Episode 96

October 18, 2023

Kevin Quinlan on climate change as a material investment risk

Kevin Quinlan, Director of Climate at SLC Management, discusses climate risk and reporting and how investors could use these insights to inform their own relevant investment mandates.

Steve Peacher: Hi everybody. It's Steve Peacher, president of SLC Management. And this is “Three in Five.” Welcome back. We haven't done one of these for a number of months. We took a break over the summer, but I'm really glad to be back doing these “Three in Five” podcasts. And I'm glad to get back into it with a colleague. My colleague, Kevin Quinlan, who's a director in our of climate in our ESG group. So Kevin is knowledgeable about all things climate related, especially as they relate to asset management. And so today that's what we want to talk about. So, Kevin, thanks for taking a few minutes today.

Kevin Quinlan: Thanks so much, Steve, for having me.

Steve Peacher: So first I wanna talk about our TCFD report. So, TCFD stands for ‘task force on climate related financial disclosures.’ We just published at SLC Management, our first report. Of course, climate's always in the news these days. I think it was across the globe, certainly across North America, one of the hottest summers around. So every that's what everybody was talking about. And I guess my question is, you know, what is a TCFD report? And why should people care? And what should they look for in a report like that?

Kevin Quinlan: Yeah, thanks, Steve. That's a great question. So, TCFD is a framework that was released in 2017 for financial reporting on climate change. Now it can be applied across any sector or industry for reporting, and it has recommendations for disclosure across four main categories. So, governance, risk management, strategy and metrics and targets. Like you mentioned SLC Fixed Income, we published our first TCFD report this year using the framework. And it's really about outlining how we approach climate risk across the firm, outlines some of the tools we developed and actions where we're taking on behalf of our clients who have climate goals. Ultimately, though it's about risk. So as the manager of our client’s capital we obviously have a responsibility to understand the material investment risks that climate change presents to our portfolio companies. You know, those could be physical risks, things like droughts, floods, forest fires, those could be things what's often known as transition risks. So technology shifts, carbon pricing. And whether or not those risks or material will depend on a lot of factors, particularly including you know what the client's objectives are. And for the question of you know, why should clients care, pay attention to this? Well, we're seeing with the accelerating impacts of extreme weather, regulators in a number of jurisdictions are starting to require pensions, insurers to report an alignment with TCFD. So clients can, who needs to meet those requirements from a regulator on climate risk, they can look at our report and see how we can support them to do so.

Steve Peacher: You know this, the whole focus on climate risk has, in the financial community. And I'm speaking from the point of view of asset managers and our clients, has really accelerated over the last few years. I mean, I I've said before, it feels like 5 or 7 years ago we never talked about this. And now sometimes it feels like it's all about people wanna talk about. But as a result of that, I think people have as many questions as they do opinions, and I know I think our clients do. So as you listen to clients ask questions about climate risk, and how they should think about it, and how they should think about it in their portfolios, what are some of the common things that they ask for, that they ask about? And they ask for?

Kevin Quinlan: Yeah. So I would say the most common request is when a client will ask for reporting on the carbon footprint of their investments. And to do this you need to calculate what's known as your financed emissions. And this is a term you you'll often hear in this space in asset management. And the way to think of finance emissions is this, is that as an investor it's what your share of a company's greenhouse gas emissions is. And there's lots of you know nuances in terms of enterprise value, and you know, book value and how you assess things. But ultimately it's about this, you take the overall greenhouse gas emissions of a company, you apportion a share of it to your investment and that's based ultimately on the size of that investment relative to the overall value of the company. So, then the question becomes, well, why would a client want to do this? You know what might be driving them? And there's a couple of reasons we see in conversations with clients. So, the first is, as I mentioned before, in a number of jurisdictions we are seeing regulators are starting to ask for this. They are asking for disclosures on the financed emissions of investments. And it's seen as a proxy for transition risk in a way. The second reason is that if a client has made some sort of Net Zero commitment, having this data is a useful way to set a baseline, track progress. That's a very common approach. The third is, you know, the carbon footprint gives you a sense of where there might be different risks or opportunities potentially in the portfolio. Sometimes clients, they just want to compare with peers and see just kind of how the numbers stack up. Now, obviously, though, there's challenges to be aware of when calculating this. So one issue, of course, is the data quality. You know, some companies obviously they don't report their greenhouse gas emissions, or maybe they put out incomplete information. And so when that happens, you have to use proxies. It also varies considerably by asset class. So for public fixed income generally, there's a lot of pretty good publicly available data that you can get to calculate. For private fixed income many issuers they don't publish or track their own emissions. So you have to go to the proxy route like I mentioned before. And for some asset classes ,securitized, there isn't yet a methodology for calculating. So you have gaps there. The one thing I would say to keep in mind in all this to clients is that you know there's no perfect metric, you know, carbon emissions and in the investment case financed emissions, it's a backwards looking metric. It doesn't tell you where a company is going. It doesn't tell you what a company strategy is. So, while it is one data point, it's important to ultimately look at a broader picture when assessing climate risk.

Steve Peacher: You know, it seems that institutional clients, there's a big range in terms of where institutional clients sit in their own journey. You've got some clients, especially out of Europe, who are well along. They've established their own framework. They know what they're looking for. They know what they want in terms of reporting from their asset managers. They know their targets. Others are still trying to come to grips with this and figure out how they're supposed to approach it. And if you've got somebody, there's somebody who's coming to us and saying, ‘Man, there's so much information out there, this is confusing. I don't know what to do. How do I get started?’ What do you tell them if you're trying, if they're trying to, to kind of get started in terms of establishing their own approach to considering how they should factor climate risk into their portfolios?

Kevin Quinlan: Yeah. Well, the first thing I'd say is that they’re right that it is confusing. There is a lot of noise out there. And you know, as you mentioned before, I'm part of SLC’s sustainable investing team, and we really focus on trying to keep things simple. And ultimately, what's relevant to the client, cause there is a lot of noise out there, and you need to cut through it and drill into what's most material and useful. So, for a client who's maybe starting to go down that this road, or just wondering kind of what it means, I would just start with first principles, which is that, you know, don't just ask for something just because you think everyone else is asking for it. You know, different clients have different needs. What's ultimately most relevant, you know, for your objectives. And often the best place to start is with the conversation with the investment teams managing the money. And this goes back to what I said at the start, which is that although we outline in the TCFD report how we approach, you know, climate risk at the firm level, the specific risks and opportunities from climate change are they're not all material in the same, in different circumstances, it varies across asset classes. It varies across geographies, timelines and of course, depending on what the actual investment strategy is for that particular client. So it's really best, I'd say, to start with a conversation there. To understand specifically what it means for you and your investments, and then then go from there.

Steve Peacher: This topic is so big, and I don't think it's getting smaller. It's getting bigger, in terms of how the financial community and investors deal with us so we could we, 5 min is not enough. So we could talk about this for 5 days and still have a lot of things going to discuss. But that was a very good summary of what is a very complex issue. I like to end these with a with a personal question. So, as we were talking about, you grew up out West in Canada, in Victoria, and then went to school in Vancouver. So I have 2 questions. One is, you know, if somebody was going out there for the first time. I mean, I've been out to both of those cities and love them. But if somebody's going out there for the first time, and you were to say, and they would ask you, what what's the one thing I should do If I'm going to visit you know Vancouver or Victoria, what would you tell them? What would be the one thing if you had one time to do one thing, do this?

Kevin Quinlan: That's a good question that. That's always tough. But II would say, you know, having grown up there and spent some a little bit of time in other cities. Obviously the big appeal of Vancouver is that you know you can you can go to the beach and be on the ocean and go on top of a snowcapped mountain, and you can do that within 90 minutes because of the proximity. You can't go wrong if you're going down to Stanley Park. It's the big park right downtown Vancouver. There's the seawall, which is, I'm a big runner, is one of my favorite running routes. You can run around there, get a great view of the city, the oceans, the mountains. I've never heard anybody be disappointed after doing that, doesn't matter what time of year. It's always a spectacular place to look out, so that if you can go to Stanley Park and the seawall, if you've only got, you know, a couple of hours, I always say, do that.

Steve Peacher: One other question. You know we talked, I've taken a float plane from Vancouver to Victoria. You say you often take the ferry, but you've done both. It was a spectacular trip for me. What's your favorite, would you, if you had a choice, would you rather fly on a Blue Bird Day or take the ferry?

Kevin Quinlan: That's a polarizing question for somebody who grew up out West, a lot of strong opinions. I spent a good part of my you know, childhood, teen years, taking the ferry back and forth. You know, I gotta say I have a soft spot for the ferry just cause in, and maybe that's cause I don't live in Victoria anymore. Maybe you have a different answer if I was still there. But when I come back I do like to take it. It's obvious, it's pretty incredible views, you know. Sometimes, if you're lucky, you get to see a big pod of Orcas off the side of the ship. That's always exciting. It's a nice little kind of 90 minute trip. So, again, you know it's maybe different if you gotta take it every other Friday for, you, know a decade. But these days I'd say I do have a soft spot for it. It's always a pretty great trip, and you can't beat the scenery out there on the West coast.

Steve Peacher: Yeah, I can imagine, I’m dying to do that. Well listen, Kevin, thank you for taking the time. Some very insightful comments, and thanks to everybody for listening to this episode of “Three in Five.”

Kevin Quinlan: Thank you, Steve.


This content is intended for institutional investors. The information in this podcast is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance, or investment services. Investors should consult with their professional advisors before acting upon any information contained in this podcast. Any statements that reflect expectations or forecasts of future events are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility.