CEO Statement on decarbonising institutional portfolios: doing nothing is the worst option of all!

One of the reasons why I decided to make my personal move to Quoniam last summer is that I wanted to be directly at the cutting edge of designing and delivering sustainable solutions for asset owners. Quoniam has a rich history of more than 18 years on its own ESG journey, and that depth of knowledge, data and resources has indeed led us to now produce our first dedicated climate solution.

What does our ESG journey look like? Here are some highlights:

• 2004: Launched first equities mandate with sustainability criteria
• 2005: Launched first fixed income mandate with sustainability criteria
• 2012: Signed the UN Principles for Responsible Investment (PRI), a globally recognised standard for responsible investment (in 2022, we once again received top ratings for our approach: https://www.quoniam.com/en/sustainability/pri-reports/)
• 2015: Signed the EFAMA Code for external Governance, the Montreal Carbon Pledge and the Global Investor Statement on Climate Change
• 2017: Implemented sustainability criteria in mutual funds
• 2019: Joined Climate Action 100+ and the Task Force on Climate-Related Financial Disclosures (TCFD)
• 2021: Achieved compliance for mutual funds according to Article 8 SFDR; joined the Net Zero Asset Managers Initiative and the Institutional Investors Group on Climate Change  2021: All mutual funds are compliant with Article 8 SFDR, Quoniam joins the Net Zero Asset Managers Initiative and the Institutional Investors Group on Climate Change
• 2022: Pioneering research on forward-looking climate data and decarbonisation portfolios

The current controversies around ESG investing show once again how important it is to take the topic seriously and substantiate it with solid data. For me, perhaps as an actuary, it is important that solutions are based on scientific approaches, interpreting not only historical data but also incorporating forward-looking models, and that they also support real transformational change. Using these core principles, we can now add to our ESG journey with the introduction of our new Climate Equities strategy. It focuses on transformation candidates with a high potential for future emission reductions – at a macro level supporting the transformation, and at a micro level presenting investors with the potential for outperformance. You can read more on the research behind it in the article linked above.

But why should institutional investors even bother about decarbonisation?

There can be many different reasons for investors to take climate change into account – own purpose and beliefs, regulatory pressure, reducing risk or exposure to companies that could be affected negatively by climate change, or explicitly seeking alpha opportunities presented by this theme. For some investors, several of these arguments will already have resonated and they have therefore already taken action. And yet, the take-up of many investors is still patchy, waiting perhaps for the ultimate proof, or the final piece of regulation, or simply wanting to follow the pack. There are times when a wait-and-see-approach is sensible. This is not one of them. Not taking a decision on climate is instead making a decision on being at the back of the pack during a period in which massive portfolio change occurs across the industry, risks are emerging, and opportunities are presenting themselves.

Climate risks and opportunities

If climate risks are not addressed, the downside risks are dramatic. According to a paper by the Thinking Ahead Institute, the costs of inaction could be immense, as tipping points are reached: if we continue with the current business-as-usual-scenario, the temperature will most likely rise between 2.7°C-3.6°C, resulting in a possible 50-60% downside to existing financial assets. In contrast, taking action to transition to a well-below-2°C-increased-world might limit the consequences to a loss of only 15%, some of which could be further offset by targeted investing to profit from new opportunities. According to the annual report on the global asset management industry 2022 by BCG, the push to achieve net-zero by 2050 entails huge opportunities: the sustainable investing market could translate to 20-30 trillion USD in targeted bond and equity flows over the next 30 years.

We can choose to act now and minimise further climate change, or to delay action, preserve the economy in its current form and suffer the consequences. It’s hard to imagine how any investor can see ignoring the climate crisis in their portfolios to be a defensible long-term strategy – it has to be preferable to take action to

a) assist in the transformation to avoid these scenarios; and

b) position portfolios to account for the risks and opportunities.

My supposition is that scientific-based, data-driven, forward-looking active management approaches are key to supporting transformation, managing climate risk and profiting from investment opportunities. As an asset management industry, it is incumbent upon us to provide those approaches – but similarly asset owners need to step up to the plate and address their strategies in a thoughtful manner, so as to not just window dress their existing portfolios with simplified CO2 reduction approaches but to create real change, manage risk and also benefit from opportunities.

There is a lot to unpack on how asset owners can approach this topic, which I’ll have to save for another day, but certainly the following need thinking through:

• how institutional investors can take decarbonisation into account;
• why it is no longer enough to simply look at risk and return when evaluating a portfolio;
• whether backward-looking passively investing in those that have already met their targets really supports change;
• the inherent portfolio construction risks in such approaches, and what investment opportunities are, as a consequence, foregone.

What do you think about this topic? Feel free to share your ESG experiences and views directly with me – via the comments in my LinkedIn post on this topic or by direct message on this platform. I would be very interested in an exchange or challenge!