04 February 2020

    The Sky was on fire

    Why climate risk is front & centre of our thinking

    The impact of man-made climate change and how the carbon economy is being reshaped is a critical consideration in managing your money. We can’t promise perfection but we are committed to making sure portfolios are well positioned for this transition. That means avoiding the most carbon-intensive companies, embracing change and limiting overall carbon exposure. It is important to look at carbon exposure holistically, not just focusing on sectors like fossil fuels, carbon risk lurks in some unlikely places.   

    It felt like end of days. An apocalypse. The sky was on fire.

    I was lucky enough to have my Christmas break in Wanaka.  On the first of January we awoke to a blood orange haze. The haze never left all day. It lingered as, arguably, one the clearest signs of man-made climate change that we will ever see.

    While Australia has always been susceptible to bushfires the timing and severity of this disaster has bought the climate change debate to forefront in Australia. I don’t think it’s a stretch to say that the Australian bush fires will change attitudes. Most obviously in Australia but also closer to home.

    As an investment manager we can’t ignore this debate. Yet responding in the right way, a way that is appropriately balanced, is challenging. I want to share my thoughts on how we manage the carbon impact of our portfolios and how we think about carbon risk. This is a topic that strongly divides people. I know that my comments won’t make everyone happy. There are people who strongly doubt man made climate change exists. For other people, we will never do enough.

    Our perspective is balanced between these extremes. Man-made climate change is, in our view, happening before our eyes, but determining the right response within portfolios is complex and requires a thoughtful approach.

    Reducing the global economy’s dependence on carbon and fossil fuels is a difficult challenge. It’s difficult because there are tradeoffs. These tradeoffs are complex. For instance there is no reason in theory that we couldn’t, right now, outlaw internal combustion engines, but for most people the cost of this would be prohibitive and would result in a huge drop in the standard of living for all but the most privileged. These tradeoffs are even more challenging because these they will change over time.

    Acknowledging these tradeoffs and embracing the fact the real World is complex is, in our view, important.

    We are of the view that we should be sensitive to carbon risk when we invest. But that we should focus on progress, reducing carbon risks and embracing new technologies, rather than on perfection, which might mean eliminating all carbon risk. While that would be a commendable goal it is frankly unrealistic in today’s world.

    This is a financial issue and a moral one

    Climate change poses ethical and moral questions that we all need to individually answer. That is not our job as an investment manager.

    Our job is to build your wealth in a way that is sustainable. Sustainability, by its very nature, means taking a long term approach. This is something we have always done as investors.

    Looking at man-made climate change through sustainability lens provides clear insights on how we should manage climate risk in portfolios.

    Climate risk is both a financial risk and an opportunity 

    Understanding the long run implications of climate risk for the businesses we invest in is an important step in evaluating the sustainability of a business and its long run potential as an investment. It has become an integral part of the analysis we conduct.

    Unfortunately this is where things can get blurry very fast.  

    Climate and carbon risk comes in many forms

    Many, if not most, businesses have some carbon exposure.

    The obvious companies that immediately spring in mind when discussing climate change are the fossil fuel companies, but focusing just the supply of energy and not on the demand side misses half the equation.

    Industries like cement production are material carbon emitters, with this one industry alone responsible for 8% of all emissions in 2015, according to researcher Chatham House[1]. These industries often get little attention in the mainstream media but need to be carefully considered when thinking about overall portfolio carbon risk.

    Even in the fossil fuel sector different companies have very different carbon intensities. Allied to that some of the traditional fossil fuel companies are leaders in R&D on alternative fuels and may be part of the solution rather than just the problem.

    Blanket solutions like simply excluding all fossil fuel companies as possible investments is blind to the what is actually contributing to climate change and what it will take to transition to the future.

    Even industries that seem to be immune from this debate can, can be problematic. For instance the technology sector, through its hyper scale data centres is a large consumer of electricity and so has to carefully manage its carbon footprint.

    Being selective in managing carbon risk is critical, in our view. This is where being an active manager, able to hand pick investments for our portfolios, gives us the flexibility to craft a far more balanced response to the risks that come from global climate change and to respond in a far more balanced way.

    Progress not perfection

    Today we live in a petrochemical fueled world. While we know this has to change it will take time and considerable investment. In our view we need to invest with this perspective. That means reducing carbon risk but potentially embracing companies that are on the journey to solving the challenging energy problems faced today.

    Our commitments

    Managing climate change and carbon risk is important.  For our clients it’s important that we are clear on what we are doing about it.

    We encapsulate our approach in a series of commitments on climate change. These clarify what we are doing, how our process will unfold and what you should expect to see from us in the future.

    • We will take climate risk into account when we make investment decisions – we consider an array of risks whenever we invest your savings. This includes a raft of financial and non-financial considerations. Increasingly climate risk, alternative energies and carbon pricing are near the top of this list. We are committed to clearly understanding climate risk and ensuring this is carefully weighed when making investment decisions on your behalf.

    • We will avoid the worst offenders – some companies and some industries face insurmountable carbon challenges. Thermal coal is the most obvious example of a fuel source that no longer makes sense from an economic perspective as fuel and facing significant stranded asset risk. We will not invest companies that mine for coal and have held that position for some time.

    • There are other companies that like coal, are higher carbon intensive, and expose investors to significant stranded asset risk. We would put oil sands in that bucket and some of the national oil companies that have very long lived reserves. These companies do not meet our threshold for investing in long run sustainable businesses and are not an area of the market that we would invest in.

    • We will be more comfortable with businesses that are part of the solution – we will live in a carbon fueled world and while we have low carbon exposure in portfolios currently (more on that below) we are unlikely to eliminate all carbon exposure. At least today. Where we will be more comfortable with carbon exposure is where the companies we invest in have a clear strategy to reduce or eliminate or exposures and where they are investing in research to find better alternatives. In our view investing your capital in the solution is much better than just eliminating all carbon exposure.

    • We will share data on portfolio carbon use so you can measure progress – we believe carbon output of our portfolios and additional data on carbon intensity is the best measure of a portfolio’s carbon efficiency. Carbon intensity refers to the tons of Co2 emitted per $m of sales. These measures consider both the production and use of energy and is the widest gauge we have seen on how a portfolio will impact climate change. We will publish this metric for our strategies giving you a clear sense of how portfolios stack up against market averages.

    • What’s good enough for our companies is good enough for us – Fisher Funds is committed to reducing its carbon footprint, reducing the resources we use and having a lighter impact on the environment. Expect to hear more on this in coming months.

    We know that this is a complex topic and that change will be required along the way. We believe that the process that we have in place recognizes the risks, in all their complexities, and is well positioned to profit from the opportunity from positive change.


    There is a saying that “what gets measured get managed.” We couldn’t agree more.

    The chart below shows a measure of the level of carbon emissions and carbon intensity (carbon emissions divided by company revenues) for the international share component of the Fisher Funds KiwiSaver Growth Fund.

    The bars on the chart compare our portfolio (in blue) to the same measure for the broader global share market (in grey).

    The good news is that our portfolio companies emit significantly less carbon than broad market, in fact well under half of the volume of CO2. The story is even better when we look at CO2 emitted per $m of company revenues – a measure of the carbon intensity of the companies we invest to.

    [1] https://www.chathamhouse.org/publication/making-concrete-change-innovation-low-carbon-cement-and-concrete