As we prepare to publish our 2nd Quarter 2021 version of Perspectives, the smoke from western wildfires in the US and Canada is again reaching east coast cities. Driven by record drought and heat, this year’s fire season is already worse than last year’s fire season, which itself occurred amidst record drought and heat.[1] Floods in Europe are reported to be the worst in memory, and the dramatic images coming out of Germany reveal the extent of the damage.
The increasing severity of meteorological and hydrological events is tracked by global insurance and reinsurance risk experts, and their databases show the growing economic cost of climate change.[2] The rising social and economic costs of climate change are driving global policy-makers to take more aggressive action to reduce carbon emissions, to direct financial flows to low carbon technologies and adapt to climate change, while managing a global transition to climate neutrality—an economy with no net greenhouse gases.[3]
The transition to a climate-resilient economy is happening swiftly and Pembroke is adapting and investing for what we believe will be a period of change and innovation. In April, Pembroke publicly supported the Task Force on Climate-Related Financial Disclosures (TCFD). Capital allocators need more climate risk exposure data to make informed investment decisions.
TCFD-aligned climate reporting promotes transparency and a unified reporting framework for companies, the investors and lenders who finance them, and the insurers who underwrite their risks. As a long-term investor, Pembroke believes that enhanced climate risk data will give us better insight about long-term risks and opportunities.
For example, the transition to a carbon-neutral economy involves the pricing of carbon emissions. An emission trading system has been in place in Europe for many years and similar systems are being launched around the world.
The price to emit a metric tonne of carbon dioxide equivalent gas has increased from less than €5 per metric tonne equivalent in 2016 to more than €50 per metric tonne equivalent today (Exhibit 1). If carbon emitting companies do not disclose their emissions and their plans to curtail, avoid, or hedge those emissions, investors will not be able to accurately price or report their own emissions risk.
Exhibit 1: The rising cost of an allowance to produce greenhouse gases in Europe
Understanding and reporting climate exposure risk is part of responsible stewardship and, to be done effectively, requires an investment in people and systems. Pembroke is adding new associates to its investment and client service team and recently created a Corporate Governance and Responsible Investing Committee (CGRI) to direct the firm’s stewardship activities.
The committee, which reports to the firm’s managing partner and includes members from across the firm, recently coordinated the production of Pembroke’s Stewardship Policy. Pembroke’s stewardship activities include monitoring the companies we invest in and the managers we hire, using our influence to engage with companies, and reporting on our engagement and proxy voting activities.
These structures will support our adaptation to the inevitable adjustments that climate change will bring to our industry. Pembroke believes that innovation will be the most effective response to climate change and that there will be opportunities for innovative companies with solutions to the world’s climate challenges. While we pursue these investment opportunities, we are also striving to innovate and prepare our own company and our clients for the changes that lie ahead.
[1] See World Meteorological Organization, The State of the Global Climate 2020, WMO-No 1264
[2] See Munich Re, Risks posed by natural disasters—Economic losses caused by natural catastrophes are trending upwards.
[3] See European Commission – Delivering the European Green Deal, July 14, 2021
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Other Articles Of Interest
Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.
