Climate Risk
As the impacts of climate change grow more urgent each year, UTAM has developed increasingly sophisticated processes for measuring and managing climate-related investment risks. We have been working for several years to deepen our understanding of climate-related risks and opportunities. As we gain added insights into this rapidly evolving area, we continuously adjust how we manage investments and measure performance.
In early 2020, we committed to reducing the carbon footprint of equity (and equity-like) investments in the Endowment portfolio by at least 40% relative to 2017 levels by the end of 2030. In 2022, we took further steps by setting a new carbon footprint reduction target alongside fossil-fuel divestment initiatives.
To provide transparency to our process, UTAM supports, on behalf of the University of Toronto, the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). U of T became the first Canadian university to adopt the TCFD recommendations for reporting on its long-term assets, including the Endowment.
Climate-related risks are evaluated by sector, country and company and over various time horizons. For the Endowment, we identify the relevant climate-related risks and their associated time horizons (i.e., when these risks may unfold). We consider transition and physical risks across countries and sectors in an effort to ascertain the parts of the Endowment portfolio that could be most at risk to the effects of climate change. This part of the process leverages country and sector climate scores from various external research groups.
After identifying the relevant risks, we assess and measure them to promote discussions and to evaluate the potential impacts to the Endowment portfolio. This includes modelling the portfolio’s exposure to at-risk sectors, undertaking carbon footprint calculations and performing forward-looking scenario analysis.
Managing the risks of climate change
Managing climate-related risks is a fundamental part of our investment and risk management approach:
Target setting: To achieve our carbon footprint reduction goals, we deploy a variety of tools, including shifting assets to lower-emitting countries and sectors, as well as investing in strategies and asset classes with lower carbon emissions.
We have committed to divesting the Endowment portfolio from investments in fossil fuel companies, which will further reduce the carbon emissions generated by investments in this portfolio.
Manager due diligence: Given our belief that ESG factors can have a material impact on long-term investment returns, we incorporate ESG considerations into our investment analysis and decision-making processes, particularly with respect to our selection and monitoring of investment managers. Our analysis includes, where possible and relevant, a review of the carbon emissions attributable to the manager’s portfolio.
Stewardship: Our stewardship activities, as an active owner, are critically important in our efforts to manage climate-related risks. We bring a responsible investing viewpoint to the exercise of shareholder voting rights, our engagement with public companies and our advocacy efforts.
Proxy voting: We have adopted the ISS Sustainability Guidelines for proxy voting.
Engagement: UTAM actively engages with companies on sustainability matters. Given our size and our practice of investing through external managers, we focus our efforts in collaborative engagement groups and initiatives, such as the International Corporate Governance Network, the Canadian Coalition for Good Governance, Climate Action 100+, Climate Engagement Canada and the University Network for Investor Engagement.