Asset owners raising the climate pressure on companies
Many of the world's largest asset owners, banks and investment managers have said they aim to achieve net zero carbon emissions across their investment portfolios, in recognition of the Biden administration in the US showing its intention to recommit to addressing climate change.
The Leaders Summit on Climate last week and the accompanying statements from the US government have given further momentum to the net zero initiative. Over 30 global asset managers said they aim to achieve net zero carbon emissions by 2050 and 43 banks announced plans to cut emissions from their balance sheets.
As reported, many of the largest asset owners in Asia Pacific have already made a concerted effort to address climate risk in their portfolios, by analysing which assets are most exposed to climate risk, and to push their external managers to engage with the companies in which they invest on the issue. Those efforts are being doubled down now that pressure is building at government level.
“As superannuation funds (in Australia) make commitments to net zero emissions targets, it is causing them to think through the portfolio implications,” Gordon Noble, partner at Blended Capital Group told AsianInvestor.
Published surveys have consistently shown how most investors are only scratching the surface on climate risk. Regulators and investors now want to see companies come up with meaningful, but achievable, targets in the drive to 'net zero'.
For example, in Hong Kong, listed companies must issue an ESG statement as part of their annual report that includes an assessment of the effects of climate change and disclosure of social key performance indicators. In New Zealand, proposed mandatory rules on climate-related financial disclosure reflect the trend for higher standards globally.
And in a fresh move last week from the Australian Council of Superannuation Investors (ACSI), Australia’s biggest superannuation funds will, from 2022, vote against the re-election of directors they believe have failed to manage climate risk appropriately, and step up the push for companies to give investors an annual vote on the climate progress.
ACSI, which represents 36 Australian and foreign institutional investors, is pressuring ASX 200 companies to set emission reduction targets that align to the Paris Agreement, and to disclose those risks by adopting the methodology set out by the Task Force on Climate-related Financial Disclosures (TCFD).
“In the absence of mandatory climate risk disclosure, asset owners are setting clear expectations with companies, along with NGOs are campaigning for better disclosure and ultimately ambitious emissions reduction targets,” Dan Gocher, director of climate and environment at the Australasian Centre for Corporate Responsibility (ACCR) told AsianInvestor.
“According to ACSI, just 60 companies in the ASX200 have published TCFD-consistent reports, which is pretty underwhelming,” said Gocher.
From an Australian perspective, financial regulators are playing a key role in driving actions across the financial system, said Noble.
“The regulations and guidance drive the behaviour of all the participants in the system. The Australian Prudential Regulation Authority’s recent draft prudential guidance provides a clear pathway on the expectations for all financial system participants. This reflects the work we are seeing at an international level, for instance through the Basel Committee on Banking Supervision.
For sectors heavily exposed to climate transition risk, like energy, materials and utilities, the disclosure requirements of the TCFD are fairly well understood. The many and various NGOs focused on climate, including Climate Action 100+, are aiming to push this further, to get the broader market to observe the same rules.
“We believe the Climate Action 100+ net zero company benchmark will shape the next evolution of climate disclosures, particularly in terms of capital expenditure and decarbonisation strategies,” said Gocher.
The challenge for asset owners is to gain meaningful insight from corporate ESG reporting. “Companies are going to show you the best version of themselves and not every company is going to disclose,” said Ben Caldecott, director of the Oxford Sustainable Finance Programme at a recent ESG online event.
“So we can’t rely on disclosure frameworks as a solution to collecting the data we need.”
And with the plethora of NGOs and climate frameworks, investors could be forgiven for feeling confused about what 'net zero' actually means.
“There are so many initiatives, and so many really complex sectoral pathways,” said Caldecott. “At the moment, it is really hard for companies and investors and directors and fiduciaries to navigate all this.
"The (climate change) community needs to make it simple for people and provide really clear guidance. There’s a lot of education that needs to go on, but we are making it hard for ourselves.”
Adam Matthews, chief responsible investment officer with the Church of England Pensions Board agreed that collective endeavour among investors, including passive investors, is the key to changing corporate behaviour.
He described Climate Action 100+ as “a tremendous piece of the architecture for us as a fund. It has helped shape the way our investment committee and our trustees have engaged with what (net zero) means for us as a fund; how do we set individual targets and for asset classes and how do we translate that through to our asset managers."