As a fiduciary, our focus is always on our clients' financial outcomes, and we therefore believe it is important to consider and manage climate-related financial risks and opportunities. In this statement we describe the objectives, financial principles and the potential practical levers behind our net zero goal and how we integrate this across 'In Scope Solutions'[1].
We acknowledge that the scope for external third party asset managers we work with to meet the goals set out above depends on the mandates agreed and asset managers' regulatory environments. This means the specific levers employed, actions taken and goals set as part of our net zero investment framework will vary (in some cases significantly) across asset class and client portfolio mandate. For full details on the application and processes of our net zero goal for individual In Scope Solutions, please refer to the respective policy and/or fund documentation, as applicable, for that solution.
Over time, there may be significant changes in real world climate transition progress, financial market characteristics and accepted industry methodologies (including science-based scenarios, data quality and reporting requirements). This means the best way to manage, measure and report the climate performance of a portfolio in the future may also need to evolve. As a result, we will periodically review, monitor and where necessary, evolve our net zero goals, underlying metrics and climate performance assessment approach in a way that is consistent with our clients' best interests.
Below, we explore three aspects around our net zero goal for In Scope Solutions:
- The principle: seeking to protect financial outcomes for clients
- Implementing our net zero goal
- Measurement: considering multiple metrics to measure progress
The principle: seeking to protect financial outcomes for clients
We believe that climate change is likely to materially affect the global economy and capital markets in both the short term (as policy changes and the transition process is priced into markets) and long-term (as the real world impacts of global warming increase). We consider that climate change is a financial risk; it is far-reaching, systemic and foreseeable.
Under current stated global decarbonisation targets of companies and governments, and based on the current climate science, the world is on track for global average temperature increases in excess of 2°C. This scenario is expected to result in a significant increase in the likelihood of crossing key earth system tipping points, further triggering potentially irreversible (and highly damaging) physical changes and/or temperature increases which, in turn, significantly increase the magnitude of systemic climate-related financial risks faced by our clients.
We aim to mitigate the financial impacts of climate risks facing asset owner investment portfolios by encouraging investment activity that manages portfolio risks for In Scope Solutions.
- Risk adjusted returns: Investing and undertaking stewardship to support the transition will, in our opinion, improve long-term risk-adjusted returns for our clients. This will come from two sources – 'better beta' and 'alpha':
- Better beta: We believe that investment in climate solutions and stewardship of assets can help encourage a transition towards a net zero economy which, in turn, controls potential future temperature increases and mitigates systemic climate-related financial risks facing asset classes in which our clients invest. On balance, acting and investing in a way that supports a transition to a low carbon economy is likely (relative to the expected costs associated with physical risks and climate tipping points) in the best long-term financial interests of our clients
- Source of alpha: We think that navigating the complexities of the climate transition is likely to be an important potential source of alpha
- Long-term ambition: We express climate ambition in terms of contributing to/financing the reduction in emissions to net zero as soon as is reasonably practicable while meeting our clients' wider financial objectives, based on orderly science-based pathways with limited reliance on Negative Emission Technologies. We believe this is compatible with a long-term target of Net Zero by 2050
- Interim goals: In recognition of the importance of the trajectory to 2050, we have set interim goals. We are seeking an approximate 50% reduction in Scope 1+2[2] emissions intensity at the total portfolio level[3] and an approximate doubling of our allocation to climate solutions[4] by 2030 (both relative to a baseline year of 2019), consistent with the goals of the Paris Agreement
Our approach is to align portfolio net zero goals consistently with other financial objectives. Given the nature of the transition to net zero, and the evolving nature of market conditions in which we invest, we expect portfolio metrics will vary over time rather than necessarily showing smooth year-on-year improvements. We believe that the fundamental aspects for long-term financial outcomes are the destination and the overall trajectory, rather than the precise portfolio metric value at every point along the path to seeking to achieve the net zero goal.
More broadly, we note that the investment industry has finite influence over global emissions and cannot deliver a system-level net zero outcome in isolation. Achieving a net zero economy and the resulting reductions in financial risks from climate change is therefore also contingent on the long-term actions of other participants, in particular governments and other policymakers.
Please see below for important additional notes[5].
Implementing our net zero goal
We aim to help mitigate the financial impacts of climate risks facing asset owner investment portfolios, where relevant, by appropriately encouraging investment activity that supports a transition to a net zero economy as follows:
- Balancing a combination of decarbonisation of existing investments and new investment in long-term climate solutions
- Using multiple 'levers' including, changes to:
- Risk management and asset allocation
- Manager selection
- Index design
- Stewardship and industry engagement to encourage mitigation of climate-related financial risks
Risk management and asset allocation
We aim to provide our clients with a clear assessment of climate risk. Both measurement and management of climate risk are areas of significant development in the investment industry and we strive to continue to play our part in progressing this development.
We aim to embed the assessment of climate risk and opportunity at three levels:
- Top-down – We periodically re-assess the financial case for and parameters of our net zero goal taking account the progress of factors including the level of ambition of government commitments, the transition of the broader economy towards net zero, climate science/scenarios and WTW's own research on climate risk
- Asset allocation – We use climate scenarios to stress test our multi-asset and single asset class portfolios, and identify key thematic risks and opportunities
- Security-level analysis – Physical and transition risk analytics enable us to gain a better understanding of the true exposure to climate-related financial risk in investment portfolios
Our goal is to ensure investment portfolios are robust and climate resilient as well as being well placed to benefit from the opportunities presented by the transition to net zero.
Manager selection
Our goal is to identify best-in-class asset managers and to work with them to build portfolios that deliver strong risk-adjusted returns over the long term. An assessment of how well climate-related financial risks and opportunities are factored into an asset manager's investment process is part of our manager research and selection process.
The manager selection and engagement process must permit the inclusion of a wide range of strategies to ensure that the portfolio retains all other vital characteristics. Aside from focusing on strategies that are performing well according to the 'Climate Dashboard' (see below), it is important to consider competent managers and strategies that may be somewhat challenged in terms of their climate performance and support them on their journey to improve.
We look to engage with managers to improve performance. This might, for example, relate to alignment and climate solutions or an improvement in their risk management (physical or transition).
We work with managers to identify specific assets that are a part of the solution to a net-zero economy with attractive long-term financial prospects. We have, for example, invested in opportunities across sustainable agriculture, forestry, electrification infrastructure, and renewable energy amongst others.
Index design
Historically, the choice of market index or benchmark has often been considered a second-order decision by many investors. However, we have always viewed this as an active decision that has a material influence on the investments that asset managers make.
We also actively contribute to the construction of new indices where we believe it will produce better financial outcomes for our clients. Our proprietary climate transition analytics are used to assess transition risk in quoted companies as part of certain indices to better account for climate value-at-risk than traditional market cap indices.
Stewardship and industry engagement
Investment decisions around individual securities and stewardship of these issuers are undertaken by external asset managers. We assess managers' abilities in these areas and, as per above, engage to improve performance and best capture return opportunities and/or reduce risks.
We were part of the first wave of signatories to the updated 2020 UK Stewardship Code.
In addition, we lead two key areas of research that further build our understanding of climate-related issues:
- The Thinking Ahead Institute (TAI), our not-for-profit think-tank with some of the world's largest asset owners and asset managers as members. In recent years TAI working groups have resulted in the creation of climate dashboards as well as research to support the improved quantification of climate-related financial risks and enhancing climate scenarios
- The WTW Research Network (WRN) was founded by WTW and is a well-established, not-for-profit, award-winning collaboration between science and the insurance, finance and risk management sector, going back to 2006. Long-term partnerships with more than 60 research organizations across the world help the network confront the full spectrum of risks facing our societies. Climate has been a key focus of WRN
Measurement: Considering multiple metrics to measure progress
There is no single definitive metric that can be used to adequately measure progress as climate is a multi-dimensional issue, and the data and analytics in this space are rapidly evolving.
A net zero portfolio in a world that does not achieve a net zero outcome will still be exposed to systemic financial risks. As such, a net zero investment framework should aim to contribute to actions that support reductions in real world system-level emissions ('financing reduced emissions').
We therefore look to enhance the assessment of climate performance of portfolios in the following multiple ways:
- We measure climate performance using a Climate Dashboard that presents multiple dimensions of "success". The Climate Dashboard does this by considering the financial impact of climate risk on a portfolio (e.g. exposure to transition and physical risk) alongside measures of the potential contribution of a portfolio on climate outcomes (e.g. emissions, alignment with net zero pathways and allocation to climate solutions)
- Over the medium-term, one area of expected evolution is to focus increasingly on the extent to which underlying companies/assets are aligned with lower temperature scenarios or are under active engagement with the aim of improving alignment
- We seek to enhance the assessment of climate performance by applying methodologies developed within WTW's Climate Practice and the Thinking Ahead Institute
Footnotes
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'In Scope Solutions' is comprised of those WTW funds and/or services with an investment strategy and asset class universe that are compatible with achieving net zero goals in a way that supports financial outcomes, and where WTW Investments has sufficient discretion. We adopt a review process on a periodic basis to review which solutions are in scope.
The above solutions will only be made available to certain investors where appropriate, subject to applicable law and client goals. In particular, the In Scope Solutions will be unavailable to certain U.S. investors, including ERISA plans.
As noted previously, how we action the net zero goal will differ depending on the nature of the solution. For full details on the application and processes of our net zero goal for individual In Scope Solutions, please refer to the respective documentation or disclosure made available for the applicable solution. Return to article - WTW Investments recognizes the increasing focus on measuring and disclosing material Scope 3 emissions. However, from a portfolio-level target setting and risk management perspective there are significant challenges regarding limited underlying reported data and double counting. In contrast, when engaging individual issuers, including Scope 3 is often appropriate given these issues do not apply to the same extent. Return to article
- The interim decarbonization goal for 2030 and net zero 2050 goal define a 'Carbon Journey Plan'. Our Carbon Journey Plans are based on the carbon footprint (emissions per amount invested) starting from a baseline of end-2019.
Using the carbon footprint (emissions per amount invested) as the basis for the Carbon Journey Plan reflects changes in scale (e.g. cash outflows or inflows) so that progress in aggregate is not materially distorted by changes in the value of assets under management. Return to article - Climate solutions are defined using standard industry guidance frameworks, for example the EU Taxonomy. We aim to approximately double our exposure to climate solutions as a percentage of client assets invested in return-seeking assets by 2030 (relative to a baseline year of 2019). We again measure this as percentage of assets invested so that progress in aggregate is not materially distorted by changes in the value of assets under management. Return to article
- Given current standard industry reporting practice, an increase in investment portfolio emissions per amount invested does not necessarily signal any increase in real world emissions, particularly when investing in secondary markets.
It is generally acknowledged that some industries will be able to decarbonise faster and others will move more slowly (such as 'hard to abate' sectors). In practice, as is the case with other portfolio goals, we would expect different parts of the portfolio to make different contributions to decarbonisation and climate solutions goals based on the composition of (e.g. structural exposure to hard to abate sectors) and depth of the opportunity set for climate solutions in each asset class. This is necessary so that net zero goals are achieved in a way that also results in better financial outcomes for our clients as, for example, decarbonising at the same rate across the entire portfolio is unlikely to be financially rational. Return to article
As at March 2025.
Disclaimer
This statement ("Statement") should not be considered as a regulatory disclosure. Furthermore, the material contained in this Statement has been prepared for general information purposes only and it should not be considered as specific investment advice nor should it be construed as an offer or recommendation to subscribe for or purchase securities. In particular, its contents are not intended by WTW to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this Statement should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.
All statements in this Statement, other than statements of historical facts, including our expectations and intentions regarding net zero implementation, and statements when we use such words as "may", "will", "believe" and "estimate" are forward-looking statements. Such statements are based upon current beliefs and expectations of management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements and all forward-looking disclosure is speculative in nature. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and therefore also the forward-looking statements based on these assumptions, could themselves prove inaccurate. Given the significant uncertainties inherent in them, our inclusion of this information is not a representation or guarantee by us that our objectives and plans will be achieved.
None of the material contained in this Statement may be reproduced or distributed, whether in whole or in part, without WTW's prior written permission, except as may be required by law. In the absence of its express written agreement to the contrary, WTW accepts no responsibility and will not be liable for any consequences howsoever arising from any third party's use of or reliance on this Statement or any of its contents.
WTW's membership or support for certain sustainability-related organizations or initiatives such as those described in this Statement may change or be withdrawn from time to time if WTW determines it is the organisation's interest to do so.
