Disclosure of climate-related risks
Climate-related risk is assessed to be relevant and material to the Funds managed by Gavekal Capital Limited (“the Firm”).
The Board is responsible for the Firm’s overall strategy and oversight of climate-related risks and opportunities. Its mandate includes:
i. setting corporate and strategic objectives and approving the framework and policies;
ii. setting clear roles and responsibilities of the Board and senior management;
iii. overseeing the incorporation and implementation of climate-related considerations into the investment and risk management processes and progresses against goals for addressing climate-related issues; and
iv. ensuring that senior management have adequate understanding of climate-related risks, and is equipped with appropriate expertise to manage climate-related risk, as needed.
The Board reviews the Firm’s climate management approach on an annual basis and are kept up to date on the progress of implementation. The Chief Compliance Officer leads the implementation and delivery of climate change strategies and reports progress to the Board.
In addition, the risk management team evaluates the risks of all investments, including sustainability risks, for portfolio managers’ periodic review. Any material climate-related risk exposures and exceptions to the Firm’s policies identified during investment management and risk management process will be escalated to the senior management.
The Firm integrates environmental, social, and governance (ESG) factors (inclusive of climate-related risks and opportunities) in the research process from an impact and risk perspective. When it comes to evaluating climate change risk/opportunities into our investment theses, we rely on a combination of fundamental analysis (by analysts and portfolio managers) and thematic research (by the ESG specialist). The Firm’s ESG specialist works with portfolio managers and analysts to identify and analyse the impact of climate-related risks and opportunities on an investee company’s business and financial projections and incorporate these analyses into its investment strategies. It also makes use of ESG scores and ratings from a third-party provider as a primary source for generating sustainability-related insights of the investments it makes on behalf of the Funds it manages. Where reasonably practicable, the team may obtain access to and utilise raw data on key environment-related performance indicators from the companies in which it invests, such as GHG emissions, waste production and energy consumption levels. Material climate-related risk factors will be subject to a periodic review.
For fixed income products, the Firm uses impact investing in the investment process. It also applies a set of exclusion criteria to limit ESG risks, divest in coal activities, avoid financing the tobacco and weapons industries and entities which violate the United Nation Global Compact. In addition, we consider engagement with investee companies to encourage positive change an integral part of our investment process. This includes working with sell-side counterparties to promote the issuance of green or ESG-eligible bonds and with issuers to encourage adoption of green bond and ESG standards in line with global guidelines.
- Risk management
On an ongoing basis, where material, the Firm assesses the potential and actual impact of climate-related risks on an individual investment-level and on a portfolio-level and documents its rationale and analysis. Assessments and analysis are made using relevant internal and external materials including news, public data, and data providers. The Firm also has policies to ensure compliance of ESG exclusion policies.
Where there are developments that could materially affect the operations and financials of a portfolio company or portfolio companies in a particular industry sector, the Firm will reassess the risk and return profile of the investment or the portfolio.
The Firm also has in place protocols to determine whether to continue with the investment, to adjust the composition of an investment portfolio, or to incorporate other mitigating measures to manage the climate-related risk exposure in the portfolios managed. Where material climate-related risk exposures or exceptions are identified in the periodic assessment performed, portfolio managers will escalate such matters with the appropriate steps to be taken per the Firm’s policies to the Board. The Board shall review the escalation and approve the proposed actions on a timely basis. The Firms also reviews regularly the effectiveness of their risk management system to ensure that any potentially significant deterioration in climate-related risks is followed up promptly.
On a regular basis, the Firm performs scenario analysis and identify portfolio carbon footprints of Scope 1 and Scope 2 greenhouse gas (GHG) emissions associated with the Funds’ portfolio investments.
- Application of scenario analysis
The Firm considers climate change in various scenario analysis, including 1.5°C, 2°C and 4°C global temperature increases, to explore the economic impact and financial risks of climate change.
The Firm uses the framework provided by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) for country exposures that are more than 10% in the Firm’s portfolios.
The three representative scenarios – orderly, disorderly and hot house world – provided by the NGFS are used for the analysis. These three scenarios cover pathways which meet the Paris Agreement targets of net zero CO2 emissions by 2050 in an orderly or disorderly manner as well as pathways which fail to meet the Paris Agreement targets, resulting in severe physical risks and temperature increases over 2°C by 2050.
These scenarios cover a range of higher and lower risk outcomes which result in varying CO2 emissions pathways, temperature outcomes and economic damage related to climate change.
Results of the scenario analysis will be used in the review of the portfolio’s climate-related risk profile as well as the Firm’s climate-related risk management policies, procedures, and practices. All assumptions and key features, including the choice of scenarios, reasonableness of assumptions, assessment of results, considerations on the need to take actions, and actions taken to address the risk of the scenario analysis will be documented and kept by the risk management team.
- Disclosure of GHG emissions
Estimated carbon footprints of the Scope 1 and Scope 2 GHG emissions associated with the Firm’s underlying asset under management at the fund level were 26,945 metric tonne CO2e on Dec 30, 2022. The scope of the analysis was corporate securities (where data was available), representing approximately $594 million (about 51.9% of the Firm’s total AUM as of Dec 30, 2022).
The portfolio carbon footprint is a representation of carbon emissions normalised by the portfolio’s market value and expressed in tons of carbon dioxide equivalent emissions (CO2e) per million dollars invested, expressed in the following formula:
Scope 1 is defined as direct GHG emissions that occur from sources that are controlled or owned by a company. Score 2 is defined as indirect GHG emissions associated with the purchased energy from a utility provider by a company.
The Firm sources Scope 1 and Scope 2 GHG emission data from Sustainalytics which is one of the major ESG data vendors in market. Carbon footprint data contain actual disclosed data and estimated data based on Sustainalytics’ estimation models using a proprietary multi-factor regression approach. These models rely on widely available financial and non-financial factors. These include:
- Size (proxied by Revenues, Number of Employees, Plant, Property & Equipment (PP&E) and Cost of Revenues)
The underlying assumption is that companies that are larger in size tend to have higher emissions. Operating revenues is the size proxy for the volume of products and services sold. Number of Employees is the size proxy for employee's activities. Gross Plant, Property & Equipment is the size proxy for emissions produced during usage of physical assets. Cost of Revenues is the size proxy for more upstream value chain activities.
This accounts for the subindustry-specific regulations, trends, and risks related to GHG Emissions.
- Company's Activities
Company activity data is included in the in the models to create subindustry segments to account for subindustry variation in business models and GHG-generating activities.
The underlying assumption is that company-level emissions can display country-specific emissions characteristics, mainly driven by regulation and policies.
The model framework facilitates consistency and comparability for Scope 1 and 2 emissions. Refining factors are used to provide flexibility to adjust for structural differences in the underlying data and address limitations of data availability.