dynamic as are the economies and companies that we consider for investment. What is also currently undergoing a change is the level of momentum behind people’s desire for their investments not to just generate financial returns but also to make a positive impact on the future. Sustainable investing has become best practice and sustainable economic and business models have become the obligation of governments and company boards alike. At Devon we are very proud of the commitments that we have made in this area, both in terms of the way that we integrate Environmental, Social and Governance considerations into our investment process and in the way that we engage with the companies that we own to motivate positive change in the area of sustainability. In today’s world the consideration of such issues no longer comes at the expense of achieving superior investment performance, but rather over the long-term, depends upon it. Climate change is one such issue.
There is now almost universal scientific consensus that climate change is happening and that human activities are largely responsible for it. As the member countries of the World Meteorological Organization recently wrote, “Human influence on the climate system is clear, and recent emissions of green-house gases are the highest in history. Warming of the climate system is unequivocal, and since the 1950’s, many of the observed changes are unprecedented over decades to millennia”. For evidence in support of this thesis, people need only look to the recent temperature records being set across the Northern Hemisphere this summer or the increase in once in a century storms that we see occurring across the planet, such as the devastating floods currently being endured in Japan.
As the understanding of climate change develops, society is now calling for action. In December 2015 this resulted in the signing of the Paris Agreement which saw 195 countries adopt the first-ever universal, legally binding global climate deal with its objective to limit the increase in global average temperatures to well below 2 degrees Celsius, above pre-industrial levels. The reason for optimism that this initiative will achieve traction is because of the commitment made in partnership across countries. While the USA under Donald Trump has subsequently withdrawn, it is expected they will come back into the Agreement under a future President. However, it is this concept of collaboration that has motivated the global investment community to take action through the launch of Climate Action 100+. This an initiative that Devon Funds are proud to be a part of.
Established in December 2017, Climate Action 100+, represents a collaboration between leading global institutional investors in committing to a 5-year strategy aimed at limiting climate change. Originally it involved 225 organizations such as the California Public Employees’ Retirement Scheme and the New Zealand Superannuation Fund, that came together to develop a strategy of environmental leadership. This initiative recognized the power that of combining the $26 trillion of assets under management that these investors had and by utilising the financial markets, significant influence could be exerted on those listed companies most at fault for the emission of greenhouse gases.
Incredibly it was recently highlighted by the Carbon Disclosure Project that since 1988, a mere 100 companies have been responsible for 71% of the world’s industrial greenhouse gas emissions! This data empowered the signatories of Climate Action 100+ with the information they required to target their efforts. The world’s worst climate offenders, including household names such as ExxonMobil, Toyota and Nestle, are the types of companies that the signatories are committed to engaging with on their performance and strategies around climate change. More specifically each company will be challenged on the following criteria: (1) they will be asked to develop frameworks to clearly represent their board’s accountability and oversight of climate change (2) action must be taken by the respective businesses to reduce greenhouse gas emissions across their value chain, and finally (3) management and boards are expected to enhance their corporate disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures. The objective of this program is positive engagement. An opportunity for large and globally important businesses to hear the concerns of the investment community and drive organizational improvement.
Subsequent to the very successful launch of this initiative, other investors from around the world looked to get involved. Devon Funds was part of this group and in early 2018 we became one of the very small number of New Zealand-based signatories. As a consequence of this member expansion the number of target companies also grew to 161 and now includes the following Australian businesses: BHP Billiton, Rio Tinto, Wesfarmers, Adelaide Brighton, BlueScope Steel, Santos, Woodside and Woolworths. Each investor within Climate Action 100+ then gets the opportunity to identify which of these companies is of particular interest to them and obligations around contact and dialogue are made. At Devon we have chosen Woolworths and with Australia’s Local Government Super taking the responsibility in the role of lead investor, we are now working with them to promote and monitor improved climate related performance by this important Australasian retailer. As party to this engagement we have already supported communication with the Woolworths board and will meet with them on the topic of climate change later this year. It is worth noting though that as an organisation, Woolworths has already made credible progress in addressing climate change risks across their supply chain and recently reported an 11% reduction in their emissions in 2017 compared to 2015.
The level of collaboration that is evident amongst many of the world’s largest investors in respect of Climate Action 100+ is unprecedented. Although financial markets are often focussed on short-term results, what is extremely encouraging is that the ultimate owners of our listed companies, ie you, our clients and the Managers appointed to look after your funds, are committing to this issue, with a sustainable long-term perspective.