Understanding Responsible Investment #11 - Zoom on the 2-degree alignment regarding investment portfolios

Dorothée Chapuis: Hello everyone and welcome to the eleventh episode of our podcast "Understanding Responsible Investment". In this episode we will discover what the notion of the temperature of an investment portfolio means. I am Dorothée Chapuis, Head of CSR for Societe Generale Private Banking Luxembourg, Monaco and Switzerland, and I am very pleased to welcome Florent Deixonne, Head of SRI at Lyxor, the Societe Generale group's asset management franchise.

Dorothée Chapuis: Hello Florent. So when we talk about climate, we obviously think about global warming. The Paris agreements of 2015 had set an ambition to limit the increase in temperature to 2°C, or even to move towards the objective of 1.5°C compared to the pre-industrial era by 2100. What exactly does this mean and how does it affect investment?

Florent Deixonne: Hello, Dorothée. We have to reduce greenhouse gases and as an investor or asset manager, we have to realize that investing in a portfolio is investing in a set of emitters that have activities that have an impact on global warming. Let's be clear, any portfolio, any index, any benchmark has a contribution to global warming. And therefore assessing, managing and mitigating climate impact is essential within the assets we manage for our clients. And then, it should be remembered that there is a very strong, very buoyant context: first of all, we are seeing strong commitments from asset managers, such as UNPRIs, or the TCFD, which is a commitment to provide transparency on climate data. There is also a regulatory framework that is becoming stricter, particularly in France and Europe. And finally, of course, there are our clients, who are in favour of the need to have a benchmark to assess the impact of their investments.

Dorothée Chapuis: All right, so how can one accurately assess the potential impact of one’s investments on global warming?

Florent Deixonne: At Lyxor, we have chosen as an impact indicator the temperature, which we propose to calculate for a portfolio, a fund or an index. This temperature translates the euros or dollars invested into the degree of global warming. I hope, Dorothée, that this simple indicator will become universal, favoured by institutional clients and easily understandable by individual clients.

Dorothée Chapuis: I see Florent, and then how do you calculate this temperature indicator for a portfolio that is made up of several companies?

Florent Deixonne:  It is indeed not simple, Dorothée. First of all, you need to have a climate scenario. What is a climate scenario? It is a model based on assumptions about population growth, economic growth and technological advances. Based on these assumptions, a climate scenario determines emission trajectories and reduction rates (by region or country, by activity, etc.) so as not to exceed an irreversible global level of emissions. Next, what we want is to move from a "Region, Country" level to a "Sector, Emitter" level: based on the climate scenarios, we use other models, which will enable us to determine the theoretical decarbonisation trajectory of each company in order to be aligned with the Paris agreement. In other words, its carbon budget must not be exceeded. Once we have determined this theoretical level for each company, then we will look at where it is. What is the volume of greenhouse gas emissions that it has emitted in the past, emits today and will potentially emit in the future, with regard to its commitments, its market share, etc. By comparing this volume of emissions with its theoretical budget, we can say whether the company is in line with the Paris agreements. As you can understand, this goes far further than calculating a simple carbon footprint reflecting the past, because here we analyze a trajectory that takes into account future emissions and climate alignment with the Paris agreements.

Dorothée Chapuis: I understand, so this is an analysis that you do not undertake. How do you translate that to the portfolio level?

Florent Deixonne: As you can understand Dorothée, the temperature of a portfolio is therefore the aggregate result of the emission trajectories of all the emitters in the portfolio. A high portfolio temperature may mean that emitters are not collectively aligned with the Paris agreements. Or that a few emitters that are not aligned with the Paris agreements have a significant impact on the portfolio and cancel out the emission reduction efforts of the other emitters in the portfolio.

Dorothée Chapuis: So, Florent, how do you lower the temperature of a portfolio?

Florent Deixonne: If you allow me, Dorothée, I will speak as a former asset manager: if I had to reduce the temperature of my portfolio, I can for example choose to invest in companies that help mitigate climate change; for example those that develop low carbon technologies, or that provide "green" products and services, such as wind energy or battery storage solutions. Or I may prefer those that already have a trajectory aligned or close to the Paris agreements. But I must also not forget the players who are in transition because it is also and sometimes mainly them who will be the economy of tomorrow, for example, an electricity producer who is shifting its energy mix from a high-carbon to a low-carbon mix...

Dorothée Chapuis: Thank you Florent it's much clearer. So as an investor, I will be able to know the global warming trajectory of my portfolio and integrate this data in my decision criteria, in addition to my risk appetite or investment horizon.

Florent Deixonne: Thank you, Dorothée, for the exchange. Goodbye and see you soon.

This podcast is part of a series of episodes proposed by Societe Generale Private Banking to understand responsible investment. It is available on the Spotify and Apple Podcasts streaming platforms via the "#Private Talk by Societe Generale Private Banking" program and on our website www.privatebanking.societegenerale.com. Feel free to subscribe to be notified when the next episode is released and to spread the word.

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