Driving down carbon emissions: our net zero strategy for our investment portfolio
We believe we have a responsibility and an opportunity as a major investor to encourage and support decarbonisation in the businesses we invest in.
Guiding our assets to net zero
Wellcome’s funding comes from its investment portfolio. Our investments are spread across a wide range of businesses and fund managers.
The purpose of the portfolio is to generate returns to fund our mission of supporting science to solve urgent health challenges.
But as a sizeable and responsible investor, we have a real opportunity to encourage and support the businesses we invest in to decarbonise. We think this will be good for them, and for our long-term investment returns.
Our plan to do this involves encouraging the managers of our assets within our portfolio to adopt a net zero strategy, with the view that if 100% of them deliver on this, we will have decarbonised our portfolio.
We believe that our strategy will see Wellcome’s investments portfolio reach net zero by 2050 at the latest.
Why is reaching net zero important?
Emissions of greenhouse gases, resulting from human activity, are causing our climate to change. Net zero means achieving a balance between the greenhouse gases put into the atmosphere and those taken out.
By reducing carbon emissions, governments, businesses and investors can protect assets from climate-related risks, ensure resilience within their business models and protect ecosystems. Businesses that do not take these environmental risks seriously put the long-term sustainability of their financial returns at stake.
Measuring: knowing where we are
Wellcome’s public equity investments already have a comparatively low carbon footprint, at less than a third of the relevant global benchmark. This is because we have relatively little exposure to the most carbon-intensive businesses.
However, we want to do everything we can to drive down the carbon emissions in our portfolio. To help us keep on track, we publish annually an assessment of the proportion of our portfolio by value with a company-declared net zero target, the proportion with a science-based net zero commitment and the proportion with a near-term science-based target.
As of September 2022, 26% of our portfolio by value has a company-declared net zero target and 23% of the portfolio has a near-term science-based net zero target. These figures are up from 23% and 17% respectively in September 2021. 13% of the portfolio has a science-based net zero commitment as of September 2022, up from 10% 12 months prior.
You can read further analysis of our progress in our annual report (p42) [PDF 3.04MB].
We want to see these numbers continue to increase, and we will be stepping up the expectations we set for the companies and funds that we invest in.
What these targets mean
- A company-declared target is where a company has stated that it believes it is on a net zero trajectory. Whilst this should imply it will reach net zero emissions by 2050, there are a range of standards around how this might be measured or achieved.
- A science-based target is a company-declared target that has been verified by the Science-Based Targets Initiative. A company’s target will only be verified if it is in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
Because our focus is on driving emissions reduction, we will not usually favour the use of carbon offsetting as a means of targeting net zero. Where these offsets must be used at the individual company level, we will look at the quality and efficacy of these offsets.
Engagement: setting our expectations
We will work with the managers of each asset we own to put them on, or encourage them along, the path to decarbonisation. We’ve created what we call an ‘engagement ladder’ to benchmark where we think each asset in our portfolio is on this journey. The aim of our engagement will be to continually encourage each company or manager to move up the ladder to achieve carbon neutrality.
We will prioritise the areas in which we think we can make the biggest difference. Initially, we believe this will be in private equity, where we’ve found that conversations about decarbonisation tend to be at an earlier stage than in public equity markets.
While our preference is to encourage companies to decarbonise we have also been clear that companies that do not engage positively on environmental concerns do not represent good investments and do not have a place in our portfolio in the long term. As well as driving real-world change, our strategy will help us minimise the exposure of our portfolio to businesses that face climate change risk.
Evolving our strategy
One of the key challenges in our plan to encourage the businesses we invest in to decarbonise is a lack of quality, standard metrics. We are encouraging all the businesses we invest in to follow the recommendations set out by the Task Force on Climate-related Financial Disclosures, which is the global standard for climate-related disclosure.
We are a member of the Institutional Investors Group on Climate Change, which helps institutional investors, such as us, to engage with businesses on decarbonisation and develop emissions reporting standards.
We believe that our strategy will evolve over time, as data and industry practice develops.
We have set a deadline of 2050 for our portfolio to be net zero which we know is achievable, because it’s important to us that we do not make promises we cannot deliver. However, we will keep this under review and hope to bring this date forward as the path towards decarbonisation becomes clearer across all parts of society.