CDP data helps us build a clearer investment picture.
Schroders is a global asset manager with £375 billion of assets under management and offices in 27 countries. It is a mainstream investor focused on creating long-term value for its clients.
Andy Howard, Head of Sustainable Research at the firm, says that CDP’s data is at the core of much of the climate research done by Schroders. He says, “The argument that climate change can affect value and that something must be done about it is broadly accepted, but CDP data provides the bridge that enables investors to get from there to actually doing something about it”
Distinguishing winners and losers with climate data
Howard explains that the company specific data in CDP’s questionnaires provides vital information to help an investor such as Schroders analyze and differentiate companies likely to provide a better investment over the long term. He cites factors such as how likely a company is to change its business model, its emission targets and its climate strategy as typical examples of the valuable data contained in a CDP questionnaire.
“We want to know how exposed a particular business is to the changing context on climate and what it is practically doing to make the changes required; including its targets, timeframes and the extent of its ambition. Good CDP responses tend to include much of that information” explains Howard.
He says that one challenge they face as investors is that there is little historical experience through which to examine the effects of tougher climate policies. There is no precedent for the scale of change that lies ahead if governments remain committed to limiting temperature rises to even close to two degrees.
He gives the example of the aluminum industry: “Aluminum is an industry that uses a lot of power and therefore is vulnerable to a changing context, such as the introduction of carbon pricing. Critically too, smelters are located all over the world and use power from a wide range of sources. As a result, introducing more stringent pricing for carbon emissions will have very different effects on the costs of different companies, potentially completely reshaping the industry cost curve. Our analysis suggests that companies like Alcoa, which relies heavily on hydropower rather than coal, will be a beneficiary if the economics of that industry are reshaped by climate policy. CDP allows us to look at that kind of detail and also to assess the likelihood that better placed companies will remain on that path.” He says that this sort of analysis, applied alongside financial data and the spectrum of other measures typically found in investor toolkits, helps strengthen insights and build conviction.
CDP data feeds into many areas of investment decisions
For a large global investor such as Schroders, there are numerous ways that CDP’s data might help in an investment decision.
“For example, in both equities and corporate bonds we might use analysis of this data to help mitigate downside risk”, says Howard. He gives the example of the sugarcane industry in Brazil that, due to degradation of land through over-farming, led the Schroders team to be concerned about the viability of the business, especially with more volatile weather likely to degrade the land further over time. Thus a decision was made to buy insurance to hedge against risks caused by the physical impacts of climate change.
Howard adds that CDP’s quarterly sector reports are also very useful. “It is not so much the opinions expressed in these reports that are helpful to us, but the process and methodologies they undertake to get to their conclusions. It might, for example, give us an idea of a different way to look at a company and that is as important as the data itself”. He continues, “We’re looking to go beyond standard practices so anything that helps us to achieve more insight than our peers is valuable and CDP sector reports can help do that”.
Self-reporting and independent nature of CDP are key
Howard also explains that the self-reporting aspect of CDP responses is extremely valuable. “It’s unusual to get data and inputs from the horse’s mouth like this. Even if there are mistakes or missing elements in there, it’s very helpful to get such information direct rather than via a third party who might put their own spin on it.”
CDP data is the foundation for much of the climate analysis done by the wider ESG research industry according to Howard. “If there was no CDP data then a lot of the other players in the market would not have the data they require to provide their services”.
“What sets CDP apart”, he continues, “is that they are not a commercial research firm and they don’t have an axe to grind. So their neutrality means that investors can trust that they are really trying to figure out the best way to be a conduit for environmental information and not assert themselves for the purposes of making money or lobbying for a particular change.”
Water and forests
Howard adds that while it is the emissions data that he finds most comprehensive and comparable, Schroders also finds CDP’s water and forests data a useful value-add in their process. While narrower and less developed than its climate information, CDP’s water data provides investors with a much deeper understanding of companies’ exposure to water risks and their mitigation efforts than is available from other sources such as CSR reports.
For example, Schroders worked with CDP on a white paper which highlights that deforestation risk associated with soy has been overlooked by most companies. He adds that the CDP Water questionnaire can often provide the best insights into how companies manage their water risks.
Schroders is an active engager of its portfolio companies – seeing the process as a useful way to better understand and maximize value in companies they invest in. Being sensitive to the effects of climate change does not mean we will never invest in carbon intensive companies. When we do so, we arm ourselves as fully as possible with information on the risks companies face, the steps they are taking and the gaps in our analysis of either. CDP provides an important source of information to help us understand the context, status and opportunities facing industries and companies.
Going beyond carbon footprint
Howard notes that the issue of climate change and what it means to investors has developed significantly since COP15 in Copenhagen. However, the tools investors use to quantify this data have to a large extent not changed and there is a lack of creative thinking around how to use tools available. He explains, “Too often the question is still ‘how do we find a better way to do carbon footprinting’, rather than ‘what are we trying to do with this data?’ There’s not much point in answering the wrong question more accurately if it leads you to the wrong conclusions.”
Howard says that there is a need for investors to think about what they are trying to quantify and compare, while using the tools already available. “CDP is in a great position to lead this debate and share their knowledge”, he continues, “It’s a hungry, empty space and we are looking forward to working with CDP and the rest of the industry to further improve the depth, breadth and quality of data available to investment analysts.”