In the four years since the Paris Climate Agreement, we’ve seen devastating hurricanes and floods in the United States, Europe and Asia. Wildfires have destroyed millions of hectares in California and Australia. Over the past decade, economic losses from natural disasters averaged $150 billion a year (€136.6 billion).1 The bottom line is: investors can’t afford to ignore the effects of climate change any longer.

Understanding climate risk isn’t as straightforward as it seems. There’s no single “climate risk.” Clearly, some sectors face an immediate physical threat – hotels, for example, that may be located in hurricane zones, or coastal businesses faced with ruin because of rising sea levels. For others, the risk stems more from regulation – heavier fines for pollution, caps on emissions, or restrictions on the use of fossil fuels. Risk may also be financial – insurers pay out billions each year in claims because of natural disasters. There is also “transition risk” – the risk that, in moving to a low-carbon economy, certain companies will need to adapt their business models, or face policy and legal challenges. We shouldn’t forget that climate change also brings with it other risks – in the form of biodiversity loss, or shortages of natural resources. This raises the prospect of a domino effect.

There’s a convergence between finance and climate – the two are becoming intertwined. Fundamentally, they’re both about Value at Risk. TCFD will be very important in this. It’s being extended and tightened, which is good. I work with insurance companies – there, TCFD is like a green Solvency II.”

~ Olivier Trecco
Client Portfolio Manager, Natixis Investment Managers International

For investors, working through these risks isn’t easy. Risks have to be broken down by sector and company – to identify not only the extent of each risk, but also how that risk might affect long-term investment returns. Incorporating climate into investment decisions is the first step – the E in ESG. Engagement also has a role to play – the more investors understand climate risk in their portfolio the better. All this puts a premium on knowledge and expertise. Across the Group, Affiliates engage every year with hundreds of companies – on issues like environmental management, emissions and energy efficiency. The notion of climate resilience has also increased in importance, with more properties and infrastructure at risk because of extreme weather. For years, Affiliates have been working on climate issues; many have embedded climate in their investment and engagement processes.

As a Group, we have identified climate change as a key ESG issue. This year, in the United States, Loomis Sayles is putting special emphasis on climate: it’s drafting a new CEO Climate Statement, and making sure climate is built in into its investment analysis, engagement and training programs. In France, meanwhile, Ostrum has introduced training for portfolio managers on climate and carbon accounting.

ESG truck

More than 50% of our Affiliates by
AUM measure their carbon footprint
or are actively considering it.

In integrating ESG, our objective is not to remove climate risk altogether. After all, even investing in hospitals, bridges or agriculture implies at least some impact on the environment. As a society, we cannot “ESG-integrate” our way out of climate change. Instead, we need to increase our understanding as asset managers, so we can support those sectors or companies working toward an effective transition to a more sustainable, low-carbon economy, and start to invest in projects that have a real impact on climate change. 

There’s no reason to suppose that, by reducing climate risk in this way, investors have to give up returns. A recent study by Morgan Stanley showed no measurable difference in performance – in fact, ESG funds, on the whole, had lower downside risk.2 In some cases, there’s a more direct correlation – in real estate, for example, AEW works closely with property managers, operators and tenants to increase energy efficiency, and reduce water consumption and waste. That lowers utility bills, potentially increasing profits and improving returns for investors.

In dealing with climate risk, we’re discovering more all the time. Data is still inconsistent, but companies are at least publishing more of it – a response mainly to stricter reporting regulations. Machine-learning could also prove useful – in analyzing correlations between ESG and financial performance, for example. But the real game changer here could be the TCFD – the Financial Stability Board’s (FSB) Task Force for Climate-Related Financial Disclosures. Launched in 2017, the TCFD recommends companies report against four pillars: governance, strategy, risk management and metrics & targets. The TCFD should increase the flow of information, and make it easier for investors to gauge climate risk. The PRI has already made the TCFD recommendations mandatory for its signatories. Our aim is, as a Group, is to meet those recommendations. For more information about our approach to TCFD, please refer to page 33 in the Natixis Investment Managers’ 2020 Responsible Investment Report. 

With reliable emissions footprint data – covering scopes 1, 2 and 33 – investors can start to map out carbon pathways, so they can see clearly the impact of climate change on their investments (and vice versa). This is important because it enables investors to align their portfolios with specific climate change scenarios – a warming, for example, of +1.5°C or +2°C (the Paris Climate Agreement calls for a warming by 2030 of “well below +2°C”). Some Affiliates are already employing this approach. Dorval, for example, uses three scenarios: +2°C, +4°C, and +6°C. For its funds, Mirova tracks the “warming” implied by its investments – to make sure it remains in line with the Paris target; Mirova is also working with specialists at Carbone 4 on “whole life-cycle” carbon foot-printing for its investments.

There is more to be done – markets are not yet fully pricing in climate risk – but the good news is that asset managers are taking climate more seriously. Increasingly, they’re including climate in their research and analysis. In effect, they’re bringing financial and climate risk closer together. The better we get, as an industry, at assessing climate risk, the more effective we’ll be at managing it.

How satisfied are you with the
climate-related disclosure of
publicly-traded companies?

How satisfied are you with the climate-related disclosure of publicly-traded companies?

Do you believe that markets are consistently
and correctly pricing climate risks
into company and sector valuations?

Do you believe that markets are consistently and correctly pricing climate risks into company and sector valuations?

Have you incorporated TCFD
disclosures into your investment
analysis to date?

Have you incorporated TCFD disclosures into your investment analysis to date?

Source: Sustainable investor poll on TCFD implementation. Copyright 2019 by Global Sustainable Investment Association (GSIA). Respondents surveyed in Australasia, Canada, Europe (excluding UK), Japan, UK and the United States.

Among clients, we’re seeing an increased focus on climate change. Across all asset classes, climate brings both critical risks and opportunities – and these are an inherent part of our investment decision-making. We back this up with training for our teams and expanding data and scenario analysis.”

~ Kathleen Bochman
Director of ESG, Loomis Sayles

1 ‘Disaster Risk Management – context’, World Bank website, April 2020

2 Sustainable Reality, Analyzing Risk and Returns of Sustainable Funds (Morgan Stanley Institute for Sustainable Investing). Copyright 2019 by Morgan Stanley.
Research was based on the performance of nearly 11,000 mutual funds between 2004 and 2018.

3 According to the Greenhouse Gas Protocol. Scope 1 covers direct emissions from a company’s operations; scope 2 indirect emissions (from purchased energy) and scope 3 emissions occurring in a company’s value chain. Scope 3 can be hard to measure, but often accounts for the largest part of a company’s overall carbon footprint, depending on the sector.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of the date indicated, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Data relating to Affiliates is taken from internal questionnaires completed by the Affiliated Investment Managers as part of a survey conducted by Natixis Investment Managers.