Governance Financial Statements
Strategic Report
49
INVESTMENT RISKS: Our credit investments are held as long-term investments. Although the value of the investments may be affected over time by the market’s view of the borrower’s credit quality, it is the borrower’s ability to repay the debt that affects us the most. Transition risks: The companies we invest in could face additional costs due to the nature and rate of the transition or, as a result of substitutability, assets could become stranded. Physical risks: Depending on the location, issuers we are invested in may face higher costs from extreme weather events or sustained asset damage. There may be business interruption from longer duration physical impacts of climate change. Material increased costs to the borrower, as a result of climate change, may affect their ability to meet their debt repayment obligations, increasing the risk of default. Sensitivity analysis of the risk of default on our credit portfolio is included in note 16. We seek to incorporate responsible investment, including climate change and climate risk management across all of the teams within the Investment Function, with all teams responsible for different elements of the investment process as outlined below. Our Responsible Investment Framework sets the basis for managing the risk exposure arising from broader environmental, social and governance risks, including climate change, and is monitored by the Investment Committee. At the broader strategic level, we consider the overall financed emissions of the portfolio and other metrics, such as the portfolio’s exposure to issuers with science based targets, to assess the portfolio’s potential future decarbonisation pathway. For the purposes of implementation, we have split our approach into the following areas: • Top down: portfolio management and asset manager due diligence. • Bottom up: credit research and investment due diligence. Top down: For internally and externally managed assets, our approach to portfolio management seeks to combine fundamental and responsible investment data, to support with meeting our overarching net zero objectives. The investment function uses outputs from our proprietary emissions modelling tool as an input into the investment decision making process while seeking more information directly from issuer reporting, in the case of internally managed assets, and via asset managers for externally managed assets. For externally managed assets, we seek to engage with our asset managers to understand their broader approach to responsible investment. We use our internal responsible investment manager assessment questionnaire to source information on their approach to responsible investment. The outputs of our assessment feed into a broader manager performance assessment, the results of which are presented to the Investment Committee and communicated to our asset managers. More information can be found on our responsible investment manager assessment in our UK Stewardship Code report available on our website www.justgroupplc.co.uk/sustainability. Bottom up: All of Just’s existing and prospective investments, where we have veto rights in place, are scored using our internal classification system (“PAYG”). In 2024 we enhanced this framework to remove the restricted bucket (Red) due to there being significant overlap with this bucket and the Purple bucket.
This ensures a consistent and robust approach is taken when assessing environmental, social and governance risks, including climate-related risks. Our classification system leverages information from third party data providers, external asset managers (where relevant) and directly sourced information from issuers. As part of our analysis for PAYG, the Credit research team considers a prospective investment’s financed emissions using reported or estimated data before determining their recommendation. To explicitly consider the physical and transition risks of climate change, we leverage third party data on Climate Value-at-Risk (“CVaR”), where data is available, primarily for our liquid corporate bonds. The purpose of this data is to understand, directionally, the potential impact of different climate change scenarios. Where data is unavailable, which is primarily the case for illiquid investments, a sector average based estimate that accounts for investment time horizon is applied to produce a holistic assessment of the portfolio’s exposure to physical and transition risks. We actively consider investments in activities and issuers which are supportive or enabling of the overall transition to net zero, such as renewable energy production. We expect these investments to exhibit less transition risk. For more information, please see our Sustainability Bond Framework on our website www.justgroupplc.co.uk/sustainability. Just Group is exposed to property risk via the LTMs held on our balance sheet. These LTMs are secured against residential properties located across the UK. If the sale proceeds from the property are insufficient to repay the accumulated loan balance on the death or entry into long-term care of the customer, Just would suffer a loss due to the no-negative equity guarantee. Climate risk can lead to increased property risk on the LTMs held in our investment portfolio due to changes in property values as a result of physical risks or transitional risks, see pages 51 and 52. What progress have we made to improve climate risk management of the Investment Portfolio? In 2024, we continued to enhance our approach to responsible investment in the following ways: • Enhanced our internal responsible investment classification system to improve the granularity of our assessments. • Obtained signatory status to the Financial Reporting Council’s UK Stewardship Code. • Enhanced our approach to calculating financed emissions with improvements in data integrity checks. • Enhanced the capabilities of the team by hiring specialists fully dedicated to responsible investment. • Improved our overall governance and internal processes, and produced an internal methodology document for financed emissions. On our LTM investments, our property underwriting assessments allow for existing flood and coastal erosion risk. We have undertaken climate change scenario analysis to improve our understanding of how our lending policy and underwriting approach need to evolve to manage any future exposure to climate change risk. We have been engaging with the Equity Release Council (“ERC") and the Partnership for Carbon Accounting Financials (“PCAF") on developing a standardised approach to emission reporting to further support the development of green lending and retrofit mortgages. Property risk The risk is attributable to both our LTM portfolio and also property related investments outside of our LTMs. In high transition risk scenarios the greatest risk may come from the introduction of legislation and regulation mandating the retrofitting of properties as well as the introduction of minimum energy-performance rating standards. This could lead to significant costs for property owners, with the burden also being passed on to businesses through their investment interests and a reduction in future investment opportunities.
• Purple – excluded: divestment and no new investment • Amber – watchlist: invest but monitoring required • Yellow – neutral: investment permitted • Green – positive impact: investment encouraged
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