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In the vast puzzle of global capital’s response to climate change, a key piece is about to be placed.
The $52trn Climate Action 100+ (CA100+) initiative will next week publish its highly anticipated benchmark analysis on its 160 target companies.
CA100+ seeks to use the powers of investor-led stewardship to transform companies in the direction of decarbonisation. The benchmarking process, a maturing of the initiative as it enters its fourth year, has been described as a “comprehensive analysis on which companies are leading the transition to net-zero emissions”.
Expectations that the benchmark analysis will bring transparency and rigour to CA100+ are high, and – in case anyone needs reminding – so are the stakes. As COP26 approaches, there is widespread agreement that now is the time to move from long-term climate pledges to immediate action. This is the decade that we need to halve emissions, yet the return of emissions to pre-pandemic levels proves the difficulty of the problem at hand. Swiss bank J Safra Sarasin’s 2020 analysis of 6,000 corporate groups’ climate plans estimated that businesses globally are on course for a 4°C temperature rise by 2100.
The $52trn question, then, is whether CA100+ can deliver progress on the timeline that science demands. Its fitness for advancing that sole purpose is the yardstick against which the benchmark analysis should be judged. Our experience using the CA100+ indicators to produce test benchmarks reveal tricky questions and judgements that CA100+ will have to navigate as they bring their findings to boardrooms and to the world.
‘Though the urge for investors to celebrate or praise company progress of any kind is understandable, it must be kept in check.’
The bones of the benchmark — its indicators, published late last year — are good. They are more practical and more discreet than the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). With shareholder votes on climate plans and performance emerging as a global norm in 2021 and 2022, the benchmark could play a pivotal role in guiding directors in their conversations with management, and providing investors with much needed consistency and transparency to assess plans and inform their engagement and voting.
The benchmark will provide clearer comparison of peers, and lay out the enormity of the task ahead. For asset managers this is a tool that could meet the demands of a rising tide of questions from clients. For directors, this could ultimately be the way in which their own performance on a board is assessed.
The benchmarks are, in theory, well placed to become a strong, staple tool in company engagement. The focus on nearer term targets (2020 to 2030), requirements for targets to include 95% of scope 1 and 2 emissions, as well as most relevant scope 3 emissions, is welcome, as is setting a clear expectation that the use of carbon offsets and carbon capture and storage technologies should be limited, if used at all.
Credible evaluation against these core metrics and continued rigour in the benchmark's development will be key to its long-term value. The key question will be: do the benchmark indicators drive conversations to where they need to be?
‘For asset managers this is a tool that could meet the demands of a rising tide of questions from clients. For directors, this could ultimately be the way in which their own performance on a board is assessed’
To answer this question, we ran our own analyses against the benchmark indicators on a handful of heavy emitters. This revealed some tricky questions about the CA100+ methodology, and tough judgement calls their assessors at Transition Pathway Initiative will have to make. A number of crucial questions sprang out at us, for example:
Will 2030 climate targets and strategies need to deliver a 45% reduction in absolute emissions (from 2010) to be assessed as Paris-aligned, or will intensity-based targets be accepted?
Royal Dutch Shell, one of the world's largest oil and gas companies, has set a target to decrease its carbon intensity metric 20% by 2030 (from a 2016 base). Given the uncertainty around production, which could increase, this target should be clearly labelled as not Paris-aligned.
Where will the line be drawn on avoiding or limiting offsets?
Shell is another good case study here – it proposes to invest in ‘nature-based solutions’ to offset emissions of around 120 million tonnes per year by 2030 and to add an additional 25 million tonnes a year of Carbon Capture and Storage by 2035. That will presumably be enough for Shell to get a ‘No’ rating on its short- and medium-term targets, but where will the line be drawn for other companies?
How will climate policy engagements be critically and accurately assessed?
Sasol, a South African Chemicals and Energy business, for the first time in 2020 disclosed in its climate change report a review of alignment with industry associations on climate policy. It describes several such associations as ‘Paris-aligned’, while ignoring actions by those associations that are clearly inconsistent with the Paris Agreement. This and other similar reviews by other companies which exist in name but not substance should be assessed with a firm ‘no’.
Will the benchmark analysis highlight capital expenditure (capex) misalignment?
It will likely be hard to find a company that has a clear commitment to align capex with a Paris consistent climate scenario, which we expect to be clear in the benchmark assessments. In a market update, the head of BHP Group’s Petroleum business signaled it intends to spend more than $8bn on oil and gas development over the next five years. This should not only mark BHP as a ‘no’ against the capital allocation alignment indicator, but also signal the material misalignment between company investments and targets.
It is vital that CA100+ makes the right judgements in its assessments and in how these are messaged to the world. The benchmark analysis will need, above all (and here is the challenge), to be clear-eyed and sober in its evaluation of CA100+’s success so far.
Though the urge for investors to celebrate or praise company progress of any kind is understandable, it must be kept in check.
We must look each other, bravely, in the eye, and remind ourselves that winning slowly risks missing our brief window to prevent miserable outcomes on a planetary scale. If the benchmarking analysis is a tool fit for the heavy lifting demanded of it, if it is to elevate the work of CA100+ to the challenges that history and science present to us at this moment, it will recognise that handing out gold stars to companies undeserving of them is a trap.
Shu Ling Liauw is a Lead Analyst at the Australasian Centre for Corporate Responsibility
Dan Gocher is Director of Climate and Environment at the Australasian Centre for Corporate Responsibility
Brynn O’Brien is Executive Director of the Australasian Centre for Corporate Responsibility