Paul Hodgson: Case study on fossil fuel portfolio disclosure: First State Investments

Looking in detail how asset manager acquired the data to calculate exposure.

In its annual Responsible Investment & Stewardship report, First State Investments made a commitment to improving climate risk disclosure with active equity teams disclosing fossil fuel (gas or other) and non-fossil exposures for the first time, both by percentage of companies and by assets under stewardship. These disclosures are accompanied by statements on how teams see and manage climate change issues and risk within the portfolios they are managing. For example, for the Global Listed Infrastructure fund, 13.7% of the fund is predominantly gas and represents 10.3% of funds under management, the respective figures for other fossil fuels are 9.8% and 11.4%, with 76.5% and 78.3% being non-fossil fuel.
These are not reflections of carbon footprinting, which the firm does not believe reflects “contextual information on how carbon emission intensity influences investment decision making”. Stranded asset risk and other risks such as to auto manufacturers over higher fuel efficiency targets, the firm says, are not captured by carbon footprinting, making that method unreliable as a risk assessor.
Of most interest, of course, is how the exposure of each portfolio and portfolio company is calculated. Will Oulton, Global Head of Responsible Investment at First State, said: “The background context is: Fossil fuels exposure seemed more transparent and definable than carbon emissions and were of interest to clients due to the stranded asset debate and our own work on stranded assets.” Actually making those calculations, of course, proved much more difficult than simply shifting focus. “Companies don’t report revenues by segment consistently and reserves data is generally reported but still difficult to capture and more difficult to define from a materiality perspective.”
Oulton explained in detail how the team went about acquiring the data to calculate exposure. “Companies in a clearly fossil fuel related GICS sub-industry groups were automatically included (e.g. oil and gas), the remaining companies were checked against lists of fossil fuel companies that were included in the Carbon Tracker Oil report, the Oxford University Smith School, Coal stranded assets report and the Fossil Free Indices top 200 fossil fuel companies.” First State then individually checked, using Bloomberg Data, other industries with potential fossil exposure, for example, diversified miners, utilities and so on. “Companies with greater than 30 per cent revenue (or generation capacity) [related to fossil fuels] were included,” said Oulton, “as were transport (mostly rail) companies with greater than 30 per cent of volume.Oil, gas and some mining services companies were also included, as were oil and gas pipeline and storage companies.” A distinction was made for gas companies, which were classed thus where gas was the majority of fossil fuel revenues. “The final lists were checked by the investment teams and further adjustments made where errors could be verified by the RI team,” said Oulton.

The whole process was extremely challenging and obtaining the data was very difficult. The report notes that climate change and fossil fuel exposure statements could not be made for all companies because the data was too unreliable or too flimsy.
Also in the report, the teams in charge of the various funds provide an additional statement on their approach to climate change and their exposure to fossil fuel companies. Companies with higher levels of carbon exposure, for example, are discounted more than those with cleaner generation portfolios. An example of AGL Energy, one of the largest carbon emitters in Australia, is given. The company has a brown coal-fired power generation facility at with a substantial stranded asset risk. However, this is offset by the fact that AGL has one of the largest renewable energy portfolios and a large bank of renewable energy credits. Balancing these two factors resulted in AGL Energy being given a sustainability rating of ‘neutral’.
The report also includes 34 case studies to illustrate the firm’s approach to stewardship. Case studies included cover a wide range of ESG issues and risks to which companies, and consequently First State’s portfolios, are exposed. For example, due diligence following the acquisition of HH Ferries in Sweden exposed potential land subsidence within its main port. On First State’s initiative a remediation programme was developed that was not only safe, but sustainable and resulted in environmental improvements. And, while the firm no longer holds United Utilities Group due to its low Social quality score, a detailed report is given in the case study of a microbial parasite outbreak that occurred while the firm did have a holding. Also Samarco Mineração S.A (50:50 joint venture between BHP Billiton and Vale) was the firm which witnessed a failure of its mine tailings dam that caused considerable social and environmental damage. Again, a detailed run down of the actions taken by the company and the quality of those actions is given in a case study.