In the belief it provides better investment outcomes, more funds managers are making carbon and climate change risk a core part of their analysis models, writes JACQUELENE PEARSON.

Earlier this year Aviva Investors took out the investment manager section of the Investment Stewardship Awards, organised by the Melbourne Financial Services Symposium. This recognition was due in large part to Aviva’s integration of sustainability into their investment decision-making process and ownership of securities. This involves pricing the amount of carbon an investee company uses. Andrew Hamilton, manager of Aviva Investors’ sustainable investment fund, says: “For carbon emitters we assume a price for carbon that we put through our financial models to see what happens to earnings and cashflows.

“We run our analysis under various carbon price scenarios, using carbon emission data from annual reports, third parties and sustainability reports,” he says. Aviva Investors usually prices carbon risk at between $10 to $30 for each tonne, a valuation range based on the European market mechanism and the proposed carbon pollution reduction scheme in Australia. “We have a large internal team of analysts and we’ve developed our own methodologies for pricing carbon risk,” he says. “Our modelling for carbon is applied to a company’s profit and loss statement and cash flow as it is just a cost – like other costs – so we can see how much it impacts on earnings.” The team’s main pricing methodology is a discounted cashflow valuation, but it can also assess the market cost of a company’s carbon emissions as a proportion of EBITDA [earnings before interest, tax, depreciation and amortisation], EBIT or net profits.

“Some companies are more affected than others. Carbon exposure is about energy use and various other industrial processes, so cement manufacturers, airlines, chemical manufacturers and the petroleum industry are deeply affected.” As for using sustainability research to identify investment upsides, he says stocks are “very hard to find in our world because we’re focused on the large listed companies… there are many more companies for whom it is a risk, rather than an opportunity,” he says. In terms of property investment, Craig Roussac, general manager of sustainability for Investa, says the direct relationship between a building’s energy consumption and carbon emissions makes it easy to factor carbon risk into an asset’s value and future performance.

He says ratings by the National Australian Built Environment Rating Scheme (NABERS) directly reflect how much carbon is used to operate the building on a square metre basis. “A low rating means a building is emitting a proportionately higher amount of carbon,” Roussac says. From November, NABERS will become compulsory for commercial office buildings over 2000 square metres, but Roussac says it should be compulsory for nursing homes, shopping centres and hospitals – which are more intensive users of energy than other commercial buildings.

Join the discussion