Equity valuations worse affected than debts under 1.5°C scenario: Invesco
Being a supporter of the Task Force on Climate-related Financial Disclosures (TCFD) since March 2019, US investment manager Invesco on Thursday released its first climate change report matching TCFD’s requirements. This type of report is soon expected to become an international standard for listed companies, among which asset managers.
In its inaugural study, the manager reviewed its environmental, social and governance (ESG) management strategy and assessed the impact of part of its investments in terms of greenhouse gas emissions, portfolio temperature and climate scenario analysis. Invesco’s pilot climate scenario analysis shall enable it to help its investment and risk management teams to establish prospective tools focusing on climate analysis. Hence, the manager plans to integrate ESG issues, and climate-related ones in particular, in all investment products and solutions by 2023.
Currently aligned with a 2.8°C trajectory
Invesco cooperates with Vivid Economics to assess carbon intensity of its scope 1 (direct emissions), scope 2 (indirect emissions linked to energy consumption) and scope 3 emissions (other indirect emissions). The firm highlights that the carbon intensity of its sampled equity basket that represents stocks it held in equity portfolios at the end of 2019 (GIVZ Equity) exhibits slightly lower emission intensity than its MSCI ACWI10 benchmark for all three scopes.
“A significant proportion of our holdings’ overall emissions intensity is contributed by companies in a small number of high-emitting sectors, including energy, materials and utilities. While these sectors together represent around 10% of our holdings in terms of value, their contribution to the overall emissions intensity is higher across all three scopes.
“For GIVZ Equity, companies in the utilities, materials and energy sectors contribute more than 75% of the scope 1 emissions intensity, and around 25% of the scope 2 and 3 emissions intensities. Examining the emissions intensities on a sector level allows us to identify and engage with those corporates that contribute most to the overall result,” Invesco specifies.
The manager also mentions its equity holdings are currently aligned with a 2.8°C warming trajectory. That places Invesco’s emissions largely above the 2°C set by the Paris Agreement in 2015 but in tune with the 3.1 degree Celsius trajectory of its benchmark.
Equity valuations suffer more under 1.5°C
Invesco’s climate scenario analysis, which relies on the hypothesis of a 1.5°C rise in temperature in comparison to pre-industrial levels, suggests aggregate valuation impacts are negative in that scenario. The British manager calculates that on average, equity valuations are worse affected than debt valuations. That of its representative equity basket as at the end of 2019 would drop 4% under the 1.5°C scenario. Invesco adds that corporate debt valuations will be less negatively impacted being more short-term and secure.
“Debt impacts are lower because most corporate debt is short term and very secure. The median maturity of debt issued by companies in the MSCI ACWI, for example, is 2025. As the most significant impacts from the 1.5 °C scenario are felt beyond 2025, this means impacts on corporate debt values are likely to be small. However, such impacts on debt valuations could increase if new debt holdings (with new issuances) do not adapt over time to reduce exposure to transition and physical risk,” it argues. Other findings of the report showcase that transition risk impacts outweigh physical risk impacts while those from chronic physical risk are more significant than those from acute physical risk.
Regarding products, Invesco said it is planning to increase ESG and climate product offerings while keep working with clients to decarbonise portfolios. Furthermore, the manager is developing ESG factsheets for its funds that include climate metrics (scope 1, 2 and 3 emissions, carbon intensity).