6. Climate change
Climate change is a major, systemic risk that could destabilise global economies and investment markets to a significant degree. As a long-term investor in private markets across a range of asset classes, Stafford supports the goals of the Paris Agreement and together with other institutional investors we share the responsibility to manage and protect the assets of end-beneficiaries whose money we manage, including from the effects of climate change.
Climate change presents both investment risks and new opportunities that need to be proactively managed as part of our pre-investment due diligence, the post-investment oversight process, as well as in the reporting to clients and stakeholders. As an investor in global forestry and low carbon solutions in infrastructure and private markets, Stafford has committed to the Net Zero Asset Managers (“NZAM”) Initiative and will continue providing solutions that not only are able to deliver financial returns but help achieve the transition to a net zero greenhouse gas (GHG) emissions economy.
Our disclosures on governance, strategy, risk management, and metrics & targets associated with climate-related risks and opportunities follow the TCFD recommendations and cover both our business operations and our investments in the sections below.1
[1] TCFD (2017), Implementing the Recommendations of the Task Force on Climate related Financial Disclosures, https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Annex-062817.pdf
I. Climate governance
Climate governance at Stafford
Source: Stafford Capital Partners
At Stafford the climate governance starts at the top, with our Executive Management Board (EMB), and extends across all levels of our investment platform and business operations. Our Strategic Position on Climate Change sets out Stafford’s priorities to guide our actions and investment processes now and into the future. It has been approved by the EMB and its implementation overseen by the Sustainability Committee which is also entrusted with responsibility for overseeing the implementation of our Responsible Investment Policy. The Sustainability Committee has a direct link to both the EMB and the Investment Committee of each business line.
The EMB has ultimate responsibility for the oversight of risk management across the Stafford Group as it is responsible for adopting and reviewing Stafford’s approach to the identification, evaluation and management of risks that are significant to the fulfilment of Stafford’s business objectives, and for the determination of appetite for retention of risks across the group. This encompasses climate-related risks. The EMB also monitors and oversees progress against goals and targets for addressing climate-related issues that Stafford has defined as part of our commitment to the NZAM.
Stafford’s CEO is responsible for reviewing and guiding strategy and guiding major plans of action and together with the CFO and the EMB ensures that adequate resources, including staff, training and budget, are available to assess, implement and monitor climate-related risks, opportunities and measures.
The EMB has delegated the role of ensuring that a risk management system is established, implemented and maintained by the Investment & Risk Committee, which is being chaired by Stafford’s Chief Investment Officer. This committee monitors and oversees risk identification and management policies, processes and tools and their implementation by the investment teams. The Investment Committees of different business lines report to the Investment and Risk Committee and are responsible for overall risk management associated with selecting, acquiring and monitoring investments. And finally, Stafford’s Partners and all staff have a general responsibility to ensure that ESG factors, including climate change risks and opportunities, are considered in our investment and corporate decision-making processes.
II. Climate strategy
Stafford has a Strategic Position Paper on Climate Change in place which sets out our approach to managing the risks and capturing the opportunities related to climate change, including our firm’s:
framework for mitigating climate-related risks and capturing new opportunities,
approach for incorporating climate change into investment processes and disclosures, and
efforts to remain carbon neutral across our operations and business activities.
Net Zero Asset Managers initiative
As part of our strategic efforts to contribute to climate change mitigation and adaptation efforts by financial institutions, Stafford has committed to the NZAM Initiative in March 2021. Through this commitment we demonstrate our continued leadership and intend to strengthen our dialogue with external fund managers and investee companies and enhance partnerships with our clients. Our commitment encompasses the following:
Work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management.
Set an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner.
Review our interim target at least every five years.
Increase the proportion of assets under management covered until 100% of assets are net-zero aligned.
Stafford's business lines are making efforts to support the transition to a lower carbon economy through targeted investment products and by seeking higher standards of integration amongst the external fund managers. We enable the low-carbon transition by strategically investing in assets that will contribute to the transition to a low-carbon economy, such as renewable energy and timberland (see chart). We are committed to driving real world impact, primarily through engagement with external fund managers and contributing capital required to finance the transition. As part of the latter, new investment solutions will be developed with a positive impact on climate change. The most recent example of this is a product designed to capture carbon through afforestation, reduced deforestation and forest restoration projects and deliver carbon credits to investors.
Stafford’s low-carbon investments*, 2019-2021 (Net Asset Value in USD billion)
* Stafford’s low-carbon investments include timberland, renewable infrastructure assets and sustainable private equity.
Source: Stafford Capital Partners, data as of December 31, 2021, 2020 and 2019, respectively.
Stafford currently does not conduct scenario analysis to assess climate-related investment risks and opportunities, however, the investment teams include climate risks exposures in their analysis of investment opportunities across our business lines.
We believe that collaboration with other investors and policy advocacy are part of our responsibilities to avoid a runaway climate outcome that will harm the financial security and safety of current and future generations. We participate in collaborative efforts with other investors through our membership of networks that are active on climate change issues, such as the Institutional Investor Group on Climate Change, and iCI (Initiative Climat International).
III. Climate risk management
Stafford has several processes in place to monitor and manage investment and operational risks, including the ones that are climate-change related. Climate change risks (and opportunities) are incorporated into Stafford’s pre-investment due diligence processes across asset classes. A summary of the broad mapping of potential climate impacts and their relevance to the asset classes that Stafford invests in is provided in the table below. A tick denotes transition risks or opportunities that will be assessed as part of our due diligence or monitored and managed for our investments. The absence of a tick indicates that the risk or opportunity is considered to be low.
Source: Stafford Capital Partners Strategic Position on Climate Change, July 2019.
Stafford’s investment teams identify climate-related risks as part of the assessment of material sustainability risks and assess any negative social, economic, or environmental externalities of investments under consideration. To complement the analysis of climate related risks that is being performed as part of the due diligence process, Stafford has developed internal tools to help us assess the exposure of timberland, farmland, infrastructure and private equity investments to physical and transition climate risk. The outcome of this assessment is documented in due diligence reports and reviewed by the Investment Committee and the Sustainability Committee (when a sensitive business case risk has been identified), prior to an investment decision being approved.
As part of Stafford’s oversight and management of existing investments and manager relationships in the post-investment stage, we work closely with fund managers and investee companies to identify the material climate risks and opportunities and the potential adverse impacts. In terms of mitigating the climate-related risks, Stafford requests detailed climate change information as part of its ESG assessment of underlying fund managers. This helps us identify the investments that have the greatest potential exposure to these risks, as well as their capabilities to take these into account as part of the underlying investment management process.
To gain a greater appreciation of the risks, and mitigants that the group, its strategies and business segments are exposed to, Stafford's EMB initiated the development of the Risk Register which allows us to identify and manage risk holistically at various levels within the organisation including at the strategy, division and/or group levels. For this purpose, a risk framework has been developed which is to be used in conjunction with the Risk Register. Stafford's business and service lines have identified the most material risks they are exposed to, including the climate risk, and evaluated their potential impact on our operations and investment portfolios. Based on these inputs the tool produces Risk Management Reports that can be displayed by strategy, business unit or division. These risk reports are reviewed by the relevant investment committees and service lines at least on a quarterly basis.
IV. Climate targets and metrics
Stafford is developing its portfolios in line with the Paris Agreement and aims to achieve the net zero alignment across strategies by 2050. Early in 2022, we defined our interim targets for 2030 as part of the NZAM commitment. We have used the Net Zero Asset Owners’ Alliance Target Setting Protocol as a framework for identifying the targets, setting 2020 as the base year.1 Stafford’s (climate) transition plan, which will become available in the coming months, will describe in more detail how we will work towards achieving the NZAM interim- and end targets. We will report on our progress towards the targets on an annual basis.
Engagement targets
Financing transition targets
Sector targets
Targets related to operational emissions
a) Our operational carbon footprint
Stafford is a financial services company with a relatively low environmental footprint in its direct activities. Nevertheless, continuous effort is put into further improving our corporate practices and activities. We have been a carbon neutral company since 2018 and have adopted various practices that minimise the carbon emissions and footprint of our business operations and staff activities Examples include encouraging low carbon travel by Stafford employees, utilising virtual meeting solutions, and encouraging public transportation for commuting.
Stafford started tracking and offsetting (Scope 1, 2 and 3) carbon emissions generated by our operations in 2018. We partnered with Natural Capital Partners (now Climate Partners) who has been calculating our operational GHG emissions and providing our Carbon Neutral Certification ever since. Our absolute GHG emissions vary over time because of the growth of our operations and recently, in response to the Covid-19 pandemic (see chart). As a result of the pandemic, our total GHG emissions have been decreasing for the last two years and remain well below the pre-Covid area.
Stafford generates most of its GHG emissions through long-haul airline travel, followed by electricity. Business travel and employee commuting (including homeworking2 ) represent the most important sources of our Scope 3 emissions, which constitute just under two thirds of our total 2021 GHG emissions. We plan to reduce emissions from our operations where possible, as part of our broader NZAM commitment, while we continue operating as a carbon-neutral organization.
Stafford’s GHG emissions and related statistics, 2019-2021
Source: Climate Partners Greenhouse Gas Assessment reports 2019-2021 (based on Stafford Capital Partners data as of December 31, 2021, 2020 and 2019, respectively)
b) Our financed emissions
Stafford engaged South Pole to calculate the financed emissions of our private equity and infrastructure portfolios and review our proprietary model for calculating carbon sequestered and stored in our timberland assets in 2021 and 2022. In the estimation of the financed emissions for 2021 we added our Private Credit and Agriculture portfolios.
South Pole has made the calculations based on recommendations outlined in the Global GHG Accounting and Reporting Standard for the Financial Industry, developed by the Partnership for Carbon Accounting Financial (PCAF). Financed emissions are defined as total Scope 1 and Scope 2 GHG emissions attributed to the entity based on share of investment. Ideally, GHG emissions data for the underlying portfolios is reported by fund managers and companies. Unfortunately, such data is currently still very limited and not included in fund managers’ standard reporting. When values from companies are not available or reported, South Pole has estimated a proxy for GHG emissions based on industry and country of company, known as the Average Method.
It does not come as a surprise that Stafford’s infrastructure portfolios contributed mostly to the total financed emissions in 2021. Private Credit and Agriculture portfolios represent the smallest part of our non-timberland assets and have the smallest contribution as a result. It should be noted that in the absence of a better model for estimating farmland emissions, the Average Method has been used, thereby overestimating absolute financed emissions and carbon intensity of the Ag&Food portfolio. Ag&Food and Infrastructure portfolio had the highest carbon intensity among Stafford’s strategies in 2021.
Contribution of Stafford's strategies towards total absolute financed emissions by investment strategy in 2021
Source: South Pole, based on Stafford Capital Partners data as of December 31, 2021.
Stafford’s GHG emissions from operations and financed emissions, 2020-2021
| 2020 | 2021 | |
|---|---|---|
| OPERATIONAL EMISSIONS | ||
| Total GHG emissions from operations (tCO2e) | 198 | 145 |
| Scope 1 emissions | 13 | 23 |
| Scope 2 emissions – location based | 16 | 35 |
| Scope 3* emissions | 169 | 87 |
| AVOIDED EMISSIONS & OFFSETS | ||
| Emissions removal: sequestered by timberland portfolio** (million tCO2e) | 15.9 | 14.6 |
| Offsets purchased (tCO2e) | 733 | 723 |
| FINANCED EMISSIONS (Scope 3 category 15, excluding timberland) | ||
| Absolute Financed Emissions (tCO2e/years, Scope 1 & Scope 2) | 333,118 | 304,448 |
| Carbon intensity (tCO2e /USD million) | 192 | 121 |
| % Stafford NAV included in financed emissions estimation | 78% | 97% |
* Excluding financed emissions and including Homeworking in 2020 and 2021.
** Based on above-ground live biomass (e.g., stems, branches and foliage)
Source: Climate Partners (Greenhouse Gas Assessment reports 2020-2021, based on Stafford Capital Partners data as of December 31, 2021, and 2020, respectively) and South Pole (estimations based on Stafford Capital Partners data as of December 31, 2021, and 2020, respectively).
[1] Our interim 2030 targets can also be found on the NZAM website via the link below: https://www.netzeroassetmanagers.org/media/2022/05/NZAM-Initial-Target-Disclosure-Report-May-2022-1.pdf .
[2] Climate Partners (ex-Natural Capital Partners) has devised a benchmark which is based on an average homeworking day, accounting for the use of assets such as a laptop, monitor, air-conditioning and heating etc. To calculate homeworking emissions, both contracted homeworking and homeworking due to COVID 19 have been considered.