This document outlines philosophy, objective, organization structure and procedures for climate risk management in China Everbright Assets Management Limited (“CEAM”).
At CEAM, we believe the prosperity of asset management business relies on the overall sustainability of growth in each industry among investment universe, and progress of the society as a whole. As a financial intermediary company, we have responsibility to guide and facilitate client capital to invest in companies which are environment, social friendly, and with sound corporate governance. Specifically, we recognize the following:
Climate related risk exposures are increasingly becoming important factors to impact the long term return of investment portfolios. This is evident when evaluating major industry policies issued by various governments to reduce carbon intensity, and encourage climate friendly initiatives.
The climate change poses severe threats to the very essentials of our society, it can potentially reshape the investment landscape. At the same time, investors are increasingly focusing on how companies manage its climate risk exposures. CEAM has the fiduciary duty to our investors to address their concerns and effectively manage the portfolio climate risk exposure. In short, to be a responsible participant in the financial industry, as we have always been, we need actively supervise, evaluate, mitigate climate risk exposure and disclose our approach to clients.
Encourage investments to focus more on companies which are more climate and environment friendly. The investment approach integrated with climate risk exposure management will not only generate attractive returns for CEAM investors in the long term, it can also establish high reputation for CEAM in the asset management communities.
At CEAM, we set up three levels of management to implement climate risk policy:
- Board of Directors: Establish and supervise climate risk policies. Specifically, the responsibilities of the Board of Directors include the following:
- (1) Set the overall policy and strategy to incorporate climate risk factors into investment processes in the portfolios.
- (2) Allocate sufficient resources for the implementation of the policy and evaluate the effectiveness of the policy across the company.
- (3) Follow the development of related laws, regulations and industry practices on the management of climate risk and provide guidance to the company, update the policy on the timely basis.
- (4) Encourage employees to participate internal and external training sessions on climate changes.
- (5) Set targets on the climate related risk and investment management.
- Climate Risk Committee: Comprised of Head of CEAM, CEAM personnel responsible for risk management and compliance. Its primary responsibilities include the following:
- (1) Enforce the climate risk policy, develop action plans to factor in the climate risk exposures into portfolio management.
- (2) Monitoring the investment processes relating to climate exposure control, monitoring and measuring changes in climate exposures across investment portfolios.
- (3) Determine the relevance and materiality of climate risk for each portfolio.
- (4) Evaluate the effectiveness of climate related risk management and provide feedbacks to board of directors.
- (5) Discuss with industry peers and get first-hand knowledge on the new requirements and best practices on the management of climate related risks, report back to the Board of Directors.
- Portfolio managers: along with investment analysts, responsibilities include:
- (1) Conduct day to day management of portfolio, develop specific strategy to manage climate exposures.
- (2) Keep alert on the changes of climate exposures embedded in the portfolio according to the established metrics as set out below in the section titled "Climate Related Risk Identification and Methodology".
- (3) Analyze and identify carbon intensity for the new securities entering into the portfolios.
- (4) Encourage analyst focus on companies with friendly climate policies.
- (5) Report to the Climate Risk Committee on the portfolio carbon intensity and any climate risk related matters that require escalation.
Types of Climate-Related Risks
Climate-related risks largely include physical and transition risks and arise from the potential adverse impact of changes in the environment on economic activity and human well-being. Climate-related risks are potential sources of financial and reputational harm, which may be linked to issues like policy change, or supply and demand of raw materials and may also vary by sector, geography, time horizon and other factors.
Physical risks affecting the investment portfolios and investment funds managed by CEAM arise from the impact of extreme weather events and/or long-term or widespread progressive shifts in climate and/or environmental conditions.
Transition risks affecting the investment portfolios and investment funds managed by CEAM arise from the impact of the process of adjustment to an environmentally sustainable economy. Examples include:
- climate-related regulation developments such as the introduction of carbon taxes;
- uncertainty and uncoordinated environmental policy changes;
- emergence of environment-friendly technological breakthroughs;
- limitations to business models in companies invested in due to environment-related reasons; and
- shifts in consumer preferences driven by a desire for more ethical or sustainable supply chains and products.
Climate Related Risk Identification and Methodology
CEAM uses an integrated approach to guide its portfolios to incorporate climate risk as a consideration in the investment management process, i.e., using a combination of top down and bottom up approach to identify, assess and manage relevant and material climate-related risk exposures of the funds, with a focus on climate change:
- Use a top down approach, rank the industry sectors by carbon intensity, being greenhouse gas emissions (Scope 1, 2 and 3 if available) .
- The results of industry sector ranking are cross examined against the portfolio distributions among industry sectors, and reference is taken from reputable sources (such as Task Force on Climate-related Financial Disclosures) as to which industry sectors are most affected by climate change.
- Based on the above analysis, determine the relevance and materiality of the climate related risk for each portfolio taking into account considerations such as the investment strategy, including the investment horizon and investment universe of the portfolio.
- Use a bottom up approach, reduce or eliminate exposures to certain companies associated with large climate related risks that could materially affect the operations and financials of the company, taking into consideration whether such risks could pose negative reputational impact, or whether the company violate the asset owner’s values.
- Increasing exposure to companies with climate friendly policies and demonstrated adherence to such policies, such as companies transitioning to clean energy sources.
Climate Related Risk Management Procedures
Board of Directors
Hold an annual meeting together with Climate Risk Committee and Portfolio Managers to review the execution and effectiveness of climate risk policies, based on the evaluation, make necessary adjustments to the policy framework according to the latest industry standards and developments.
Climate Risk Committee
- Hold an annual meeting to review the portfolio composition, based on portfolio distributions among industry groups to evaluate how the climate risk exposure is managed.
- If it is determined a certain portfolio’s climate risk exposure is close to material, make recommendation to portfolio managers to reduce the exposure during a specific time period.
- Constantly monitor the latest industry standards and make recommendations to the Board of Directors on the adjustment of climate risk policy.
- Explain portfolio climate risk exposure to Board of Directors and Climate Risk Committee when necessary, in any case at least once a year in the Board of Directors annual meeting.
- On a daily basis, according to the company’s climate exposure evaluation metrics, monitor and keep alert on how the new investments affect the climate risk exposure of the portfolio, if the climate related risk is close to material or upon the recommendation of the Climate Risk Committee, make portfolio adjustments to reduce the exposures.
- When participating industry conference or engaging with company management, along with investment analysts, ensure others understand the importance of climate risk policy to CEAM’s investment decision making, encourage the company management to take more climate friendly actions.
- Encourage investment analysts to recommend securities issued by companies with climate friendly policies where consistent with investment strategy. Ensure investment analysts be aware of company’s carbon intensity and its effect on the portfolio carbon intensity when making investment recommendations.