APAC institutional pressure on utilities boosting transition plans
Asia Pacific institutional investors are increasingly dealing directly with energy and utilities companies in the region to accelerate the work of decarbonising their operations.
According to the Asia Investor Group on Climate Change's (AIGCC) latest report on its Asian Utilities Engagement Program (AUEP), institutional investors are pushing for more focus on climate transition plans, including setting short-term science-based targets and immediate emission reductions.
The report said that genuine progress is being made.
The investors include Singapore’s GIC and Taiwan’s Cathay Financial Holdings, as well as global asset managers including abrdn, Amundi, BNP Paribas, Fidelity International, J.P. Morgan, Manulife, Nikko and Sumitomo Mitsui.
Their goal is to increase the effectiveness of climate engagement in utility companies through a common agenda and collaborative effort, with the consistent, long-term shared objective of sending a powerful signal.
“Investors are asking and expecting that companies respond to climate change with greater urgency and ambition to ensure jobs are created, livelihoods are protected, and returns are sustainable over the long term as economies transition,” AIGCC’s director of investor practice, Monica Bae, told AsianInvestor.
The AUEP investor group selected the seven focus companies because they produce substantial greenhouse gas emissions, have large coal-fired power capacity or have a strategic role in driving the net zero emissions transition.
The companies are China Resources Power, CLP (Hong Kong), Chubu Electric Power (Japan), J-Power (Japan), Huaneng Power (China), Persero (Indonesia) and Tenaga Nasional (Malaysia)
The utility sector is fundamental in an economy’s decarbonisation efforts, given its interrelation with other sectors such as heavy industry, transport and real estate.
“Hence, there is a need for utility companies to take upfront action towards a 2030 target in line with the 1.5 degrees pathway,” said the report.
Investor engagement with Asian electricity utilities will play a key role in climate change mitigation given the sector contributes more than 20% of global greenhouse gas emissions and has a young asset-age profile of about 14 years (versus an average economic lifetime of 46 years).
ASSET OWNER ENGAGEMENT
Engagements are most effective, especially in this market, when they’re able to occur directly with the companies in a trusted context, as opposed to aired in public, so AIGCC does not provide specifics of individual engagements.
But Chang-Ken Lee, president of Taiwanese investment and banking firm Cathay Financial Holdings told AsianInvestor CFH has worked closely with Taiwan’s biggest emitters on plans to decarbonise right across their supply chain.
In 2022, CFH announced that it would withdraw from investments in the coal energy sector and value chain companies that are not implementing active transitions. At the same time, it is gearing up investments in low carbon transitions, monitoring high climate risk industries, and gradually reducing the carbon footprint of the investment portfolio.
Singapore’s GIC has adopted a range of strategies to steer companies through their transition.
While looking to direct capital towards enablers of the low-carbon transition, “GIC will support transition efforts by companies through active engagement and strengthening the ecosystem for sustainability disclosures,” it states in its latest portfolio review, issued at the end of July.
It will also manage the risks of potentially stranded assets if they are unable to transition their businesses.
AIMINGF FOR ZERO EMISSIONS
During the second year of the AUEP reporting (August 2022 – July 2023), investors intensified their engagement on climate governance, including executive-linked remuneration, and continued discussion of credible decarbonisation strategies, according to AIGCC managing director Rebecca Mikula-Wright.
“For transition plans to be credible, companies looking to explore alternative renewable technologies, such as hydrogen, should ensure they are truly zero-emissions throughout the supply chain, and make sure they have a genuine advantage over more mature clean energy options.”
The most important starting point is that power companies need to get onto a 1.5°-aligned pathway.
Getting the global economy onto a Paris-aligned pathway will require a concerted pivot to renewable energy, low-carbon transportation, green buildings and industrial processes, as well as sustainable agricultural and land-use practices.
“Under the AUEP, investors with $12 trillion under management have said they expect power companies to adopt transition plans that get them there. That’s crucial to ensure jobs are created, livelihoods are protected, and returns are sustainable over the long term as economies transition,” said Bae.
It necessarily follows that fossil fuel generation capacity needs to be replaced by clean energy capacity. The focus companies collectively have 360GW of generation capacity, the vast majority of which is still based on fossil fuels, which must all get to 1.5° alignment.
The sequence is important, said Bae. “Because of ‘just transition’ and energy security concerns, which are themselves critical for public support, additional renewables capacity is a pre-condition for withdrawal of fossil-fuel generation.