Can investors continue to engage with companies on limiting global warming to 1.5C?

RI explores investor responses to the issue and the hopes for keeping the Paris Agreement alive at COP28.

For the investment world, the upcoming COP28 comes at a difficult time. While the run-up to global climate talks in recent years have seen investors come out in full force with their hopes and expectations, there has been less momentum ahead of this year’s event.

Hosted in Dubai in the oil-rich United Arab Emirates, COP28 has attracted controversy for a host of reasons. A particular cause of unhappiness is that Sultan Ahmed Al Jaber – the head of the country’s national oil company, Adnoc – will act as president of the summit.

In addition, the ESG backlash in the US has weighed on the responsible investment community this year. One market participant told Responsible Investor that they would attend the talks but “keep a very low profile, given what’s going on in the US”.

But there is a bigger and more fundamental question at play. The pursuit of limiting global warming to 1.5C above pre-industrial levels – agreed at COP21 in Paris in 2015 – has seen investors with trillions of dollars of assets under management set goals to align their portfolios with this target.

However, there have been a number of warnings in recent month that this target is, effectively, dead. July, August and September 2023 saw sweltering conditions around the world, with average temperatures for each month more than 1.5C above the pre-industrial benchmark – the first time this threshold has been hit during the Northern Hemisphere summer.

Temperature control

The fact that the 1.5C target is on life support, if not completely dead, means that this year’s talks could, if anything, provide an opportunity to reflect on what this means for investors signed up to be net zero by 2050.

Such reflection on progress and next steps would align with one of the milestones at this year’s conference – the global stocktake. This refers to the two-year process to assess progress in achieving the goals of the Paris Agreement, the first of which will conclude at this year’s COP.

Clearly, the stakes are high. For the Principles for Responsible Investment, COP28 “represents a significant – and perhaps final – opportunity for parties and non-state actors to scale up action to deliver on the Paris Agreement”.

“We need to limit warming as much as possible. The next target is 1.500001C, not 2C” 

Laura Hillis,
Church of England Pensions Board

Nathan Fabian, the PRI’s chief sustainable systems officer, tells RI: “Our view is that the international community’s target of 1.5C is not going to change. We have an increase in risk of going over that target in the 2030s even, well before the net-zero timeline, so that’s quite a shift in the landscape.

“But even if global warming was to overshoot 1.5C, it still represents our best understanding of a relatively safe level of warming. So, it’s not a case of investors being able to say, oh well, we’re now looking at 1.8C, 1.9C or 2.2C.”

Instead, Fabian says the international community and investors need to look at how this risk will impact their pathways to net zero, and “if necessary, the return of warming to 1.5C later in this century”.

“If investors say we’ll just wait and see what happens, that would be exactly the wrong response – well below 2C is still highly likely.”

Laura Hillis, director, climate and environment, at the Church of England Pension Board, echoes this sentiment, saying investors need to get smart when talking about the target. “Even if it becomes less likely, we still need to push for it because we need to limit warming as much as possible. The next target is 1.500001C, not 2C.”

Climate pessimism

Could the pessimism around the 1.5C goal make it more difficult for investors to engage with companies?

The forceful pushback from ExxonMobil against a proposal co-filed by Legal & General Investment Management (LGIM) in 2023 suggests it might.

The UK investment heavyweight called on the US oil major to undertake an audit into how the IEA’s Net Zero Emissions by 2050 Scenario might impact the retirement of its assets.

Exxon, no stranger to getting into scraps with shareholders, questioned the validity of the request in an SEC filing, stating that the resolution was filed “even though virtually all observers, including the IEA itself, agree that the world is not on the IEA [Net Zero Emissions] pathway”.

“The proponent’s request is driven by a view of the energy transition that is fixated on a scenario that is disconnected from how the transition is unfolding today, as well as the strategies needed to support society’s evolving needs,” Exxon said.

John Hoeppner, head of US stewardship and sustainable investments at the US arm of LGIM, tells RI that the “nature of the conversation is starting to become more challenging” with some companies.

On Exxon, he says, “they referenced the IEA in a way that they haven’t historically. It could be seen as opportunistic, perhaps, that they’re now pointing to a third party who historically they’ve been hesitant to cite – now it’s to their benefit”.

Stephen Beer, LGIM’s senior manager for sustainability and responsible investment, adds that whether engagements become more challenging or not, the request remains the same – net zero by 2050 by the fastest route. “The window for achieving 1.5C consistent with net-zero carbon emissions is closing fast, but it’s not closed. That means that the engagement ask becomes more urgent.

“We’re not holding on to an impossible goal just for the sake of it, because the 1.5C goal is still possible, there are still viable routes, the IPCC is very clear about that, and that’s what we’re engaging and running with.”

Echoing Beer, Bruce Duguid – head of stewardship at EOS, the stewardship arm of Federated Hermes – tells RI that “it’s important to continue to set 1.5C targets, even if the context is increasingly challenging”.

“There may come a time when the most ambitious feasible pathways offer a lower, but meaningful, probability for 1.5C. Aiming for such a goal would be the best chance to keep 1.5C alive by delivering the maximum feasible ambition.”

But the growing urgency has coincided with record profits for oil and gas firms (Exxon posted all-time high earnings of $11.4 billion in Q1, before profits fell back slightly later in the year), as well as the US ESG backlash. This year saw support for environmental proposals slump. LGIM’s proposal, for example, achieved 16 percent support, significantly down compared with the majority support for a proposal on the same issue at Exxon in 2022.

Hoeppner, however, advises caution to anyone “extrapolating shifting shareholder proposal support with concern on the underlying issues”.

“Shareholder proposals are one proxy, but I don’t think that they are fully representative.”

The gap between success and failure of limiting global warming represented by a healthy tree on one side of a chasm and a dead one on the otherPolicy engagement 

EOS’s Duguid says it is important that companies identify and express the dependencies necessary for them to transition in alignment with 1.5C, with policy being the main one, along with factors like technological innovation and consumer demand.

Again, there are signs this increasingly important avenue of engagement is becoming difficult for some. Newton Investment Management told RI earlier this year that it does not have any specific policy around policy engagement for 1.5C.

“I don’t think an investor can call themselves responsible if they don’t engage on this systemic risk” 

Steve Waygood,
Aviva Investors

Therese Niklasson, its global head of sustainable investment, said: “Given the direction of travel for global warming, we are less comfortable in keeping strict policy targets to 1.5C. Our focus is aiming for this, but more realistically staying below two degrees.”

But there are other options. Duguid says the importance of the policy piece makes engagement in some regions “a tougher conversation because policy ambition is not yet fully aligned to 1.5C”.

EOS, he adds, is working on the development of “regionalised pathways for certain sectors so that we can flex our expectations to companies in different regions”, while continuing to push for “more ambitious NDCs [Nationally Determined Contributions] and regional convergence through our advocacy”.

Given the importance of policy, engagement with companies on their lobbying becomes increasingly important. It is an area that the Church of England Pension Board has led on. Hillis notes that there are often “inconsistencies” where a company is broadly aligned to net-zero goals, but will fund industry associations that lobby against climate policies.

For Aviva Investors’ chief responsible investment officer, Steve Waygood, investors must target governments in order to bring about changes to the real economy. “We should pivot engagement away from hundreds or thousands of conversations with individual companies. Markets are functions of government policies – and governments have categorically done nowhere near enough to keep 1.5C – at least at the moment – as a plausible prospect.

“This type of market shaping is super important and woefully underprioritised by investors. I don’t think an investor can call themselves responsible if they don’t engage on this systemic risk.”

COP28 hopes 

When it comes to progress towards the 1.5C goal, PRI’s Fabian hopes to see stronger national plans by governments at COP28, along with “substantial progress in stocktake preparations”.

But, says Fabian, climate talks cannot be viewed in isolation and are not only about headline outcomes at specific COPs. “We take a broader view on the COP process and the year-by-year changes. Clearly, we need the Middle East engaged in the low-carbon transition… and there are benefits behind the scenes on how you build momentum on transition.”

Echoing the view that COPs need to be looked at in a broader context is Waygood, who has attended most UN climate talks since COP6 in The Hague in 2000. While he shares the concerns about what is likely be achieved at this year’s COP (he highlights that OPEC, the intergovernmental organisation of oil-producing countries, has a pavilion at this year’s talks for the first time, “and that’s not a good thing”), he hopes there will be progress at the summit on defining the role of finance in meeting the Paris Agreement as part of the stocktake.

The agreement explicitly mentions finance and 1.5C, calling on governments to “make financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. Waygood says there is some confusion around this paragraph and how to implement it.

Also, last year’s Sharm El Sheikh implementation document called for a “transformation of the financial system” to bring about climate action.

In Dubai, Waygood hopes for further developments on both these points, and a “recognition that the stocktake needs to [assess] all finance books and look at how much is flowing into fossil fuels and how much is flowing into solutions – how much are we transitioning? What else needs to be done?

Is 1.5C alive?

The world has almost run out of runway on achieving the Paris Agreement target

Several studies over the past year have suggested that the goal of limiting temperature increases to 1.5C over pre-industrial levels is either no longer achievable, or at least highly unlikely to be achieved.

In October 2022, the UN Environment Programme warned that “no credible pathway” to meeting 1.5C is in place. “Only an urgent system-wide transformation can avoid climate disaster.”

Then in May this year, the World Meteorological Association found that there is a 66 percent probability that at least one year between 2023 and 2027 will see temperatures exceeding the 1.5C threshold. 

It is currently looking likely that the threshold will be exceeded sooner rather than later. Climate non-profit Berkeley Earth calculated that July, August and September 2023 all breached the 1.5C limit. It estimates that there is a 90 percent chance that average temperatures in 2023 will exceed 1.5C above the pre-industrial average.

To put an optimistic gloss on the barrage of bad news, it is worth bearing in mind that – at least in theory – an ‘overshoot’ of 1.5C could prove to be temporary. The IPCC charts a conceptual pathway in which temperatures exceed 1.5C for several decades before falling back by 2100, as emissions decline and carbon removals are scaled-up. But such a course is risky. “A larger and longer overshoot increases the risk for irreversible climate impacts, such as the onset of the collapse of polar ice shelves and accelerated sea level rise,” the IPCC warns.