A good year for engagement impact
The last year has seen good progress for corporate engagement on climate change, supported by the positive momentum leading up to the 2015 Paris Agreement. The ‘Aiming for A’ shareholder resolutions of 2015 at BP, Shell and Statoil are bearing fruit through new disclosure of risks and mitigating actions well beyond prior years. Similar shareholder resolutions at each of the mining companies Anglo American, Glencore and Rio Tinto passed with more than 95% approval. In response, Glencore has already published a significant report on low carbon resilience. Oil company Total has voluntarily joined the same reporting regime, pledging that 20% of its portfolio will be low carbon in 20 years’ time. And there has been progress in the US, with similar resolutions at ExxonMobil and Chevron achieving 38% and 41% approval, and even 49% at Occidental Petroleum, leading to positive signs for a richer dialogue in the coming year.
Investors’ climate change goals
Given this positive momentum, it is important to remind ourselves of investors’ goals and confirm that we are on the track to meeting them. Against the overriding objective to deliver sustainable, long-term returns, climate change introduces two challenges: 1) the risks to corporate value from the transition to a low-carbon economy; and 2) that climate change is successfully limited, preferably to 2°C above pre-industrial levels. Of these two goals, the greater prize is alignment to 2°C as, for a diversified portfolio, the gain by new low-carbon ‘winners’ will, to a large extent, counter-balance the losses of old, higher-carbon ‘losers’. Of course, the smoother the transition, the better, which means taking action sooner, rather than later.
Options for engagement
To date, wider corporate engagement has focused primarily on operational greenhouse gas emissions management and on the strategic risks to the extractive industries from lower demand. There has also been a focus on realigning corporate public policy to that of investors, recognising the futility of the alternative. These objectives, together with a focus on low carbon research and development and the wider corporate governance framework are embodied in the Aiming for A shareholder resolutions.Priorities for the next phase
Despite this progress, the global economy, and therefore most corporate activity, remains misaligned to the desired 2°C goal, in large part due to the weak public policy environment. With divestment unlikely to make a difference, other than as a signal to policy-makers, corporate engagement must now focus on greater alignment to 2°C and strengthening public policy, as follows:
• More opportunity, less risk: real progress has been made on carbon risk reporting and we must finish the job by establishing a new normal, hopefully through the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. We can then shift focus to the pursuit of the strategic low-carbon opportunities which will actually deliver the 2°C goal, particularly in the sectors identified below.
• More demand, less supply: the recent focus on carbon asset risk in the extractive industries does not materially alter demand and is more about capex than carbon. To reduce demand, we must focus on opportunities in the high-demand sectors, in particular the utilities and the automotive industry, together with the industrial goods players that make the world’s energy hungry boilers and air conditioners.
• Energy efficiency step change: The biggest single source of emissions reduction is not renewables, but energy efficiency. To achieve 2°C, we must move from business-as-usual reductions to more strategic, higher investment projects, justified by their more predictable savings. The obvious initial focus is the more energy intensive sectors such as steel or chemicals.
• New approaches to public policy engagement: Companies are a powerful lobbying force and often have deep insights into the pitfalls of regulatory change. As investors, we must therefore not only neutralise any anti-climate change lobbying but seek to harness companies as a positive force for change. This won’t be easy and calls for some reflection on the best approaches, potentially involving the formation of new alliances and with new incentives.
Bruce Duguid is a Director at Hermes EOS. Hermes is a member of the Aiming for A coalition of investors.
He is participating in the Engaging Companies on Climate Change session at RI Europe 2016 today.