Institutional clients in Willis Towers Watson’s $166 billion outsourced chief investment officer (OCIO) business will find carbon emissions in their portfolios halved within the next decade and reduced to net-zero by 2050.
About 385 discretionary clients globally will be affected by the strategic change. Leaders at the consulting firm said Thursday that the decision will generate additional alpha for portfolios by managing risks and enhancing returns related to climate change. (Discretionary clients give the consulting firm authority over their trades).
“We think that understanding this transition will be one of the biggest sources of alpha across all asset classes and that this alpha opportunity is likely to be greatest in the next few years,” Craig Baker, Willis’ global chief investment officer, said in a statement.
The consulting firm said the halving of emissions by 2030 will be based on a 2015 baseline, aligning with the goals of the Paris Agreement.
Among the positive climate-related opportunities the consulting firm plans to invest more in are renewable energy holdings, including solar panels and wind farms, according to Willis’ US Delegated Investment Solutions Head Clint Cary. The consulting firm has already explored those investments in its equity and real asset portfolios.
“The projections for how energy growth will be achieved throughout the world are pointing to renewables as really the sole source of growth going forward,” Cary said. “And so we see that as a very large opportunity set for our investors to capture outsized returns.”
The consulting firm is also tilting assets toward companies with lower carbon footprints. Willis has a strong tech sector weighting in its portfolios, Cary said.
However, it will continue working with heavy carbon emitters that are improving their greenhouse gas emissions, Cary added. Examples theoretically would include energy sector companies that are working to pivot their businesses to a net-zero economy.
Ultimately, that investing discretion will lie with third-party managers that are overseeing mandates for Willis’ OCIO business. The consulting firm will work closely with them to identify risks and opportunities.
“We are looking at managers that tend to incorporate climate risk into their portfolios and outperform,” Cary said.
Willis is also reviewing physical risks in its assets related to climate change. The firm is investing heavily in climate-related analytics. In November, it bought climate change analytics firm Acclimatise. In January, it brought in-house an energy finance team from the Climate Policy Initiative, an advisory organization, of economists, analysts, and financial and energy industry professionals.
Willis will also explore transitioning portfolios to net-zero with non-discretionary clients who opt into the firm’s Carbon Journey Plan. Overall, Willis Towers Watson as of 2019 (the most recent figures available) had about $3.5 trillion in assets under advisement (AUA).