Mercer has launched climate transition analytics and advice to help guide institutional investors who want to transition to a 1.5C scenario of global warming as outlined in the Paris Agreement.
Analytics for Climate Transition (ACT) is designed to assist investors in constructing climate resilient portfolios on a multi-year timeframe, as 1.5C requires a 45% emissions reduction by 2030. ACT is now being offered to Mercer's investment consulting clients worldwide and will be leveraged to support climate transition strategies across its $304.5 billion USD global assets under management on behalf of its Investment Solutions clients.
"ACT combines analysis supported by Mercer's experience in climate investing and strategic views," said Helga Birgden, global business leader, responsible investment, Mercer. "It's strategic and forward looking, and it gives a total portfolio view of risks and opportunities that arise from the transition to a zero carbon economy."
ACT allows investors to examine climate risk and currently covers listed assets and provide guidance for other asset classes for investors to complete a total portfolio baseline for annual monitoring purposes.
"It is also a bottom up, and includes geographic, sector, manager and stock drivers to allow investors to look at the capacity for portfolios to move to a low carbon economy and to contribute to limiting global temperatures to under 2 degrees, ideally 1.5 degrees, in line with IPCC recommendations."
ACT draws on data sources from major data and research firms, and combines information on scope 1 and scope 2 emissions; scope 3 will be considered in the future. The data is ranked and weighted according to Mercer's views. Investors will apply ACT by establishing a baseline emission assessment of their portfolio from the top down and bottom up perspective. This then allows investors to identify the most carbon intensive companies that have the lowest capacity for responding to low carbon transition within their portfolio, and, at the other end, the companies best positioned to transition and that have low/zero carbon intensity. On this spectrum many companies will fall in between.
"The first step is to understand the portfolio top down and bottom up from the emissions baseline," Birgden said. "We talk about the grey, the green and the in between. The idea is first of all, be clear on your current portfolios' emissions intensity and capacity to transition to net zero by understanding which are the grey - high intensity, low transition stocks, which are at the other end are the green solutions - the low carbon intensity, high transition stocks, and which are the' in between' companies, where stewardship and engagement is going to be critical."
Investors need to set 2030 targets to place them on the road to 2050 reductions targets.
"Working back from the ultimate goal of a net zero 1.5 degree scenario in 2050, investors can use ACT to make decisions over numbers of years and set targets annually to reduce emissions in their portfolio, as well as allocate to meaningful increases in green allocations," Birgden said. "Those targets should be backed by implementation plans by region, asset class and draw on the emissions baseline of the portfolio and analysis."
Energy transition is underway, and the levelised cost of renewable power generation is now competing with fossil fuel power generation in some regions, with the provision that development in storage will further accelerate this trend, Birgden said.
"Companies are already in transition and active managers are increasingly seek out those companies and assets in transition," she said. "The short term is a different matter. Short term, the acceleration of support for ESG and sustainability needs to be watched closely as this has driven up prices of 'green' assets and could be creating short term opportunities in 'grey' assets."
Birgden notes that companies that have the highest risk of stranded assets through the transition to a low-carbon economy actually represent a small part of most investors' portfolios, meaning that the majority of the transition work takes place in the "in between" space - so refining targets, engaging with companies on their transition targets and goals, and increasing allocations to green solutions is key.
"Once you run the analysis as we have, you recognise that the actual number of companies in the portfolio that are acute, high stranded asset risk are fairly small but may have high emissions that contribute to a significant amount of the portfolio's carbon footprint and transition risks," Birgden said. "It's less dramatic than many investors might assume. Reducing the exposure is a discipline and at the other end of the spectrum, you need to build your plan over time to maximise your low carbon and zero carbon.
"One of the key messages that we have as a result of the analytics that we've developed is that this requires planning, and taking long and short term views. It's also the in-between that is the bulk of the portfolio which gets less airplay and that is where the power of engagement comes into force."