Total time: 10:52

0:02

Sara Rodriguez: Hi everyone and welcome back to the Sage Advisory Podcast. My name is Sara Rodriguez, and I'm a Research Analyst working on the Sage ESG research team. Today I have with me another ESG team member here at Sage, Emma Harper. Emma, how are you?

0:19

Emma Harper: I'm well. How are you?

0:22

Sara Rodriguez: I’m good. The two of us are going to sit down and talk a little bit about how we evaluate climate risk here at Sage. When it comes to ESG, climate risk is usually a pretty hot topic, but I feel like it took a little bit of a backseat to social issues in 2020 and 2021. However, it’s definitely still on the minds of everyone in the ESG space and it's something that we're always trying to evolve here at Sage. As many of you may know, last Fall marked the 26^th Annual United Nations Climate Change Conference, or COP26, which was basically a summit of world leaders coming together to talk about climate change policy and targets for keeping emissions well below 2 degrees and aiming for 1.5 degrees. I’m sure many of you know about the Paris Agreement, which took place at this summit in 2015 and involved every country agreeing to work together to limit global warming to those levels. So, that was a huge milestone for this conference, and unfortunately, what came out of this past year was basically an acceptance that we are still off track to beat climate change and to meet those Paris Agreement levels. So, there is still a lot to be done when it comes to curbing climate change and reducing emissions. Emma, I’m wondering if you can tell us about the suggestions that were made at the conference for keeping global warming levels below 2 degrees Celsius.

1:59

Emma Harper: Sure. So, there were a couple of suggestions. Basically, the entire conference, everybody agreed that countries needed to come back next year with some stronger targets and stronger emissions cuts in order to make the pathway for the actual degree limitation. At this COP26 conference, it was estimated that global emissions would have to be cut by 45% in this decade, so by 2030, in order for us to remain on track for any of these 2-degree or 1.5-degree scenarios. By the end, 151 countries had submitted new climate plans to slash their emissions by 2030, but there were several countries, big countries, that needed to come up with more aggressive plans. So, it was decided, as I said, to meet next year as well, and then annually after that to check in on where countries were on their targets. So, there were several things talked about, but what was really clear was that all hands had to be on deck here. All hands will have to be on deck to make a change, to actually see our temperatures not skyrocket and create massive, catastrophic issues with climate change in the future. And so, I think it's clear that countries need to make massive changes, that also companies need to make massive changes. And I know that's something that we focus on at Sage because companies need to be a part of the solution in addition to countries.

3:30

Sara Rodriguez: So, there will definitely be a lot that goes into keeping global warming to 1.5 or 2 degrees. You know, as fixed income investors, we're always looking at risk and as many of us know, even these 1.5 or 2-degree scenarios present us with risk, whether they be physical risk like severe weather events. You know, we had that devastating ice storm here in Austin, Texas last winter that cost the economy billions of dollars. And then there are also things like transition risk, which may cause companies to have increased costs due to things like carbon taxes or new regulation. However, at Sage we find that it's important to not only see the negative that comes with climate change risk, and we try to also look at the opportunities that may come with it. Companies may have the opportunity to innovate and adopt disruptive technologies, and some of them may even see their business model benefit from climate change risk.

4:36

Emma Harper: That's interesting because, you know, you think of the climate crisis and see all the negative externalities from a warming climate. You know, sea level rise, Arctic ice melting, crazy storms that are coming in. You see definitely the negative side of climate change, but you really don't think of the opportunities that companies might have to find ways to technologically improve the way that we are currently sourcing energy, burning energy, etc. Also, I think adaptation to some of these climate change risks that are happening, companies that can adapt and create an opportunity out of that adaptation as well. So, I think that's an interesting way to look at it, both from the risk and opportunity side of things.

5:24

Sara Rodriguez: And as you know, risks and opportunities are both a big component of the analysis we do here at Sage when we are looking at companies and how they’re performing from a climate perspective.

5:39

Emma Harper: Yeah. So, can you describe a little bit more in detail about how we analyze companies from this climate perspective and from this risk and opportunity perspective that we've been talking about, can you describe the process a little bit?

5:54

Sara Rodriguez: Definitely. So, when it comes to analyzing this, one of the first things that we do is try to group companies together by business model and by average emissions intensity because we don't want to end up comparing apples to oranges. Different companies in different industries have different ways that climate change affect them, whether it be a company in the financial sector or maybe a company in the energy space. Those are going to look pretty different when it comes to climate change. That helps us establish a comparable peer group. Then when it comes to the company level, we're looking at two key points. First, we're going to look at how the company is exposed to risk based on its industry and based on its specific business activities. The second point we're going to look at is what the company’s current carbon related operational performance looks like. Will the company be able to seize those climate related opportunities that we're talking about, are they going to be able to innovate? How will they adapt to the climate change transition? So, we integrate all of these components together and that allows us to really determine which companies are excelling at climate change risk mitigation and potential innovation.

7:18

Emma Harper: You know something that comes out of something like this, the climate change conference, are countries’ pledges and goals towards becoming Net Zero and eventually finding that point of carbon neutrality. So, I know that's something that we look at for companies as well. So, can you go into a little bit of detail about how we look at company’s Net Zero commitments?

7:45

Sara Rodriguez: Yeah, absolutely. We do take a deeper look into when a company announces that they're going to be Net Zero by 2030, or 2045, or 2050, because it's kind of like, okay, you can say that, but then what are you doing to back that up? So, one great way that we look at it is we look to see if they are aligned with the Science Based Targets initiative. The Science Based Targets initiative looks to see if companies have benchmarks that they're targeting themselves against and how they're progressing against those benchmarks. If they're doing the things necessary to meet that goal by 2030 or whatever date they have set. So, that's what we're looking at when we're looking at Net Zero commitments. Emma, do you have any closing thoughts related to COP26?

8:37

Emma Harper: Yes. So, really out of this last year’s meeting in 2021 and the check-in meeting in 2022, again the idea is that everybody has to be on deck with this. The entire globe, countries and companies need to be on deck. So, you know just reiterating the point that it's so important to analyze this for companies because we need to know that they're going to be onboard with cutting emissions and finding their pathway to Net Zero. So, that's definitely something that we should be taking a look at, and we are taking a look at and will continue to do so in the future due to the really important nature of this climate change crisis that we're facing.

9:22

Sara Rodriguez: Yeah. And I think that our climate analysis process allows us to have a method where we can present our clients a way to invest in something that they care about and can feel good about when it comes to climate change risk. So, everyone, thank you for listening to us today. If you'd like to learn more, please visit us at sageadvisory.com. You can also find us on Instagram and on LinkedIn @sageadvisory. Have a good day.

9:52

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