Our pathway to net zero
David Land, Rothesay
At Rothesay we believe that our whole industry, and the wider financial services community, needs to work together to tackle climate change and where we can champion this in a meaningful way we always will – like joining the UN-convened Net-Zero Asset Owner Alliance. In this article our Head of Investment Strategy, David Land, shares a few thoughts and principles underlying our approach to ESG investment.
Protecting our policyholders’ pensions
At Rothesay, we often describe our engagement with ESG principles, such as our pledge to achieve net zero across our business by 2050, as a fundamental part of our commitment to providing our policyholders with security for the future.
Ultimately, to protect our policyholders' pensions for the long term, our lending needs to be aligned with businesses that will successfully navigate climate risks and can clearly demonstrate credible pathways to do so. We carefully measure and manage the risks associated with ESG principles in our investment portfolio and ensure that our lending is aligned with businesses that will successfully navigate these risks in the future.
The investment environment is evolving
Both companies' reactions to climate change and investment markets are developing rapidly so that within a year a company can go from making no useful disclosure to introducing the beginnings of a credible transition plan, which may include elements that our lending could support.
For example, while we limit our lending to high carbon intensity sectors with uncertain future emission pathways, like the automotive sector, this could then change for companies that have a credible pathway to carbon reduction, for instance a car manufacturer able to effectively switch to electric vehicles.
In addition, underwriting and ongoing risk management of investments in real estate may include climate scenario analysis in which we assess the possible costliness of damage caused by flooding, or more positive but still material factors, like the cost of complying to new climate legislation.
Investing in climate stress-testing capabilities is important
Investing in our own stress testing capabilities is really important to us as, ultimately, to make a meaningful contribution to carbon reduction we need to know where in the portfolio the biggest climate risks are and then be transparent about how, and how frequently, we measure and report them.
In terms of our approach, so far, to climate stress testing, we have concluded that there is no substitute for carrying out single name credit analysis through a climate lens, trying to uncover a company's greatest climate sensitivities and then constructing scenarios that will cause appropriate stresses to their bond prices. This way we don't accidentally give a bond a clean bill of health because its issuer is not affected by a limited standard set of scenarios. Conversely, we don't waste time assessing irrelevant risks, for instance, trying to calculate potential losses caused by wildfires for a business based somewhere like Edinburgh, where they just don't occur.
Our three tips for investment managers taking the first step towards climate change-aware investing
- Make sure meaningful interim targets are set and reported on regularly – long-term ambitions are important, but there needs to be a credible pathway in which people can see near-term change too.
- Don't hide behind incomplete data – where it doesn't exist, come up with proactive ways to address this and report on what you can transparently.
- Integrate responsible investing across not only your whole investment team, but your whole business – at Rothesay all parts of our business are expected and want to contribute to our climate change efforts. Businesses that have an isolated responsible investing team beg the question, 'what is everybody else doing?'
About the author
David Land is Rothesay's Head of Investment Strategy. Previously, David was a Managing Director at Goldman Sachs and worked as a trader in Interest Rate Products and Credit Derivatives since 1993. Prior to joining Goldman Sachs, David was a programmer at the IBM UK Scientific Centre.