Our goal: Net zero greenhouse gas emissions by 2050 for fully discretionary delegated investment portfolios

WTW Investments believes in “investing today for a more sustainable tomorrow”. This is now more important than ever as the economy transitions to a net zero and climate-resilient future. Climate is a financial risk; it is far-reaching, systemic and foreseeable. As investors, we are in a position to help mitigate the financial impacts of climate risks facing asset owner investment portfolios by encouraging investment activity that supports a transition to a net zero economy.

Below, we explore four key areas around the delivery of our net zero goal:

• The principle: seeking to achieve better financial outcomes for clients
• A transition to a net zero and resilient future
• Measurement: considering multiple metrics to measure progress
• Helping other investors with their own net zero goals

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 in fully discretionary delegated investment portfolios:

• Top-down – We periodically re-assess the financial case for and parameters of our net zero commitment 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 detailed climate scenarios to stress test our multi-asset and single asset class portfolios, and identify key thematic risks and opportunities.
• Security-level analysis – Our proprietary physical and transition risk analytics enable us to get a much better understanding of the true financial climate risk in investment portfolios.

Our goal is to ensure fully discretionary delegated 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 issues, as well as wider sustainability issues, are factored into an asset manager’s investment process is a significant 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. The point is not to only focus on strategies that are performing well according to the ‘Climate Dashboard’ but 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.

For strategies where we feel improvement is required, we engage with the manager. This might, for example, relate to emissions, alignment and climate solutions, or an improvement in their climate change risk management (physical or transition).

We work with managers to identify specific assets with compelling long-term prospects and which fall in areas that are a part of the solution to a net-zero economy. We have 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 investment that asset managers make.

We actively assess the characteristics of market indices and make a deliberate choice of which to use – climate risk is one of the factors we use in this decision. We provide this assessment as advice to clients or as part of our discretionary investment process.

We also actively contribute to the construction of new indices where we believe it will produce better outcomes for our clients. Our proprietary climate transition analytics are used to assess transition risk in quoted companies and to design indices that better account for climate value-at-risk than traditional market cap indices.

Stewardship and industry engagement

Investment decisions about individual securities are made by the asset managers we employ on our client’s behalf. We assess the managers' ability to reflect climate risk in their decisions when selecting securities, and we regularly engage with the asset management industry regarding their stewardship practices.

We were part of the first wave of signatories to the updated 2020 UK Stewardship Code and remain current signatories of the Code.

In addition to engagement with external asset managers and underlying issuers, we also engage with wider industry groups to support wider system transition on climate. In some cases we can take the lead on initiatives and in others we can support those organisations that are well placed to lead. These are detailed in our UK Stewardship Code Report with some examples below:

• The Thinking Ahead Institute (TAI), our not-for-profit think-tank with many of the world’s largest asset owners and asset managers as members, has a mission to ‘mobilise capital for a sustainable future’; TAI has been involved in the creation of climate dashboards and the identification of changes required at asset owners in order to become a net zero organisation, among other relevant topics.
• 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.
• For some of our delegated mandates, we have engaged EOS at Federated Hermes (EOS) as an expert collaborative stewardship overlay service who supplements and adds to the stewardship work performed by the external asset managers we work with. In addition to the bottom-up company engagement, EOS undertake market-wide engagement and advocacy.
• WTW co-founded the Investment Consultants Sustainability Working Group (ICSWG) in 2020 and membership of this initiative has grown to nearly 20 organizations in both the UK and US groups. Both groups have established links with regulatory and oversight bodies, as well as the asset management and asset owner communities. WTW has representation in the UK and US ICSWG’s Steering Committees and in the UK Raise the Bar workstream.
• We support IIGCC’s Net Zero Investment Framework and are Signatories to the Principles for Responsible Investment.

To support investors who would like to set out and deliver on their own climate-related goals, we provide analysis, advice and implementation support across the full range of investment decision-making from governance, through strategy and manager selection, to ongoing monitoring.

This includes:

• Assessing investors’ current climate risk exposure and climate performance using a Climate Dashboard.
• Determining investors’ level of climate ambition, a consistent set of climate targets and establishing a Carbon Journey Plan to set a top-down framework for assessing progress towards these.
• Setting climate action plans using the insights from the Climate Dashboard, for example, by identifying parts of the portfolio that have high emissions, are misaligned with net zero pathways and are materially exposed to transition risk.

For investors who would like to take immediate steps to progress towards net zero we can provide multi-manager funds in the main asset classes that have an established climate-integrated approach. In the European Union, we manage a number of funds that categorised as having sustainable characteristics as an important part of their proposition under the new European Sustainable Financial Disclosure Regulation (SFDR). These funds can provide investors with a high quality and cost effective means of implementing a journey to net zero while allowing the investors to retain control over the overall asset allocation and risk profile of their portfolio.

We also provide a wider range of services designed to support clients with different levels of internal resource and different levels of complexity of investment portfolios as summarised below.

Solutions

Institutional investors can confront the risks and opportunities of climate change in many ways. Our capabilities in this area are outlined below:

1. 01

   Benchmarking

   assessment of approach and activities relative to peers and global best practice standards

2. 02

   Mission, beliefs and purpose

   setting and socialising the foundations of a strategic approach to climate

3. 03

   Carbon journey planning

   setting portfolio decarbonisation pathways and climate solution allocation targets

4. 04

   Climate scenario analysis

   applying multiple climate pathways to stress test asset portfolios and liabilities, assess resilience and identify strategic actions

5. 05

   Physical climate risk mapping

   using leading reinsurance tools to analyse impacts of extreme and changing weather patterns, with a focus on real assets

6. 06

   Thematic risk and opportunity exposure

   identifying areas of risks and opportunities to best position portfolios for long-term trends

7. 07

   Fund solutions

   embedding the best of our climate research, risk management and idea generation

8. 08

   Exclusions

   establishing policies with practical advice for implementation

9. 09

   Portfolio reporting and analysis

   detailed portfolio information on material sustainability and climate risks and opportunities

10. 10

    TCFD

    enhanced reporting as part of a strategic approach to managing climate risk and opportunities

Footnotes

1. In certain pathways to “net zero”, Negative Emission Technologies (NETs), such as Carbon Capture and Storage and Direct Air Capture, are assumed to offset potentially material levels of residual GHG emissions from key industries. Whilst we believe that these technologies will be an important part of the low carbon transition, a number of these technologies are either very costly and/or unproven at scale. We therefore, in line with the IIGCC’s Net Zero Investment Framework, design our Carbon Journey Plans around pathways that have limited reliance on NETs as these result in the lowest levels of residual GHG emissions in 2050 onwards and therefore a lower probability of overshooting the 1.5 degree carbon budget. Return to article undo
2. WTW Investments recognizes the increasing focus on and importance of measuring and disclosing material Scope 3 emissions. However, from a portfolio-level target setting perspective, we believe that incorporating Scope 3 into interim portfolio-level decarbonization targets is problematic due to issues including data quality and double counting. We consider that it is more impactful to focus and set portfolio-level targets based on improving portfolio alignment and reducing transition risk. It is our belief that investors who improve these two dimensions of portfolio alignment through a combination of investment and engagement activities will be well placed to also reduce forward-looking Scope 3 emissions. In contrast, when engaging individual issuers, including Scope 3 in their targets is often appropriate given the issues noted above do not apply to the same extent. Return to article undo
3. The interim decarbonization target at 2030 and net zero 2050 goal define a “Carbon Journey Plan” for aggregate fully discretionary delegated investment portfolios. 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 across aggregate fully discretionary delegated investment portfolios is not materially impacted by client gains and losses. Return to article undo
4. Climate solutions are defined using guidance from the EU Taxonomy and the IIGCC including the Net Zero Investment Framework. We aim to 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 measure this as percentage of client assets invested to reflect the impact of changes in scale (e.g. cash in/outflows and client wins/losses). Return to article undo
5. For clients whose inception date with WTW is after end-2019, the 2030 decarbonisation target is calculated assuming that a 6.1% p.a. absolute emissions reduction had been achieved between end-2019 and the commencement date for the portfolio (6.1% p.a. emissions reduction is consistent with a 50% reduction in 11 years from end-2019 to end-2030). This ensures a consistent focus on a trajectory of halving absolute emissions between end-2019 and 2030 and reflects the fact that WTW Investments has no influence over the climate performance of a client portfolio during a period prior to the commencement date of a client. As a result the future rate of decarbonisation embedded in the Carbon Journey Plan will also be 6.1% p.a. Return to article undo
6. 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.
   We note that the 50% target reduction in absolute emissions by 2030 set out in the IPCC Special Report on 1.5C is a goal for the total economy. Within this aggregate goal 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). Similarly, the emissions and climate solution goal relating to aggregate fully discretionary delegated investment portfolios set out above are expressed in total portfolio terms. 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 targets 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 essential to ensure that net zero goals are achieved in a way that also results in better financial outcomes for our clients, e.g. decarbonising at the same rate across the entire portfolio is unlikely to be financially rational.
   We finally acknowledge that the scope for asset managers to invest for net zero and to meet the targets set forth above depends on the mandates agreed with clients as well as the clients’ and managers’ regulatory environments. Our net zero goal is made in the expectation that governments will follow through on their own commitments to ensure the objectives of the Paris Agreement are met, including increasing the ambition of their ‘Nationally Determined Contributions’, and in the context of our legal duties to clients and unless otherwise prohibited or required by applicable law. Return to article undo

    

Disclaimer

This 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, 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.
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.