According to responsible investment analyst at EdenTree Investment Management, Carlota Esguevillas, when talking about climate change it is key to define what it means, and understand what your impact is. “Everyone is well aware of the urgency around climate change and the environment but it is essential to take a step back, think about what the terminology really means, and what you want to achieve.”
One of the starting points is to think about the difference between carbon neutral and net-zero pathways, she says. “If you are thinking about carbon neutral, you are usually talking about a reliance on offsetting to achieve your goals. On the other hand, if you are looking at net-zero, then you are actually talking about taking real action to reduce your footprint. The net-zero approach is a much more credible pathway.”
To help charities use their investments to achieve their climate change targets, EdenTree has a number of core principles that guide its responsible and sustainable investment policies. For the last six years it has been measuring the carbon footprint of all its funds, as well as being a signatory of the Montreal pledge. But fundamental to its philosophy is ensuring that investment funds are aligned with the Paris Agreement. “Some investors talk about the green credentials of their funds, but when you look under the bonnet, they are not at all robust. We map out all the data of our funds to make sure they are aligned with a 1.5-2 degree warming pathway. All our charity funds are within that range. When compared with the benchmark MSCI or FTSE World Index, which have warming potentials in the 3-4 degrees range, it brings to life the impact charity investors can have by taking a climate active approach.”
Investment stewardship
To maintain that level of impact takes a high degree of engagement with investee companies. “There is a lot of technical data gathering, looking at carbon budgets and different sustainable development scenarios, so that we can determine what the footprint of each fund is,” says Esguevillas. “One of our key engagement priorities every year is to encourage the highest emitters in our funds to set science-based targets, which allows us to track their progress and ensure they are on the pathway to decarbonise in line with the Paris Agreement."
Ultimately, keeping companies focused on these priorities comes down to good stewardship. Esguevillas notes: “We have voting rights, but that is just one part of it. We try to meet with every company in our funds to discuss a range of different environmental, social and governance (ESG) topics and look at ways to improve corporate practices. Obviously, every company in our funds is a company that we feel is suitable to be included, so we are starting from a relatively high base. But we recognise that expectations around climate are constantly changing and that the standards are moving. We want to engage with companies to encourage them to move faster and to be more ambitious.”
Stewardship at this level involves a delicate touch, suggests Esguevillas. “We aim to develop constructive relationships with companies in our funds. We try to understand their challenges, we congratulate them when they do something positive, but we also challenge them to go further and go faster.”
Making an impact
For many, COP26 failed to live up to its billing and many fear that the pace of change will not be fast enough. However, Esguevillas says there are some positives to come out of the latest climate summit.
“Clearly COP26 wasn’t perfect but I think the determination and ambition of businesses to lead the conversation and tout their green credentials was a real step-change. They were the ones putting pressure on governments and you can see that momentum has continued, with businesses really driving the agenda.”
The key thing, says Esguevillas, is for charity investors to know that, regardless of their size, they too can have an impact with their investments. “There’s perhaps a sense that climate change may only be for businesses and governments or large charities and large foundations, but I think that’s definitely not the case. Even the smallest charity has a role to play in climate change. With their investments specifically, no matter how much they have to invest, it can make a difference. It doesn’t impact your returns at all, so it really is a win-win in every sense.”
This can extend beyond a charity’s investment strategy to include the overall integration of sustainable practices within their own operations, suggests Esguevillas. “I completely understand the focus on the needs of beneficiaries and cost is obviously very important, but a lot of initiatives are actually cost saving. Our main role is on the investment side, but we can also help charities navigate the journey to reduce their own carbon footprint and communicate that to donors and beneficiaries.”
What we do
EdenTree is a pioneer in responsible and sustainable investing, having launched the Amity UK Fund as one of the first ethical equity funds in the UK in March 1988.
We believe that the companies still making a return tomorrow will be the ones acting responsibly today. That’s why our authentic approach to responsible and sustainable investing fully integrates environmental, social and corporate governance factors across every part of our investment process.
Key points*
- 30-year track record
- £3.7bn of assets under management
*Figures as at 1 March 2022
Carlota Esguevillas is the Responsible Investment Analyst at EdenTree Investment Management
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