How can investors assess companies’ low carbon strategies? Are companies making a sufficient contribution to the goals of a low carbon economy? The Transition Pathway Initiative will help investors address these questions.
Investors have a crucial role to play in supporting the transition to a low carbon economy. Through initiatives such as Aiming for A, Carbon Action and the Carbon Asset Risk Initiative, investors have already made important contributions to strengthening corporate practice and reporting on climate change. However, it is clear that much more needs to be done if we are to meet the ambition of the Paris climate change agreement.
Before devising an appropriate response it is important to acknowledge the practical barriers to investor activity in this area. The first is that many investors are resource-constrained and do not have the capacity for the very detailed analysis needed to genuinely interrogate corporate practice and performance on climate change. Without investing enormous resource we will struggle to understand where companies stand on the path to a low carbon future. Encouragingly, some companies are taking important steps as a result of Aiming for A, and other engagement efforts, in improving disclosure and starting to test their long term resilience.
However, important questions remain:
• Can we meaningfully differentiate between company strategies, even in the same sector?
• How do we know if company strategies sufficiently address the very real climate risk that is embedded in many business models?
• How do we know whether company strategies are making a sufficient contribution to the goal of a low carbon economy?
Answering these questions is further complicated by the lack of consensus about what the transition to a low-carbon economy looks like for individual companies as well as for sectors.
As a result these barriers have made it difficult for investors to assess the performance or track the progress of individual companies. Inevitably, they limit the effectiveness of investor engagement. It is essential that investors share a common understanding of actions needed for the low-carbon transition, enabling them to speak with a common voice and ensuring that companies get a consistent message from their owners.
In response to these challenges, a group of international asset owners have been working together over the past year to establish the Transition Pathway Initiative. This Initiative is intended to directly address these barriers. We convened a group of global international asset owners that have, to one degree or another (no pun intended), been developing climate change policies or strategies. The group members each wanted simple, clear information relating to climate change and companies, but also wanted total flexibility as to how to use it for their own strategies and Fund needs.
With the support of Dr Rory Sullivan and a partnership we are developing with the London School of Economics, Grantham Research Institute on Climate Change and the Environment and importantly building on the great work of the CDP, IIGCC and others, we have been working together to:• Define what a low carbon transition pathway is for companies in different sectors, in particular those in high impact sectors such as extractives, oil & gas, automotive and utility companies.
• Develop indicators that enable investors to objectively assess and compare individual companies’ management systems and processes, strategies, and ultimately their performance in line with transition to a low carbon economy.
• Develop a publicly available online tool to be hosted by a leading internal research university that can be used by investors to monitor and track company and sector performance. This in turn will be able to support an analysis of the effectiveness of investor engagement.
• Develop a voting template that will be available to sit alongside the pathway.
• Build wider market support by inviting other asset owners and the market to use the indicators and the online tool in their investment research, decision-making, and company engagement.
Since starting this initiative we have made significant progress. We expect to launch the indicators and the online tool in September 2016, and to publish the first in a series of sector evaluations in late 2016. As part of the September launch, the individual asset owners participating in the Transition Pathway Initiative will each explain how they intend to use the indicators and online tool to inform their investment decision making, their company engagement and their voting activities.
In its own right we hope that the publicly available tool will provide the market with a way to be able to assess where companies sit in terms of transition. We are building in a flexibility to ensure that those areas that require further information disclosure can be enhanced as the Financial Stability Task Force develops its thinking.
But what is clear to the group of asset owners is that we know enough now to be acting and informing our decision making.
This Initiative is open to other asset owners to join. We hope that in time by gathering a large group of asset owners and asset managers behind an agreed framework for assessing companies that the Transition Pathway Initiative will be a tipping point for the market. Importantly, this initiative begins to get the balance right between the role (and responsibility) of asset owners and that of companies. It sends a clear signal to companies that addressing carbon risk/climate change is a critical issue for us, and providing them with a clear, consistent framework for reporting action.
This article was written by:
• Adam Matthews, Head of Engagement for the Church Commissioners for England and the Church of England Pensions Board
• Faith Ward, Chief Responsible Investment and Risk Officer for the Environment Agency Pension Fund
• Professor Simon Dietz, Co-Director, Grantham Research Institute on Climate Change and the Environment, London School of Economics
• Dr Rory Sullivan, Consultant to the Transition Pathway Initiative
Matthews, Ward and Sullivan will be speaking at RI Europe on Thursday June 23. Matthews is available via email.