Steven Sowden and Paul Fleming: 'You have to envision how the climate crisis is going to impact your portfolio'

03 May 2022 Expert insight

Charities need to consider to what extent all climate crisis scenarios will impact investing.

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When thinking about the climate crisis there are a number of scenarios that people in all sectors are considering – from a speedy transition to net-zero to global catastrophe, and all points in between. These playbooks can also be applied to your investments and how they are managed.

Investment consultant at Mercer, Steven Sowden, explains: “We are working with a number of clients, including charities, to analyse their portfolios against a wide range of potential scenarios to help them understand which investments are exposed to which type of transition risk. We consider scenarios from a rapid transition whereby the world achieves the objective of limiting global warming to 1.5 degrees, to a failed transition where we miss targets and the planet continues to warm at an accelerated rate.”

Both these scenarios, and all those in between, involve risk from an investment point of view. “In a rapid scenario, the risks are due to the pace of change as businesses quickly act to decarbonise our economy,” continues Sowden. “But of course, with a failed transition, physical risks come to the forefront.”

One of the key reasons for mapping out the worst case scenario is that it provides a justification for having net-zero targets, says Sowden. “We may think that the physical manifestations of climate change that we are seeing today such as wildfires, droughts and polar-ice caps melting won’t have a big impact on the performance of financial portfolios for decades to come, particularly if they are reasonably well diversified. But if the direction of travel stays the same, the meaningful human impact that we are seeing now will be priced into the markets sooner than we think. You have to envision how the climate crisis is going to impact your portfolio, take opportunities that arise, and avoid the risks.”

Sustainable strategy

This type of longer-term thinking is particularly pertinent to charity investors, who are typically looking for a sustainable strategy that will provide stability for years to come. “Our charity clients intend to be around for decades into the future,” says Sowden. “So it is important to understand the long-term impact of their investments in the context of climate risk.”

To have genuine impact, Sowden believes that divestment is not going to be part of the complete solution. “Excluding companies on its own is not going to have a massive impact on decarbonisation. Engaging with carbon-emitting sectors and working with them to change is going to be much more progressive. Divesting has its place, but at some point, you’ve got to engage and try to change the industries. It’s easy to get out of a sector, but it’s not going to have much effect on carbon emissions because you have to a degree opted out of the debate.”

For Sowden, it is about aligning you investment strategy with the values of your organisation and engaging with the companies you invest in. “By investing there is an opportunity to help reshape the way an industry works. Other companies will see that those organisations that are making efforts to reduce their emissions are receiving more interest from investors. That will force them to change. It’s about considering what your aims are as an investor – whether you want to play a role in the transformation of industries on the journey to net-zero or whether you want take a less impactful route.”

Mercer's role

Mercer’s role in all this is to provide advice and work with clients to find solutions to achieve their investment aims. “We work with our clients in a range of different ways,” says head of UK endowments & foundations, Paul Fleming. “In some cases, we act as an investment consultant, advising the client and helping them appoint a third-party manager. Another way we work with clients is to implement solutions where the clients come to us and essentially treat us more like an investment manager.”

So, how does Mercer work with charity clients? Fleming explains: “Advice is what underpins everything we do at Mercer – the ability to administer advice at a highly professional level. So when a charity comes to us and says it wants sustainability and to have an impact, our manager researchers find the best fund manager to administer their sustainability and engagement strategy. We work through a manager selection programme with the client and support charities by implementing solutions directly through a third-party manager. We do a lot of the heavy lifting so that charities get on with doing what they do best, whether that is grant giving or providing services. Fundamentally, what we do is to administer advice so that a charity can achieve its investment and sustainability goals.”

What we do
As the trusted advisor to many not-for-profits we are a boutique of experts with the experience to engineer complex solutions designed to meet our clients objectives in today’s world. From large foundations to small family-run endowments, we help organisations to meet their investment goals, improve oversight and control, and manage reputational risk. We are backed by the strength of a global organisation, with access to best-in-class investment managers from a range of asset classes. Additionally, our buying power keeps costs competitive. Our combination of boutique advice and global implementation is unique, supporting not-for-profits in meeting their goals no matter what the future brings.

Fast facts

  • Mercer has advised charities for 45 years
  • Globally we advise on $254bn of charity and foundation assets
  • Mercer’s average UK charity client has £45m of assets
  • Mercer’s research team employs over 200 people

Steven Sowden is Senior Investment Consultant and Paul Fleming is Head of UK Endowments & Foundations at Mercer  

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