Hedge out climate change risk: Mellon Capital

Hedge out climate change risk: Mellon Capital

Australian institutional investors should be taking more measures to decarbonise their portfolios, argues US fund manager Mellon Capital.


Mellon Capital portfolio manager Karen Wong is in Australia and New Zealand this week to promote the San Francisco-based firm’s Enhanced Carbon Efficiency Strategy.

The quantitative fund, which is headed by Ms Wong, was established in 2014 with US$100 million of funding on behalf of Mellon Capital client the McKnight Foundation.

Mellon Capital partnered with consultant Mercer and asset manager Imprint Capital on the strategy, which now has US$400 million of additional client money and is looking to expand into Australia and New Zealand.

The fund invests in the MSCI All Country World Index (ACWI) using MSCI environmental, social and governance (ESG) data with the aim of reducing exposures to carbon emissions by 50 per cent.

The strategy also aims to minimise tracking error to less than 0.5 per cent.

“This is a hedge against climate change risk. We know it's happening, and we know it’s going to happen to impact the portfolio – but we don't know when extreme weather events are going to hit,” Ms Wong said.

“We want to achieve a balance between the environmental objective and the financial objective – that’s why there is less than 50 basis points of tracking error [built into the strategy].

“When we decarbonise we look at companies that are more proactive in mitigating climate change risk and we try to overweight those companies, and then we underweight companies that are not so proactive.

“So it's a best in class approach. We reward the companies that are more aware of the risk.”

One of the challenges for Ms Wong and her team is getting accurate ESG data.

“Ten years ago there was very little data about ESG. People were not really paying that much attention back then,” she said.

But the global financial crisis changed things, and companies began to direct much more attention to good governance practices, Ms Wong said.

“That drove the data. People started thinking ‘maybe I should start looking beyond financial data’,” she said.

“We spend a lot of time looking at the data. We know it's not perfect, but at least we can come up with a reasonable process with reasonable data.

“We can't wait. Climate change is so urgent. It's important for us to start taking action. And rather than trying to be perfect in everything, we take the mindset that it's better to start with something.”

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