As the financial argument continues to stack up, and as community attitudes and expectations keep changing, the transition to a low carbon economy is well underway, driving the flow of investable capital from ‘grey’ to ‘green’ in rising volumes.
As an overarching principle, an integration and engagement-based approach is integral to the way we think about investing responsibly. This means incorporating environmental, social and governance (ESG) factors, including climate-related factors, within investment decisions to improve risk/return outcomes. It’s also about engaging with investment managers and companies to encourage them to do the same.
Contrary to an historically popular belief, responsible investing is not about divesting. In fact, divestment or exclusion policies should be a last resort. It’s one that can be adopted, typically, for ‘values’ rather than ‘value’-based portfolio decisions.
In considering the pros and cons of the proverbial ‘stick’ versus ‘carrot’ approach, a decision to divest may have a feel good element to it, but does little to move the dial. In reality, someone else has bought your shares and nothing has changed in the real economy. Indeed, the person who has your bought fossil fuel shares may care less about climate transition that you do, so the net result is worse in terms of progressing the transition than if you’d stayed invested and used your influence.
And, divesting can also bring with it unintended consequences. For example, not only does divesting from fossil fuels today do nothing to progress the transition to a lower carbon economy, it also completely underplays the complexity of the social and economic transition required to shift to lower emitting technology.
Responsible investing is about enabling a just transition that considers the many complex issues at play. It’s about using your influence through investment in new technologies and climate solutions, and through engagement with companies to move them along the transition spectrum. The reality of everyone divesting from fossil fuels today, before new technologies are available and trained workforces are in place to run them, would create something far from a just transition.
It’s why it is important that investment managers strike the right balance on behalf of investors between a company’s current carbon intensive activity and evidence of a clear path towards a lower emissions future – in a timeframe which it considers reasonable and achievable.
A climate transition plan is key to supporting an emissions reduction target. Developing a plan includes setting current emissions baselines; assessing portfolio opportunities for emissions reductions; setting targets for reductions milestones; and, agreeing implementation plans that can be integrated within strategy and portfolio design decisions.
High carbon intensity, low-transition capacity companies, however, should be down-weighted or sold. And in making such decisions, it’s beneficial to ‘decarbonise at the right price’. Under this approach, investment managers will continue to consider valuations, liquidity and timing when prioritising emissions reductions from a diverse portfolio of companies.
If the market as a collective is to play its role in society’s push towards a net zero emissions target by 2050 (or sooner), it will take more than simply carving out fossil fuel related exposure from a portfolio, without reducing the emissions in the real world.
Rather, investment managers need to assess the full spectrum of their portfolios – the grey and green, and everything in between – and decide which companies are going to be part of the low carbon economy transition, or could be with some encouragement, based on multiple metrics. Then, they should sell the carbon intensive companies that won’t.
Chief Investment Officer, Pacific
Chief Investment Officer, Pacific
Kylie Willment is a Partner in Mercer’s Institutional Wealth business and is Chief Investment Officer for the Pacific region. Kylie leads the investment solutions portfolio management team which consists of asset allocation strategists, portfolio managers and analysts across Australia and New Zealand. The team is responsible for managing over $30 billion in assets within Mercer's Multi-Manager Funds.
Kylie is a member of Mercer's Pacific Investment Committee, Mainstream Assets Global Investment Committee, the Institutional Wealth Leadership Team and the Pacific Leadership Team. She is based in Sydney.
Prior to joining Mercer in October 2017, Kylie gained 27 years of experience in financial services including 14 years in investment management. Kylie joined Mercer from NSW Treasury Corporation (TCorp), the $90 billion state government investment agency. At TCorp, Kylie was responsible for managing over $30 billion within the TCorpIM Funds, for advising a number of large government clients on investment policy and strategy and for leading the development of TCorp’s investment stewardship framework. Earlier in her career, Kylie worked for National Australia Bank in Brisbane and various investment banks in the United Kingdom.
Kylie holds a Masters of Applied Finance from Macquarie University and is a Certified Investment Management Analyst (CIMA®). She is a Director of IMCA Australia and a member of the Investment and Wealth Institute’s global Certification Commission..
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