Talking Heads – Las carteras se ajustan al objetivo de cero emisiones

This is an audio transcript of the Talking Heads podcast episode Progressing portfolios to net zero

Andrew Craig: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the alignment of portfolios with net zero objectives. Net zero, of course, is what we need to ensure carbon neutrality by 2050, the objective being that the amount of greenhouse gases emitted needs to equal the amount removed from the atmosphere.

As an asset manager, we have developed strategies to adapt portfolios that are aligned with this ambition of helping to limit climate change while preserving or improving their financial return.

I’m Andrew Craig, Co-head of the Investment Insight Centre, and I’m joined today by Fabio Pinna, a Portfolio Manager in our Systematic and Quantitative Investment team. Fabio is a trained economist and one of our environmental, social & governance (ESG) champions, so he has a particular focus on the integration of our proprietary sustainability framework into portfolios. And that includes the strategies for transitioning portfolios so that they contribute to net zero. Welcome, Fabio, and thanks for joining me.

Fabio Pinna: Thank you so much for having me here today and especially to discuss this challenging and engaging topic.

AC: The place for us to start is the first step on the journey to net zero, which is understanding the client’s appetite, priorities and their constraints around net zero. How do you go about helping your clients to set their decarbonisation and alignment objectives and define the measurable key performance indicators for their portfolios?

FP: Sure, net zero objectives and targets vary from one investor to another depending on their overall degree of maturity in their sustainable approaches as well as other investment needs, they must integrate.

Clients have different time horizons or different risk appetites, so we need to take into consideration all these differences in helping our clients set their net zero ambitions. For most, we provide a simple and robust framework that they can use to decarbonise their portfolios. This is a first important step in their net zero journey and clearly the one that has gained traction over the past few years in the industry.

For these investors, we typically set an explicit target on the carbon footprint of their portfolios. So usually, we set a target where we reduce the carbon footprint of the portfolio relative to the benchmark by 15%. This approach works well as the targets are simple and clear. They allow our investors to show real commitment to reducing their impact.

There are also other investors who are further ahead in their net zero journey and for whom we are already implementing net zero approaches. Here we consider a decarbonisation trajectory that is recommended by the international scientific community, which is summarised as a reduction in carbon footprint of about 7% per year.  

AC: So, you described two distinct groups: investors who are perhaps on the first step towards net zero, so they do not have a benchmark for their portfolio, which is necessarily aligned with the Paris Agreement on reducing greenhouse gas emissions. For these clients, you have to come up with a strategy as to how they’re going to invest in financial securities in a way that corresponds to the objective of reducing carbon emissions. Then the second group is those who do have benchmarks aligned with the objectives of the Paris Agreement on reducing greenhouse gas emissions. For those clients, the investment universe is distinct and you’re managing against a benchmark which takes into account net zero objectives. Is that right?

FP: That is correct. So, the first group of investors do not have a specific net zero benchmark in mind, but they are still very interested in the standard market benchmarks.  

AC: So, I assume that means that they have a smaller investment universe of the securities they can invest in because you’re excluding companies whose carbon footprint is not good. Is that a disadvantage for them in terms of performance?

FP: In general, they do not have a smaller investment universe. It means that we select the companies within our client’s portfolio in such a way that the final carbon footprint of our portfolio is lower than that of their benchmark by 50%, which of course would tilt the portfolio of our client towards companies with lower carbon footprints.

This can help mitigate the risks of the investment and improve the portfolio’s environmental profile.

However, the contribution of this approach to the decarbonisation of the real economy might be limited because we might be tilting investment towards, let’s say, specific sectors or regions.  

AC: Can you tell us more about these limitations? And about what BNP Paribas Asset Management is doing to overcome them in our clients’ portfolios?

FP: This is a challenging and intellectually stimulating question. The limitations of the portfolio carbon footprint reduction approach might be to exclude high-emitting companies with credible decarbonisation plans in favour of companies with a lower carbon footprint, but no decarbonisation plans.

The portfolio carbon footprint reduction approach might also reduce exposure to sectors, for example, utilities or energy, or geographies, for example emerging markets that are critical to our economies and for the net zero transitions.

Thirdly, the approach is inherently backward-looking. For example, we would judge a company by what it has done, not based on what it plans to do. In this way, it does not account for decarbonisation strategies that are company specific. It is very important to assess the evolution of the net zero journey of the company and more generally of the markets.

AC: Presumably, you work with the experts within our Sustainability Centre when you’re looking at assessing these companies and the efforts they’re making and their profile with regard to carbon emissions.

FP: In fact, the Sustainability Centre and we [at BNPP AM] as a whole have developed a forward-looking framework to accommodate the appetite of our investors that are more advanced in their net zero ambitions.

This framework, which measures the net zero alignment of investment in corporate issuers is called the triple A framework: the triple A stands for Achieving net zero, Aligned to a net zero pathway and Aligning to such a pathway.

The first category, the best of the three, is Achieving net zero. These are companies that as of today are close to a net zero equilibrium – emitting an amount of greenhouse gas emission that can be offset in a sustainable world.

The second category is Aligned to a net zero pathway. These are companies that are still emitting more greenhouse gases than can be offset today, but are on a trajectory that will make them carbon neutral by 2050 in a sustainable world.

And the third group, the least advanced of the three, is Aligning to a net zero pathway. These are companies that are not yet on a trajectory that will make them carbon neutral by 2050, but they are approaching such a sustainable pathway. In other words, we can see that these companies are actively discussing and preparing plans to align their businesses to net zero.

All other companies we categorise as not aligned.

 AC: Can you provide some other examples of how BNP Paribas Asset Management integrates net zero considerations into the daily management of portfolios?

FP: As part of the daily management of our business, we assess whether our portfolios are exposed to good investment fundamentals and also check whether some of the portfolio companies are lagging significantly on their net zero objectives – perhaps those that are significantly emitting more than the targets they set. Let’s call them laggards. A situation like this can create trade-offs between the purely financial objectives of the portfolio versus other extra-financial objectives such as net zero.

To successfully address these trade-offs, we integrate firm engagement activities into our portfolio management. Corporate governance is an important criterion and is key to making sustainable targets credible. Our engagement approach aims at improving a board’s awareness and effectiveness of their net zero strategies.

Let me give you a theoretical example. If a portfolio company is a significant net-zero laggard, we can still keep it in the portfolio under the certain conditions and within the specific investment constraints of the portfolio. One condition is that the company shows strong investment fundamentals, and another is that it falls under the scope of our engagement activity.

Over time, our engagement team can engage with the board of the company to assess their net zero strategies and where they stand on their net zero journey. If along the journey we realise that the company is still lagging significantly relative to its ambition, and it may be that its culture is resistant to net zero, then we can divest completely from the company.

AC: For our final question, is there for you, Fabio, a particular net zero initiative that makes you proud of being part of BNP Paribas Asset Management?

FP: Well, one of the initiatives that makes me proud to work for BNP Paribas Asset Management is its ability to ‘walk the talk’ by committing capital in climate solutions.

This is demonstrated by the acquisition of a majority stake in a leading Danish natural resource company, International Woodland Company or IWC.

IWC is headquartered in Copenhagen and has more than 13 years’ experience in providing investment management and advisory services within sustainable timberland investments, agriculture investment and ecosystem services, including carbon credits and conservation projects.

These are all key activities in the net zero journey and, beyond the acquisition, for the expansion of BNP Paribas Asset Management’s sustainable investment offering and for broadening our private market investment solutions.

This kind of activity gives me more confidence that the global financial system can successfully accompany the real economy towards net zero and help achieve the world’s sustainable goals.

AC: Indeed, for those of our listeners who are interested in learning more about natural capital and about the International Woodland Company, there is on our platform a podcast with Celine Claudon, Chief Commercial Officer for IWC and Maxence Falco, Private Asset Lead at our Sustainability Centre.

I would also draw listeners’ attention to a recent publication that our Client Solutions team, Product Strategy Marketing team and the Sustainability Centre co-wrote. It is a comprehensive, practical handbook on adjusting your investment approach to net zero.

If you’d like a copy of that publication, please contact your dedicated client relationship manager.

Fabio, thank you very much for joining me today.

FP: Thank you so much, Andy.