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Sarona Asset Management’s Climate Journey: Navigating Risks and Building Resilience

As a signatory to the Task Force on Climate-related Financial Disclosures (TCFD)1, Sarona Asset Management, Inc. (Sarona) is dedicated to aligning its impact measurement, management, and reporting systems with evolving industry standards. In a strategic collaboration with OnePointFive (OPF), a sustainability advisory and technology firm that helps organisations unlock sustainable growth through intentional climate solutions, Sarona undertook a comprehensive assessment of climate-related risks and opportunities within its portfolio.

A Climate Risk Assessment and Hotspot analysis conducted by OPF shed light on the vulnerability of three key countries—Vietnam, India, and Brazil—representing 35% of Sarona’s total investments. These nations face physical risks such as flooding, typhoons, droughts, and intense heat, which could lead to infrastructure damage, supply chain disruptions, and food insecurity. Additionally, the transition risks associated with reducing fossil fuel reliance and embracing renewable energy sources pose challenges like increasing regulatory requirements and additional costs for adopting new technologies.

The hotspot analysis brought to the forefront a critical revelation: a significant portion of Sarona’s portfolio’s carbon footprint was concentrated in a few companies, particularly within the logistics sub-sector. Three portfolio companies—Company 10, 11, and 12—were identified as contributing a substantial 69% of Sarona’s total portfolio footprint, emphasizing the need for advanced investment strategies and criteria to manage climate risks effectively.

Acting upon OPF’s recommendations, Sarona crafted a TCFD alignment Action Plan, focusing on internal enhancements and supporting fund managers in adopting the same disclosure framework. This proactive approach reflects Sarona’s commitment to cultivating an informed perspective on climate-related risks and opportunities across its diverse portfolio.

In our pursuit of TCFD alignment, Sarona underwent a thorough comparison of its investment management system with TCFD guidance, revealing varying degrees of alignment across governance, strategy, risk management, and metrics and targets. Over 18 recommendations for improvement were identified, prompting Sarona to make strides in enhancing internal policies and processes. Climate considerations will be explicitly incorporated into risk management systems, with targets set for greenhouse gas emissions.

Looking ahead to 2024, Sarona plans to develop climate scenarios, identify emerging risks in the short, medium, and long term, and implement robust risk mitigation and resilience planning. At the fund manager level, climate-related disclosures and efforts towards environmental sustainability will be prominent topics in Sarona’s annual ESG and Impact survey and Benchmarking reports.

Based on Sarona’s SGGM Impact Report for 2022, the majority of our partner fund managers have plans to contribute towards mitigating and building resilience to climate change. Many have yet to set goals and key performance indicators, establish a governance structure, and publish environmental-related disclosure reports. They face challenges in starting their climate journey, often stemming from a lack of awareness of the financial materiality of climate change impacts and gaps in knowledge and guidance on TCFD and other reporting standards.

Acknowledging the challenges partner fund managers face in embarking on their climate journey, we have taken steps to bridge the gap. An informational webinar was organized by Sarona, providing insights into TCFD guidance and other reporting standards, emphasizing the importance of nuanced and context-sensitive metrics. A climate risk assessment resource list and open-source tools were also provided to the webinar participants. It was also highlighted that adopting TCFD recommendations has several benefits: safeguarding access to global capital, protection against financial losses, and preparation for upcoming regulations. While the TCFD has been subsumed into the International Sustainability Standards Board (ISSB), companies can use the TCFD recommendations at their discretion. Employing these recommendations serves as a beneficial starting point for companies transitioning to utilizing the ISSB’s Standards.

As Sarona continues gaining knowledge and expertise, aligning to TCFD recommendations remains a gradual but purposeful process. In maximizing opportunities and mitigating risks associated with climate change, Sarona’s impact as an investor in emerging markets extends beyond financial returns, contributing to a more sustainable global economy.

For additional resources, OPF provides Guidance Documents and Climate Risk Analysis tools.

1Starting 2024, the TCFD is subsumed into the International Sustainability Standards Board (ISSB). The requirements in IFRS S2 Climate-related Disclosures issued by ISSB integrate and are consistent with, the four core recommendations and 11 recommended disclosures of TCFD.

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