Climate change
Climate change is a major, systemic risk that could destabilise global economies and investment markets to a significant degree. In addition to systemic risk, there will be winners and losers at the national, regional and individual company and asset level. Investors thus need to be vigilant and proactive in assessing and managing these risks. Climate change presents both investment risks and new opportunities that need to be proactively managed as part of our pre-investment due diligence, the post-investment oversight process, as well as in the reporting/disclosure to clients and stakeholders.
As a long-term investor in private markets across a range of asset classes, Stafford has a shared responsibility with other institutional investors to manage and protect the assets of end-beneficiaries whose money we manage, including from the effects of climate change. We support the goals of the Paris Agreement and are concerned that we are currently falling well short of the agreed goal of “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels” and transiting to a net-zero portfolio by 2050.
The challenges of climate change are being addressed by embracing the transition to a net zero greenhouse gas (GHG) emissions economy, and the sooner the transition takes place, the better the outcomes will be. As an investor in global forestry and low carbon solutions Stafford has committed to the Net Zero Asset Managers Initiative (see box) and will continue providing solutions that not only are able to deliver financial returns but help achieve the transition to the net zero economy.
Net Zero Asset Managers initiative
Stafford is proud to be an early signatory to the Net Zero Asset Managers initiative. In this way we demonstrate continued leadership on climate issues, deepen our dialogue with external fund managers and enhance partnerships with our clients. Through this initiative, we have committed to[1]:
Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management (‘AUM’)
Set an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner.
Review our interim target at least every five years,
Increase the proportion of AUM covered until 100% of assets are net-zero.
Our commitment reflects our belief that the transition to a low-carbon economy is inevitable and already under way. As an asset manager we play an important role in investing to support the transition to a low carbon, more climate resilient economy through how we manage our assets. We believe that collaboration with other investors and policy advocacy are key pillars of our responsibilities to avoid a runaway climate outcome that will harm the financial security and safety of current and future generations and we will work together with our clients, external managers and other stakeholders towards achieving net-zero emissions. Within the initiative we aim to contribute to developing methodologies and work with other investment managers to extend the signatory group.
[1] See https://www.netzeroassetmanagers.org/ for more information.
Our disclosures on governance, strategy, risk management and metrics and targets associated with climate-related risks and opportunities follow the TCFD recommendations[1].
[1] TCFD (2017), Implementing the Recommendations of the Task Force on Climate related Financial Disclosures, https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf
I. Climate governance
At Stafford, responsible investing and climate governance start at the top, with our Executive Management Board (EMB) and extends across all levels of our investment platform and business operations.
Our Strategic Position on Climate Change spells out how the Board is being informed about climate-related risks and opportunities. This climate change position paper has been developed to set out Stafford’s priorities to guide our actions and investment processes now and into the future.
It has been approved by the EMB and its implementation overseen by the Sustainability Committee, which meets on a quarterly basis and reports directly to the EMB. Each Stafford’s business line has provided input into the formulation of this climate change position paper and shares responsibility for its implementation.
Climate governance at Stafford
Source: Stafford Capital Partners, as of March 21, 2021.
The EMB has ultimate responsibility for the oversight of risk management across the Stafford Group as it is responsible for adopting and reviewing Stafford’s risk-based approach to the identification, evaluation and management of risks that are significant to the fulfilment of Stafford’s business objectives, and for the determination of appetite for retention of risks across the group. This encompasses climate-related risks.
The EMB is responsible for risk management and has delegated to the Investment and Risk Committee the role of ensuring that a risk management system is established, implemented and maintained.
The Investment Committees of different business lines report to the Investment and Risk Committee and are responsible for overall risk management associated with selecting, acquiring and monitoring investments. Stafford Capital Partners' Strategic Position on Climate Change further describes the role of management with respect to identifying climate related risks and opportunities.
The Sustainability Committee is entrusted with responsibility for overseeing the implementation of our Responsible Investment Policy, amongst a variety of other related activities. This structure allows the Sustainability Committee to have a direct link to both the Executive Management Board and the Investment Committee of each business line.
Stafford’s Partners and all staff have the responsibility to ensure that ESG factors, including climate change risks and opportunities, are considered in our investment and corporate decision-making processes.
II. Climate strategy
Climate change is a major, systemic risk that could destabilise global economies and investment markets to a significant degree. Stafford finalised its Strategic Position on Climate Change in 2019, describing how we integrate and mitigate climate related risks across the business lines and investment portfolios.
As an investor in real assets and private markets we are working closely with the managers to identify the material climate risks and opportunities and the potential adverse impacts prior and during the investment period. In terms of mitigating the climate-related risks, Stafford has begun to include specific climate change questions as part of its ESG assessment of underlying fund managers. This helps us identify the managers that have the greatest potential exposure to these risks, as well as their capabilities and efforts of terms of taking these into account as part of the underlying investment management process.
Stafford's business lines are making efforts to support the transition to a lower carbon economy through targeted investment products, including seeking higher standards of integration amongst the investment managers of private equity and venture capital funds. The long-term nature of the funds, being 10 years, also demonstrates this long-term viewpoint of the Stafford Capital Partners. We enable the low-carbon transition by strategically investing in assets that will contribute to the transition to low-carbon economy, such as renewable energy and timberland. Our timberland business line is currently working on investment propositions in the area of afforestation, reduced deforestation and forest restoration, with all of the associated carbon benefits to clients.
Stafford currently doesn’t conduct scenario analysis to assess climate-related investment risks and opportunities, however, the investment teams include climate risks and opportunities in their analysis of investment opportunities across our business lines.
III. Climate risk management
Stafford has several processes in place to monitor and manage investment and operational risks, including the ones that are climate-change related. Climate change risks and related investment opportunities are being incorporated into Stafford’s pre-investment due diligence processes across asset classes. A summary of the broad mapping of potential climate impacts and their relevance to the asset classes that Stafford invests in is provided in the table below. A tick denotes transition risks or opportunities that will be assessed as part of our due diligence or monitored and managed for our investments. The absence of a tick indicates that the risk or opportunity is considered to be low.
Source: Stafford Capital Partners Strategic Position on Climate Change, July 2019.
Stafford’s investment teams identify climate-related risks as part of the assessment of material sustainability risks and assess any negative social, economic or environmental externalities of investments under consideration. The outcome of this assessment is documented in due diligence reports and reviewed by the Investment Committee and the Sustainability Committee (when a sensitive business case risk has been identified), prior to an investment decision being approved. In the post-investment processes, as part of Stafford’s oversight and management of existing investments and investment manager relationships, we actively manage to reduce risks. We engage with our direct investment management teams and fund managers to implement the recommendations by the Taskforce for Climate-related Financial Disclosures (TCFD) and improve their climate change related disclosures.
To complement the analysis of climate related risks that is being performed as part of the due diligence process, Stafford is currently testing a model we have developed internally to monitor the exposure of portfolios to physical and transition climate risk for our private equity, infrastructure and timberland investments.
IV. Climate targets and metrics
Stafford is developing its portfolio in line with the Paris Agreement with the aim of having a net zero portfolio by 2050. Our ambition is to present a carbon footprint that includes all asset classes, therefore in 2021, in cooperation with external experts we will begin to estimate the carbon emissions across our portfolio companies, and we will define interim and long-term targets for our business lines.
Stafford’s low-carbon investments, 2018-2020 (NAV in USD billion)
* Stafford’s low-carbon investments include timberland, renewable infrastructure assets and sustainable private equity.
Source: Stafford Capital Partners s, data as of December 31, 2020, 2019 and 2018, respectively.
Overall, Stafford’s targets on climate change include:
a) Reducing exposure to assets with significant climate transition risks such as funds investing in oil/coal/gas companies.
b) Investing in low-carbon, energy-efficient climate adaptation opportunities in different asset classes such as renewable energy and timberland. At the end of 2020, 43% of assets under management by Stafford were in low-carbon investments, such as timberland, renewables and sustainable private equity.
c) Aligning entire group-wide portfolio with net zero carbon by 2050.
These targets are supported by our engagement with external managers whose funds we have invested in on improving their disclosures and transparency on climate change-related risks and opportunities. As part this engagement, we started posing climate-related questions to private equity firms in our 2018 ESG survey. Through managers’ survey responses we gather insights into their climate-related strategies, governance, risk management and targets. In other words, managers’ responses indicate to what extent they are implementing the TCFD recommendations.
According to the 2021 survey, just above one-third of the 106 respondents publicly support the TCFD and the Paris agreement. In total, we have invited 132 managers to respond to the survey, which reflects the status of their responsible investment practices at the end of 2020. Half of the managers have set organization-wide targets on climate change and more than 80% of managers have identified the assets that are exposed to physical climate risk. Only 10% of surveyed managers have no risk management processes in place to assess their exposure to climate change related risks. Other climate-related insights from the ESG survey are showed below.
Climate activities of third-party managers at the end of 2020
Source: fund managers, PRI, Stafford Capital Partners, PRI, based on data as of December 31, 2020.
Overall, 2021 survey results suggest that fund managers still have a way to go with respect to climate change risk management, measurement, and ambitions. We will continue engaging with the managers on how they can advance their management of climate change-related risks and opportunities, encourage them to adopt the TCFD recommendations for climate reporting and define specific targets for their portfolios. In addition, we are working with our peers in industry initiatives that aim to standardize climate reporting for investors in private markets.
V. Future plans
Stafford will continue to participate in collaborative efforts with other investors through our membership of networks that are active on climate change issues, such as the Institutional Investor Group on Climate Change, and iCI (Initiative Climat International). We will continue engaging with our clients and our peers to help develop, evaluate, and implement methods for achieving net zero in the portfolios we manage on behalf of our clients.
Internally, we will continue to develop and clarify information and processes regarding the supervision and assessment of climate-related risks and opportunities and reduce our emissions from operations. For this purpose, we will continue conducting research on the physical and transition risks of climate change and develop tools and processed that can be directly applied into our investment processes. Our investment teams will continue identifying opportunities to invest in third-party funds and companies that deliver products and services that support decarbonization and climate resilience.
As part of our commitment to the Net Zero Asset Managers Initiative we will work towards achieving our end target of becoming net-zero while monitoring our progress towards 2030 interim target (defined in the fall of 2021) and the 2050 targets on an annual basis.