Our pledge: Net zero greenhouse gas emissions by 2050 for our discretionary investment portfolios

WTW’s Investments believe in “investing today for a more sustainable tomorrow”. This is now more important than ever as the whole economy transitions to a net zero and climate-resilient future. Climate is a financial risk; it is far-reaching, systemic and foreseeable. As investors, we have a really important role to shape the system going forward – to steward this whole economy transition.

• The principle: Achieving better financial outcomes for clients
• A just transition to a net zero and resilient future
• Changing the ‘system’ through engagement and collaboration
• Measurement: Essential that we are held to account via multiple metrics rather than one
• Helping other investors with their own net zero pledges

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We believe that working to achieve net zero by 2050 is completely consistent with the financial goals we have been given by our clients, so we have already embedded this in our investment process and ultimately in the portfolios we are managing and stewarding.”

Craig Baker | Global Chief Investment Officer

We believe that climate change will materially affect the global economy and capital markets in both the short term (as policy changes and the transition process is priced into markets) and long term (as the real world impacts of global warming increase). As a fiduciary our focus is always on our clients’ financial outcomes, and we therefore believe it is important to consider and manage the financial impact of climate change on our clients’ investment portfolios.

• Risk adjusted returns: Being strategically ahead of a low-carbon transition will, in our opinion, significantly improve risk-adjusted returns for our clients. This will come from two sources – ‘better beta’ due to more effective stewardship and ‘alpha’ as the mispricing of climate issues is resolved.
• Source of alpha: We think that understanding this transition will be one of the biggest sources of alpha across all asset classes and that this opportunity is likely to be greatest in the next few years as the data is not yet well understood and prices have not yet fully reflected the likely path for the world. We will therefore target pathways that seek a reduction in emissions of significantly more than 50% and a doubling of our allocation to climate solutions^* by 2030, consistent with the goals of the Paris Agreement.
• Pace of trajectory: We will look to be compliant with the principles currently set out in the Paris Agreement around the pace of the trajectory to net zero, with limited reliance on the use of Negative Emission Technologies^**. We will also aim to ensure that the principles we follow and the measures we use to assess progress are consistent with IIGCC’s Net Zero Investment Framework.

It needs to be recognised that it is not in our clients’ financial interests to force ourselves to always be ahead of the pathway to net zero regardless of market pricing or the magnitude of the risk posed by climate change. We believe that the important things for the long-term financial outcomes for our clients’ portfolios are the destination and the overall trajectory of decarbonisation, rather than the position at every point along the path to net zero.

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Climate change, and a just transition to net zero greenhouse gas emissions, is a systemic and urgent global challenge which necessitates specific risk management, opportunity identification and collective action.”

Craig Baker | Global Chief Investment Officer

We recognise that the investment industry is not simply a ‘taker of outcomes’ generated by the investments it makes, but rather as allocators of capital and stewards of its client’s assets it can and should play a meaningful part in helping to ensure a just transition to a net zero and resilient future.

We believe that the transition to net zero should be achieved by:

• A combination of decarbonisation of existing investments and new investment in long-term climate solutions.
• Using multiple ‘levers’ including, changes to
  • Risk management and asset allocation
  • Manager selection
  • Index design
  • Stewardship
  • Policy level engagement.
• We believe engagement is likely to be more effective in decarbonising the system than exclusions alone, but recognise that exclusions may be necessary at times where engagement cannot solve the problem.

Risk management and asset allocation

We are committed to providing our clients with a clear assessment of climate risk and to providing them tools for managing the risk in their portfolios. Both measurement and management of climate risk are areas of significant development in the investment industry and we are committed to playing our part in leading this development.

We aim to embed the assessment of climate risk and opportunity at three levels in our discretionary portfolios:

• Macro – Our Climate Dashboard helps us to monitor how the macro landscape is changing with respect to climate issues.
• Asset allocation – We use detailed climate scenarios to stress test our multi-asset and single asset class portfolios, and identify key thematic risks and opportunities.
• Security-level analysis – Our proprietary Climate Quantified physical and transition risk analytics enable us to get a much better understanding of the true climate value-at-risk in our portfolios.

Our goal is to ensure our discretionary portfolios are robust and climate resilient as well as being well placed to benefit from the opportunities presented by the transition to net zero.

Manager selection

Our goal is to identify best-in-class asset managers and to work with them to build portfolios that deliver strong risk-adjusted returns over the long term. An assessment of how well climate-related issues, as well as wider sustainability issues, are factored into an asset manager’s investment process is a significant part of our manager research and selection process.

But we aim to go beyond this and to work with these managers to identify specific assets with compelling long-term prospects. Many of these fall in areas that are a part of the solution to a net-zero economy. We have recently invested in opportunities across sustainable agriculture, forestry, electrification infrastructure, and renewable energy amongst others.

Index design

Historically the choice of market index or benchmark has often been considered a second-order decision by many investors. However, we have always viewed this as an active decision that has a material influence on the investment that asset managers make.

We actively assess the characteristics of market indices and make a deliberate choice of which to use – climate risk is one of the factors we use in this decision. We provide this assessment as advice to clients or as part of our discretionary investment process.

We also actively contribute to the construction of new indices where we believe it will produce better outcomes for our clients. Our proprietary climate transition analytics are used to assess transition risk in quoted companies and to design indices that better account for climate value-at-risk than traditional market cap indices.

Stewardship

Investment decisions about individual securities are made by the asset managers we employ on our client’s behalf. We assess the managers' ability to reflect climate risk in their decisions when selecting securities, and we regularly engage with the asset management industry regarding their stewardship practices.

However, we also recognise that this is an evolving area and that a ‘whole portfolio’ approach needs to be taken to the potential impact of climate risk.

• In order to have the biggest impact in engagement we partner with EOS at Federated Hermes, a stewardship specialist, to engage with companies, regulators and governments on our clients’ behalves.
• We are tier 1 signatories to the UK Stewardship Code, and have submitted our first annual report in respect of the new 2020 stewardship code.
• Over 2020 alone, we carried out over 200 engagements with over 70 managers on sustainability, and continue to focus our industry engagement efforts on the topics of culture, sustainable investment, and inclusion and diversity.

While we have discretion over $165bn (as of 31 Dec 2020) and influence through our advice on over $3.5trn (as of 2019), we recognise that we are only one part of the investment chain and that to be most effective in managing climate risk and stewarding the transition to net zero, we need to collaborate with others. In some cases we can take the lead on initiatives and in others we can support others who are well placed to lead.

Given this responsibility and our potential influence, we will work hard on engagement and collaboration in the area of climate change. Examples of collaborative initiatives that we are leading include the following:

• The Thinking Ahead Institute (TAI), our not-for-profit think-tank with many of the world’s largest asset owners and asset managers as members, has a mission to ‘mobilise capital for a sustainable future’; TAI has been involved in the creation of impact measurement dashboards and the identification of changes required at asset owners in order to become a net zero organisation, among other relevant topics.
• John Haley, CEO of Willis Towers Watson, is Chair of the World Economic Forum’s Coalition for Climate-Resilient Investment (CCRI).
• The Willis Research Network (WRN) is an award-winning collaboration founded 15 years ago, which links more than 60 organizations in science, academia, and the private sector to confront the full spectrum of risk modelling challenges with climate change being one of the key ones.

Examples of collaborative initiatives that others are leading but we are providing our support to include the following:

• The Institutional Investors Group on Climate Change (IIGCC)
• The Asia Investor Group on Climate Change (AIGCC)
• The Investor Group on Climate Change (IGCC)
• The Transition Pathway Initiative (TPI)
• The UK Stewardship Code
• CFA Institute
• UK Investment Consultants Sustainability Working Group

We support IIGCC’s Net Zero Investment Framework and are Signatories to the Principles for Responsible Investment (PRI).

Measurement of our progress and that of the whole investment industry in stewarding the transition to a net zero and climate-resilient economy is an important issue. There is no single definitive metric that can be used to adequately measure progress, and the data and analytics in the climate space are rapidly evolving. We are therefore investing heavily in leading analytics in this space, including the development of our proprietary Carbon Journey Plan methodology, an ‘impact measurement framework’ we have developed together with other industry participants via the Thinking Ahead Institute, real asset risk via our acquisition of Acclimatise in December 2020, and transition risk in listed assets via the energy finance team from the Climate Policy Initiative who joined us in January 2021.

In particular, it is important to note that current emissions are not always the best measure of adherence to the trajectory between now and 2050 – the trajectory that a company is on, for example, is at least as important as today’s starting point, as is their role in helping the wider economy achieve net zero and of course the likely impact of all of this on their share price. As mentioned earlier, it is not in our clients’ financial interests to force ourselves to always be ahead of the pathway to net zero regardless of market pricing or the magnitude of the risk posed by climate change. We believe that the important things for the long-term financial outcomes for our clients’ portfolios are the destination and the overall trajectory of decarbonisation, rather than the position at every point along the path to net zero.

To support investors who would like to set out and deliver on their own climate-related goals, we provide analysis, advice and implementation support across the full range of investment decision-making from governance, through strategy and manager selection, to ongoing monitoring.

We suggest that all investors should now:

• Assess their current climate risk exposure
• Establish a Carbon Journey Plan to manage their climate risk over time

For investors who would like to take immediate steps to progress towards net zero we can provide multi-manager funds in the main asset classes that have an established climate-integrated approach, and are categorised having sustainable investment as a key part of their proposition under the new European Sustainable Financial Disclosure Regulation (SFDR). These funds can provide investors with a high quality and cost effective means of implementing a journey to net zero while allowing the investors to retain control over the overall asset allocation and risk profile of their portfolio.

We also provide a wider range of services designed to support clients with different levels of internal resource and different levels of complexity of investment portfolios as summarised below.

Solutions

Institutional investors can confront the risks and opportunities of climate change in many ways. Our capabilities in this area are outlined below:

1. 01

   Benchmarking

   assessment of approach and activities relative to peers and global best practice standards

2. 02

   Mission, beliefs and purpose

   setting and socialising the foundations of a strategic approach to climate

3. 03

   Carbon journey planning

   setting portfolio decarbonisation pathways and climate solution allocation targets

4. 04

   Climate scenario analysis

   applying multiple climate pathways to stress test asset portfolios and liabilities, assess resilience and identify strategic actions

5. 05

   Physical climate risk mapping

   using leading reinsurance tools to analyse impacts of extreme and changing weather patterns, with a focus on real assets

6. 06

   Thematic risk and opportunity exposure

   identifying areas of risks and opportunities to best position portfolios for long-term trends

7. 07

   Fund solutions

   embedding the best of our climate research, risk management and idea generation

8. 08

   Exclusions

   establishing policies with practical advice for implementation

9. 09

   Portfolio reporting and analysis

   detailed portfolio information on material sustainability and climate risks and opportunities

10. 10

    TCFD

    enhanced reporting as part of a strategic approach to managing climate risk and opportunities

Disclaimer/Footnote

^* Climate solutions as per the EU Taxonomy and the IIGCC Net Zero Investment Framework.

^** In certain pathways to “net zero”, Negative Emission Technologies (NETs), such as Carbon Capture and Storage (CCS) and Direct Air Capture (DAC), are assumed to offset potentially material levels of residual GHG emissions from key industries. While we believe that these technologies will be an important part of the low carbon transition, a number of these technologies are either very costly and/or unproven at scale. We therefore, in line with the IIGCC’s Net Zero Investment Framework, design our carbon journey plans around pathways that have limited reliance on NETs as these result in the lowest levels of residual GHG emissions in 2050 onwards and therefore a lower probability of overshooting the 1.5 degree carbon budget.