More than 600 leading institutional investors are right now reporting on how they fulfil their Net Zero commitment of reducing carbon emissions from investment portfolios. After picking the low-hanging fruits like divesting from the worst fossil fuel companies and joining initiatives like Climate Action 100+ and other networks, real-world reductions become more difficult. Engagement International can support ensuring continued reductions by identifying and engaging with portfolio companies showing the highest financed emissions, not covered by other engagement initiatives.

Are you one of the investors signed up to one of the different Net Zero Investor Networks, committed to reducing carbon emissions by about 50% before 2030? Have you already secured significant reductions by divesting from coal, oil, and gas companies that are clearly not aligned with net zero goals, and have you already joined the Climate Action 100+ and thereby indirectly engaged with 170 of the world’s highest emitting companies?

Then you might worry how you should be able to continue reducing the total portfolio emissions by the around 7% annually that is necessary to reach the 50% reduction goal before 2030 and Net Zero before 2050. Especially realising that more divesting or focus on a smaller range of net zero aligning companies in less climate-exposed industries would not lead to the required real-world carbon emission reductions and an acceptable risk-adjusted financial return.

Net Zero engagement through Engagement International might be a solution that could ensure compliance with Net Zero requirements of real-world carbon emission reduction, primarily through the power of active ownership.

You shouldn’t be in doubt of our experience. Since the Paris Agreement entered into force in 2016, we have successfully been engaging bi-annually on behalf of investor clients with the world’s largest emitters in all industries and regions.

In most cases, we base our engagement on high-quality data from the world’s largest provider of ESG and climate data, MSCI ESG Research, that we have been collaborating with closely since our founding in 2014.

Through our robust engagement process, milestone-based reporting, and proven engagement results, we have gained respect among international companies and institutional investors, including a company engagement response rate of 70–80%.

Engaging with Top Investor Financed Emission Companies

Since the development of the Net Zero Investment Framework in 2021, we have adjusted our climate milestone system to be aligned with this world-leading model for assessing a company’s net zero alignment.

This is a dynamic process. Last week was the last chance for investors, companies, and other experts to comment on a new version of the Net Zero Investment Framework. And this will probably not be the last version of the KPIs, milestones and recommendations regarding net zero assessment. Due to this, we have decided not just to copy and paste the latest version of the framework but rather to ensure that Engagement International’s framework is aligned and leads to more or less the same assessments.

As the first step of our net zero engagement solution, we will ensure you have a solid climate and engagement policy and strategy, aligned with your own values and investor beliefs, and best international practices and recommendations.

The second step is a mapping of the listed equities and corporate bonds in your investment portfolio that contributes the most to your total carbon footprint. According to IIGCC Net Zero Investment Framework, signatory investors are supposed to engage with portfolio companies that together contribute to at least 70% of the total emissions from all portfolio companies operating in high-impact industries.

Supporting our clients in meeting this requirement, Engagement International can identify portfolio companies with the highest investor-financed emissions, calculated as the GHG intensity per invested million USD (EVIC) multiplied by the actual investment in the individual company. Next step is to rank the portfolio companies according to the financed emissions and confirm the top emitter portfolio companies that in total contribute to at least 70% of the emissions.

As step four, you can flexibly decide at which of five engagement levels you wish us to engage on the selected portfolio companies. The engagement level constitutes the scope in terms of number of milestones addressed, type of dialogue, and reporting format.

For your decisions, we will recommend which companies to engage and at what level, based on our assessment of the engagement candidates. In collaboration with you as an investor client, we will also agree on the engagement goal before we invite the companies.

When dealing with climate laggards that fail to demonstrate the necessary commitment to achieving Net Zero before 2050, we recommend focusing on these core alignment milestones: commitment, reduction targets, and disclosure of emissions.

When the engaged company is aligned with milestone requirements regarding the above, we will shift our engagement recommendations to focus on three new milestones: climate strategy, capital allocation and carbon emissions reduction performance.

According to the Net Zero Investment Framework, a comprehensive management of these six milestones are the criteria for being assessed as “Net Zero Aligned”.

Hence, investor clients may conclude engagement at this point. However, to ensure the ongoing alignment of the engaged portfolio company with net zero goals and to achieve the necessary emissions reductions before 2050, we recommend continuing the engagement dialogue with a focus on the additional consolidation milestones: Risks and Opportunities, Climate Adaptation, Climate Governance, Just Transition, Transparency.

Engagement Dialogue and Reporting

Whether we engage face-to-face, via conference call, or through written dialogue, we aim to meet the engaged companies bi-annually. During these engagement dialogues we discuss the company’s plans and initiatives to address raised concerns and our recommendations of best practice.

After the engagement meetings, we report the dialogues and results in a portfolio report and individual company reports, tailored to the specific engagement levels.

For measuring and reporting the engagement results, we use our dedicated milestone and rating system. From a five-point rating scale (A, B, C, D, E) you can easily get an overview of the Engagement Potential, Risk Exposure, Management Level, Performance Level, Engagement Progress, and Investment Signal when it comes to all engaged companies.

If the engagement does not lead to the expected improvements of climate management, we escalate our engagement efforts. One of the escalation steps can involve recommendations for proxy voting through our voting partner, Minerva Analytics, or preferred voting providers.

Finally, as step 10, we can assist asset owner clients in identifying which of their investment managers are responsible for the most critical portfolio companies when it comes to aligning with net zero expectations.

Upon request, we can also support you by engaging directly with investment managers, media or other relevant stakeholders.

If you’re interested in receiving sample reports or learning more, click here to get in touch with us.