Trillium: Setting a portfolio-coverage target

Trillium Asset Management

Signatory type: Investment manager

Headquarters: United States

AUM: $4.4B USD (as of 30/12/22)

 

COVERED IN THIS CASE STUDY

Asset class: Listed equity

 

Trillium was founded in 1982 by Joan Bavaria, considered the founding mother of socially responsible investing. Trillium uses a holistic, fully ESG-integrated fundamental investment process to uncover compelling long-term investment opportunities. This process is enhanced by active and engaged ownership. The firm delivers domestic US and global equity, fixed income, and alternative investments to institutions, intermediaries, high net worth individuals, and charitable and non-profit organizations. In June of 2020, we were acquired by Australian financial services firm, Perpetual Ltd, and we remain a certified B Corp.

Why we set a 2030 emissions reduction target

Given our style of investing, it was crucial for us to set a target that ensures our authenticity as a responsible investor. Net Zero Asset Managers Initiative (NZAM) brings participants together in a global collaboration focusing on a single goal: applying pressure to urgently decarbonise the global economy and limit the effects of climate change. We joined this initiative because we recognize that the target setting and reporting aspects of NZAM will be key to the success of our longstanding work driving carbon reductions in our economy, and we recognise the power of acting in coalition with peers to seek the same end goal.

As long-term, sustainability-focused investors, Trillium’s listed equity portfolios were already constructed and managed with climate impact in mind. Trillium’s shareholder advocacy work on behalf of our clients has long focused on climate change, using our leverage not only as investors through dialogue and proxy voting, but also as active participants in filing shareholder resolutions. In the high-emissions energy and utilities sectors (which generate a large portion of our benchmarks’ emissions), Trillium seeks to invest in companies that enable the transition to a net-zero greenhouse gas (GHG) emission economy and demonstrate alignment with the global ambition to limit climate change. In practice, to be considered for investment, an energy or power company must demonstrate that its business model is designed to succeed in a low-carbon economy. At a minimum, the company must have no commitments to initiate new fossil fuel exploration, production or refining.

As a result, as of 30 June 2022, Trillium equity portfolios had no exposure to the traditional energy sector. Given that our starting point looked very different from our traditional, mainstream benchmarks, we prioritised setting a 2030 target that would be relevant for us.

How we measure and communicate net-zero alignment

In order to measure our listed equity investments’ alignment with net zero, we established a set of portfolio metrics, which portfolio managers monitor at least quarterly, with data and characteristics regarding carbon emissions and intensity of our equity investment strategies compared with their benchmarks. To communicate these results with our stakeholders, Trillium has begun providing an annual firm-wide impact report with aggregate data, as well as periodic strategy-specific ESG fact sheets. The metrics we consider include:

• intensity-based emissions measurements – the weighted average carbon intensity (WACI) and relative carbon footprint of our portfolios;
• the “temperature” rating of the portfolios;
• the Science Based Target (SBT) portfolio coverage.

The intensity-based metrics normalise emissions using portfolio company revenues (WACI) or amount of money invested (carbon footprint), and are particularly helpful to show changes both over time and as a result of portfolio construction decisions. Taking the “temperature” of the portfolio essentially models future emissions from the companies in the portfolio, and what the expected temperature increase associated with those emissions would be.

Using those methods of assessment, our portfolios were already in strong positions as we began the process to set our target. Our 2021 Impact Report shows that, as of year-end 2021, Trillium’s equity strategies, on average had:

• a carbon footprint 78% less than their benchmarks;
• WACI 59% less intense than the benchmarks;
• an average alignment reflecting 1.6 degrees of temperature increase compared with benchmarks that were aligned with 2.6 to 3.6 degrees.^[1]

However, using any of these metrics, or any similar ones that rely on incomplete data and estimates sourced from external data providers, also introduces an element of uncertainty. As such, any progress we hope to demonstrate will be similarly affected by the quality of the data.

Our 2030 emissions reduction target

The third metric we track, SBT coverage, is the one we have chosen for our 2030 target. This metric tracks the proportion of the portfolio’s assets invested in companies that have committed to setting their own SBT. Our target is that 75% of the holdings of our in-scope assets (described below) will have committed to setting SBTs by 2030. Our approach is based on the premise that the impact of our investments is determined by the actions and commitments of companies in our portfolios. If the companies we invest in set credible science-based targets for GHG reduction, as approved by the Science Based Targets Initiative, we can consider our assets invested in those companies as covered by those targets.

We can source this metric directly from SBTi and, while targets may rely on incomplete data and methodologies, whether or not a company has committed to setting or has already set a target is a binary. We also recognised that this metric was the one where we had the most work to do, given the strong position of our portfolios on the other metrics, relative to their benchmarks.

Scope of our target

Trillium’s equity investments consist of a set of domestic US, global and international equity strategies for our clients, including a domestic US small and mid-cap strategy. We have long recognised that the expectations we have of the largest companies we invest in cannot be the same for the smaller companies. While we perform the same level of ESG due diligence and reporting on all of our investments, these smaller companies may not have the capacity or resources to develop externally verified targets. For that reason, we chose to leave our existing small/mid-cap equity strategy out of our 2030 target, but we continue to engage with these companies on the topic. We also exclude assets for which Trillium is sub-advisor but anticipate working with the advisers of those assets to explore efforts to set their own net-zero goals.

Example: working toward the target

As we considered the available approaches, we appreciated the simplicity of the SBT approach, and that it would be easy to communicate to external stakeholders. We also felt that it matched well with our skills and tool sets as active and engaged investors. For example, we expect the success of our own engagement efforts to help in achieving our target.

Our Shareholder Advocacy Team has focused on climate change for more than two decades and has been asking companies to set science-based targets for some time. When we approach companies on this topic as members of NZAM, we have confidence that other investors are asking the same questions and we believe that this alignment will drive better outcomes.

As figure 1 shows, 48% of our included equity investments had set an SBT as of 30 September 2021, when we set our target. By 30 June 2022, that number had increased to 60%, and to 63% by the end of the year. To help implement our commitments, Trillium engaged many portfolio companies through dialogues and shareholder proposals in 2021-2022. In the first half of 2022 alone, our shareholder advocates reached agreements with four portfolio companies, including small- and mid-cap companies, to commit to setting SBTs, and only two of the proposals went to votes in the spring of 2022. Based on our own engagement successes and the pressure from NZAM signatories’ efforts, we believe SBTs will increasingly be the norm by the 2030 target date, allowing us to meet our target.

As per our Proxy Voting Policy Guidelines, to align our proxy voting with our commitment, we hold boards accountable by voting against some or all directors at companies whose policies and practices do not reflect scientific recommendations. In particular, we vote against/withhold support from the appropriate committee chair, or if none exists, the board chair, if the company has not set or committed to set a science-based GHG emissions-reduction target through the SBTi.

Figure 1: Proportion of assets invested in companies committed to SBTi targets

Source: SBTi and ISS ESG

 

Important Information:

This is not a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. The specific securities were selected on an objective basis and do not represent all of the securities purchased, sold or recommended for advisory clients. Information and opinions expressed are those of the author and may not reflect the opinions of other investment teams within Trillium Asset Management. Information is current as of the date appearing in this material only and subject to change without notice. This material may include estimates, outlooks, projections, and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented.