Climate Change policy (extract)
DNR Capital supports the global ambition to limit global warming through reduced carbon emissions. Climate change has been identified by the Board as a material risk and is included in DNR Capital’s enterprise Risk Register.
DNR Capital’s primary climate change risk relates to investment risk. Climate change, along with other ESG factors, have the potential to impact investment risks and returns. DNR Capital has adopted an ESG integration and engagement strategy to enhance risk-adjusted performance.
DNR Capital considers both transitional and physical climate risks in our climate risk assessment and investment decision making. DNR Capital considers the key climate change risks and opportunities over our investment horizon to include:
- increased climate policies and regulation such as tougher emissions and energy efficiency standards and the impost of carbon pricing;
- increased climate related financial disclosure requirements;
- inefficient capital allocation towards energy transition;
- slower deployment of renewable energy (delays in approvals, shortages in future facing commodities etc) supporting medium term demand for fossil fuels;
- emergence of “green premiums”;
- decreasing capital and operating costs of climate transition enabling technology, including renewable energy, electric vehicles, battery storage etc;
- changing patterns of consumer demand, investment, production, demand and growth; and
- near term physical impacts of acute weather events such as physical damage to assets and infrastructure, operating and supply chain interruptions, destruction of inventory and other such financial impacts.
Our approach to climate change
DNR Capital recognises that climate change risks and opportunities have the potential to impact investment risks and returns. DNR Capital have a multi-faceted approach to assessing climate change, as outlined below:
- Climate change is one of nine factors assessed in DNR Capital’s ESG Score. Our ESG score is one of five components of our proprietary ’quality web’, which is used to assess the quality of companies.
- Once a company is assessed to meet DNR Capital’s quality criteria, detailed company analysis and valuation work is conducted to determine whether sufficient return upside exists. Consistent with DNR Capital’s ESG integration and engagement investment strategy, climate change risks and opportunities are also factored into this assessment, our framework for this assessment is discussed in more detail below.
- Where material climate change risks are identified, DNR Capital will conduct a dedicated ESG engagement with the company.
- DNR Capital conduct a biannual ISS Climate Impact Assessment Report to assess aggregate climate risk at the portfolio level.
- DNR Capital maintain a database of company and portfolio level climate related indicators that is monitored and tracked over time.
The outcomes of these climate change assessments informs investment decision-making and portfolio construction. Each of these investment processes is discussed in more detail below.
DNR Capital conduct detailed company analysis and valuation work to determine whether sufficient return upside exists. Where material climate change risk is identified, DNR Capital use the following framework to conduct a deep dive risk assessment:
- climate governance;
- climate strategy;
- climate risk management and strategy implementation;
- net zero strategy, integrity and reliance on offsets;
- climate scenario analysis,
- physical climate risk assessment; and
- climate disclosure.
Consistent with DNR Capital’s ESG investment philosophy, where we invest in a company with climate risks, the forecast return is sufficient to compensate for the risk.
Where material climate change risks or opportunities are identified DNR Capital will conduct a dedicated climate change engagement with the company. DNR Capital use the climate change framework discussed above as the basis for preparing detailed questions for these company engagement meetings. These meeting are a forum to better understand the company’s approach to climate change risk, and to understand the steps a company is making to improve climate performance, including but not limited to:
- climate governance including: remuneration alignment with achievement of climate related outcomes, adequacy of climate experience at the Board level, climate strategy and integration of climate in capital allocation decisions, capex budget;
- climate disclosure including: TCFD compliance, climate scenario analysis and granularity of climate scenario analysis at asset level, signpost analysis and view on current transition trajectory;
- net zero commitment including: Science Based Targets, ambition of medium and long term targets, inclusion of scope 1, 2 and 3 emissions, strategy, plan and resourcing to achieve targets, reliance on offsets to achieve targets; and
- physical climate including: risk assessment, asset resilience and capex budget.
DNR Capital’s climate change engagement initiatives are conducted in line with our Corporate Engagement Policy. DNR Capital’s climate change engagement initiatives are conducted by investment analysts, in conjunction with portfolio managers and the ESG investment analysts. As such, the insight gained from each initiative is incorporated into the research and investment decision making process.
Complementing DNR Capital’s climate risk assessment at the company level, DNR Capital conduct a biannual ISS Climate Impact Assessment Report to assess aggregate climate risk at the portfolio level. These reports include:
- portfolio emission exposure analysis (carbon footprint and carbon intensity contributors and attribution);
- climate scenario analysis (portfolio compliance with emission budgets and by sector);
- net zero analysis (assessment of quality and alignment of commitments);
- fossil fuel involvement and physical climate risk assessment; and
- the report also provides an assessment of portfolio climate risk using ISS’ proprietary “Carbon Risk Rating” (portfolio distribution of scores, top/bottom 5 rated holdings and sector attribution).
The ISS Carbon Impact Report conducts climate change scenario analysis at the portfolio level using the IEA Sustainable Development Scenario (SDS). The SDS is a Paris Accord-aligned scenario and is well aligned with the group of 1.5°C scenarios used in the IPCC SR 1.5 report.
DNR Capital maintain a database of company and portfolio level climate related indicators that is monitored and tracked over time, this includes but is not limited to:
- Net zero commitment;
- Carbon footprint data; and
- ISS Climate Impact Report portfolio and index data.
DNR Capital will report to clients on climate related investment and engagement initiatives through annual Stewardship Report, client reporting, marketing presentations and bespoke client requests.
Roles and Responsibilities
The Board and executive management
The Board and executive level management have formal oversight over and accountability for responsible investment, including climate change, at DNR Capital. Responsible investment, outcomes, including climate change, will be reflected in executive remuneration.
Socially Responsible Investment (SRI) Committee
DNR Capital’s SRI Committee was established in 2010 and oversees the implementation of our ESG policies and integration of ESG into investment decision-making.
DNR Capital’s ESG integration and engagement initiatives are conducted by the investments team. As such, the insight gained from the process is incorporated into the research and investment decision-making process. Responsible investment, outcomes, including climate change, are reflected in remuneration.