Understanding Responsible Investment #11 - Zoom on the 2-degree alignment regarding investment portfolios
"Understanding Responsible Investment" Podcasts
Episode #11: "Focus on the 2-degree alignment regarding investment portfolios "
by our CSR expert Dorothée Chapuis,
Head of Corporate Social Responsibility for Société Générale Private Banking Luxembourg, Monaco and Switzerland.
Interview with Florent Deixonne,
Head of SRI at Lyxor.
Click on the button below to play.
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.
Would you like to discuss this subject further with us?
The content provided on this page is for informational purposes only and is not contractually binding. The materials contained herein are not intended to provide investment advice or any other investment service and do not constitute a personal recommendation, advice, or an offer from Societe Generale Private Banking to purchase, sell or subscribe to investment services and/or financial products and/or investments in the aforementioned asset class. Some of the products, services and solutions described can carry various risks and involve the potential loss of the entire invested amount, if not theoretically unlimited loss. As such, they are reserved for a certain category of investors and/or adapted solely for informed investors who are eligible for such products, services and solutions. The information set out above shall not be considered legal, tax or accounting advice.
The wealth management and financial solutions, offers, products, services and activities mentioned on this page depend on each client’s personal situation, the legislation applying to them, and their tax residence. Consequently, the offer presented may not be eligible for implementation, adaptation or approval at all of the Societe Generale Private Banking entities and must comply with Societe Generale Group's Tax Code of Conduct. Furthermore, access to some of these products, services and solutions is subject to specific conditions, notably in respect of eligibility.
Please contact your private banking adviser to check that these offers meet your needs and are suited to your investor profile (knowledge, experience in investment, financial situation, including ability to withstand losses, and investment objectives, including risk tolerance).
Societe Generale Private Banking shall under no circumstances be held liable for any decision taken by a reader on the basis of this information. Before Societe Generale Private Banking can provide a potential investor with an investment service and/or a subscription to financial products, the investor must first be made aware of, understand and sign the related informative and contractual documentation, notably in respect of the associated risks (prospectus, Key Investor Information Document, Term Sheet, etc.). The potential investor must not base his/her investment decision and/or give investment instructions solely on the basis of this document.
All Societe Generale Private Banking entities reserve the right not to update or amend this document and shall accept no liability in this regard. The present document has the sole aim of informing investors, who will make their investment decisions without overly relying on this publication. The Societe Generale Private Banking entities shall under no circumstances be held liable for the accuracy, relevance or exhaustiveness of this information. The Societe Generale Private Banking entities give no explicit or implicit guarantees as to the accuracy or exhaustiveness of this information or of the profitability or performance of any asset class, country or market.
This document is not intended as a list or summary of all the terms and conditions pertaining to financial products, nor to identify all or some of the risks that may be involved in the acquisition and/or sale of a financial product/investment in any of the aforementioned asset classes.
The historical data and the information and opinions herein have been obtained from, or are based upon, external sources that Societe Generale Private Banking entities believe to be reliable but have not been independently verified. The Societe Generale Private Banking entities shall under no circumstances be liable for the accuracy, relevance or exhaustiveness of this information. Information provided on past performance, even repeated performances, is in no way a guarantee of future performance and may not be repeated. The value of an investment is not guaranteed and the value of investments may fluctuate. These forecasts about future performances are based on assumptions which may not be realised and do not therefore provide any assurance or guarantee with regard to the expected results of the investments in the aforementioned asset classes.
Generally speaking, Societe Generale Group companies may be market makers, conduct transactions involving the securities referred to on this page, and may provide banking services to companies whose asset classes are mentioned on this page, as well as the subsidiaries thereof. Societe Generale Group companies may, from time to time, conduct transactions, generate profits, hold securities or act as adviser, broker or banker in relation to these securities, or derivatives thereof, or in connection with the asset classes mentioned in this document. Societe Generale Group companies may, from time to time, acquire or liquidate positions on the securities, or the underlying assets (including derivatives), mentioned on this page or, where applicable, any other assets. Consequently, this may affect any returns for a potential investor either directly or indirectly. Societe Generale Group companies have no obligation to disclose this page or take it into account in providing advice or conducting transactions with a client or on behalf of a client. The administrative structure of the Societe Generale Group includes all safeguards needed to identify, control and manage conflicts of interest. To this end, Societe Generale Private Banking entities have implemented a conflict of interest management policy to prevent such conflicts of interest. For further details, Societe Generale Private Banking clients may refer to the conflict of interest management policy given to them by the Societe Generale Private Banking entity of which they are clients.