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Stewardship to Drive Net-Zero

Interview with Venetia Bell, Chief Sustainability Officer, Gulf International Bank


Conducting stewardship activities within investment portfolios is one of the most direct levers that investors can use to support their transition to net-zero. How can investors facilitate the transition in the real economy and actively support decarbonisation efforts through engagement with companies and their stakeholders?

 

Why do you think stewardship is an important tool to drive net zero?

Stewardship can play a central role in investment strategies to progress towards net-zero objectives. Though engagement, asset managers increase understanding – certainly for themselves, but often for their companies also – of material ESG matters in their portfolio. For the companies, engagement with investors can result in beneficial idea exchange, with investors providing useful peer benchmarking, ideas from similar investee companies as well as industry frameworks. For the investors, engagement can uncover new information – such as the culture of the management team and how deeply and proactively they have considered the risks and opportunities from climate change. A portfolio company that can’t articulate its climate strategy is unlikely to have robust risk management systems or a forward-thinking approach to it market and clients. When it comes to producing resilient company performance, management’s disinterest in climate is a canary in the coal mine. We believe that stewardship is more powerful than divestment in propelling the transition towards a net-zero economy. While the world will continue to buy high-emitting products, such as cement and oil, regardless of our investment, we see the value in actively engaging with these companies on their transition to net-zero as a far more effective approach. For example, in recent years, several oil and gas companies have sold their oil wells and coal plants to private companies or private equity firms1. These privately-held companies tend to operate with a degree of insulation from the societal and environmental pressures that investors have exerted on the fossil fuel sector. Rather than transitioning away from fossil fuels and investing in sustainable alternatives, such as renewable energy or biofuels, there is concern that these new owners may prolong the operation of coal plants and oil wells, resulting in non-existent emissions reduction or worse, increases. In our view, engaging with major oil companies to encourage them to reduce emissions by fundamentally transforming their business practices, instead of merely divesting high-polluting assets, is a more powerful instrument in driving progress toward the net-zero goal. This approach acknowledges the importance of constructive dialogue and influence as essential steps in the journey toward a sustainable, low-emission future. Can you give us some examples of successful investee engagement for net-zero?

Our GIB AM Sustainable World Equity team engaged with Thermo Fisher, the American pharmaceutical and biotechnology Services Company on raising net zero alignment within their supply chain. The company had already committed to becoming net-zero by 2050 and joined the Business Ambition for 1.5°C campaign led by the Science Based Targets initiative (SBTi). They have since persuaded 90% of their suppliers (by spend) to commit to set science-based targets by 2027. As well as encouraging and supporting this initiative, we engaged on how they can continue to progress further.

The team also recently engaged with JB Hunt, one of the largest American trucking companies, on enhancing their emission reduction targets towards net zero. They have made significant progress, but we continue to set targets and engage, as we believe that JB Hunt, as a solution provider, can further reduce the emissions of their customers by continuing to shift cargos from truck to rail. We estimate that would cut customer’s CO2 by 65% per journey. With freight transport accounting for around 9% of all global carbon emissions2, we think that JB Hunt can have a material impact of moving the industry towards net zero.

Our GIB AM Emerging Markets team uses a stakeholder analysis and survey to identify the most relevant and material ESG risk factors for investee companies. They then establish an ambitious long-term sustainability plan with a focus on 4-5 areas identified. For example, the team has been engaging with Locaweb, a Brazilian IT service management company. Through their analysis, they recommended that Locaweb:

  • Set ambitious goals in line with the company’s values and build on the issues identified in the materiality matrix;

  • Formulate KPIs to measure Locaweb’s progress in achieving these targets; and

  • Integrate these KPIs into management variable compensation.

The company has now started to disclose its Scope 1 and 2 emissions and has announced strategic sustainability goals for 2030 including a carbon neutral goal. The team will continue to partner with the company on furthering this progress by setting and verifying Science Based Targets (SBTs), as well as linking management variable compensation and including more quantifiable KPIs.

Our Emerging Markets team also holds a prominent Brazilian industrial electric motors manufacturer. This company has a strong international presence and is exposed to high-growth markets and trends. Since we became shareholders, we have actively engaged with the company on various issues, such as improving disclosure practices and integrating sustainability into their operations. As a result of our engagement, the company has set ambitious goals to reduce greenhouse gas emissions. We have successfully advocated for the inclusion of these targets as a key metric for determining management variable compensation. We believe that, in the longer term, this move will not only lower the company's implied cost of capital but also align incentives with their broader sustainability strategy. This company has consistently been among the top three contributors to our GIB AM Emerging Market Active Engagement Fund's returns since its inception.

Isn’t engagement only possible for equity investors? What about fixed income?

While it is true that equity investors have a more direct influence on the companies they invest in due to ownership and voting rights, engagement is not limited to them alone. Fixed income investors can leverage their position and influence to drive ESG and sustainability goals, where consistent with their investment remit.


At a portfolio level, our GIB AM Sustainable World Corporate Bond team monitors climate credentials on an on-going basis, and the implementation of SBTi-approved emission targets. Nearly half of our investee companies have SBTi approved targets3. We have started to engage with those companies that currently do not have validated targets or stated intentions to set them up.


So far, our engagements with non-SBTI committed companies have yielded interesting insights. Our conversations have helped us to understand where SBTi is not yet suitable, and to understand how many of these companies are still committed to very strong sustainability targets. This gives us sufficient comfort to buy their debt / remain invested even when they are not committed to the SBTi; without engaging with issuers to understand this intricacy, high-quality and sustainable issuers may have been overlooked.

How do you tackle trade-offs between financial and sustainability objectives?


Tackling trade-offs between financial and sustainability objectives can be a complex and nuanced process. At GIB AM, we do not view these objectives as inherently contradictory; in fact, the complete opposite. We believe that sustainability will bring the greatest financial returns to our clients in the long term. Therefore, we integrate sustainability factors into all investment decisions.

This is demonstrated through our review of Novo Nordisk, a stock that has been performing well recently. Their share price is up by approximately 50% to the end of October, while the MSCI world index has seen a modest 7% increase4. During our valuation assessment, we factored in an estimate of the global population affected by diabetes and obesity up to 2030 and beyond, who could potentially benefit from the company's medications that replicate the blood sugar-lowering hormone GLP-1. These drugs are increasingly prescribed for weight loss as well. By amalgamating sustainability and financial analyses, we gained a better understanding of the potential future financial returns.


Through integrated decision-making, we approach financial and sustainability objectives as interrelated components of our investment approach – both influence internal and external decisions and actions.

Another central component to our investment philosophy at GIB AM is our long-term view on investments. Trade-offs may be more likely to exist in the short term, but we believe that forward-looking portfolios, based on long-term sustainability themes, will ultimately deliver attractive returns for our clients and outperform peers.

What do you see as the engagement priorities looking ahead?


Looking ahead, addressing the urgent need for emissions reductions and limit global warming to 1.5°C remains a top engagement priority. While there has been progress since the first COP meeting, the latest scientific findings reinforce the need for immediate action. And we know that there has not been enough action to date.


Companies with science-based targets (SBTs) are outpacing the broader economy in emissions reduction5, but only 3,730 companies have set SBTs and 2,545 companies have net-zero commitments. With that in mind, our company-wide engagement priorities remain focused on Paris-aligned transition plans, including the establishment and verification of SBTs. We firmly believe that the race to net zero presents both opportunities and risk reduction for businesses, making them more resilient.


Whilst engagement often focuses on engagement with investee companies, we continue to place a significant emphasis on engaging with our clients. For example, many clients that want to invest passively default to traditional indices such as MSCI World. However, we see investing in sustainable indices (such as MSCI World ESG Screened) as an opportunity for passive asset owners to align with sustainable principles without compromising returns or taking on higher risks. Our analysis shows that, over the past decade, sustainable indices closely mirror the performance of their parent benchmarks, with minimal daily variance6. Therefore, we continue to prioritise client engagement – either to invest in sustainability-focused active strategies, such as those rated Article 8 or 9 under EU regulation SFDR, or encouraging them to transition to sustainable indices that incorporate emissions reduction and net-zero objectives.

Conclusion


Engaging to drive net-zero objectives is one of the most direct levers that investors can use to support the climate transition. And it can be a powerful lever, as demonstrated by the examples provided in this article, not only for equity holders but also in fixed income investments.


As we look to COP 28, we reflect on the past seven years since the Paris Agreement was set. The idea of COP 28, the year that marks the halfway point with another seven years to go to 2030, is to evaluate existing plans, look back and check in on how far we have come, and what we pledged to do but have not yet achieved. Central to these efforts is the promotion of Paris-aligned transition plans, establishing and verifying Science-Based Targets (SBTs), and encouraging clients to transition to sustainable strategies that incorporate emissions reduction and net-zero objectives. At GIB AM, wwe will continue to conduct and champion stewardship and engagement within our investment portfolios to support and advance the transition to a more sustainable, low-emission future while delivering good outcomes for clients.


 

About Gulf International Bank

Gulf International Bank B.S.C. (GIB) is a pan-GCC universal bank established in 1975 and regulated by the Central Bank of Bahrain. GIB provides diverse financial products, services and bespoke banking solutions to a wide client base in the GCC, Europe and North America. This includes corporate, institutional, global transaction and investment banking; treasury and asset management; and meem, the world’s first fully-digital Shariah-compliant retail bank.

The Group is active across regional and international markets through its subsidiaries GIB Saudi Arabia and GIB (UK) Ltd and its branches in the UAE and USA. GIB Saudi Arabia is the first foreign-domiciled bank to establish a local commercial bank in the Kingdom. Headquartered in Al Khobar, the bank has branches in Riyadh and Jeddah with its Riyadh based subsidiary, GIB Capital, delivering the Bank’s investment banking activities. Its activities span equity advisory and placements, mergers, acquisitions and privatisations; debt capital market solutions and strategic financial advisory, along with asset management and equities brokerage.

GIB (UK) Ltd is a London and New York-based global asset manager with AUM in excess of US$ 11 billion. As a signatory to the UN Principles for Responsible Investment, it offers sustainable investment strategies. GIB is owned by the governments of the Gulf Cooperation Council countries, with Saudi Arabia’s Public Investment Fund being the primary shareholder.


About Gulf International Bank: https://www.gib.com/en


About the Author

Venetia Bell is the Group Chief Sustainability Officer at Gulf International Bank (GIB), and Head of Strategy at GIB Asset Management. Amongst other responsibilities, Venetia leads GIB’s drive to embed sustainability and responsible banking principles in everything it does. She also led an award-winning multi-stakeholder initiative to enhance data and funnel private capital towards humanitarian and resilience projects.

Venetia is a Young Global Leader of the World Economic Forum. She is a Chartered Governance Professional, a designated Climate Competent Director, a Certified Investment Fund Director, and the Chair of Trustees of several charities. Prior to GIB, she had several roles at the Bank of England, and has published a range of policy-focused research.

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