After the disappointing political results of COP26, institutional investors and the companies they are investing in have to do even more by their own to secure a net-zero world in 2050.
Not at least due to the new Net Zero Alliances for Asset Owners, Asset Managers, Banks, Insurance companies etc., we have fortunately seen an increasing number of investors that are now committed to net-zero GHG emissions by 2050, as many of their portfolio companies.
It means, among many other things, that they have to reduce their carbon emissions from listed equity and corporate bond portfolios each year by 5–10 percent. Quite a challenge, as it has to be “real world reductions” and not just reductions of carbon footprints by divesting from entire high-impact industries like oil and gas.
According to all net zero alliances, the annual reductions of portfolio carbon emissions should preferably be obtained through engagement with the portfolio companies. The goal is to encourage them to reduce their carbon emissions through science-based reduction targets and strategies aligned with net zero emissions in 2050 or sooner.
Engagement International has supported institutional investor clients in reducing their real-world carbon emissions since 2016 by engaging with the “Climate Top100” companies in their portfolio. Now, we have expanded the engagement to include the “Climate Top1000+ Laggards”.
Engagement with the largest effect
Since 2016, just after signing of the Paris Agreement, we have been engaging two times a year with the companies in our investor clients’ portfolios that belong either to the group of 50+ listed companies with the highest scope 1 and 2 emissions, or the 50+ companies with the highest potential emissions from fossil fuel reserves. We call it “Climate Top100 engagement”.
About half of the companies are covered by the powerful engagement initiative Climate Action 100+ that Engagement International is also actively supporting.
Now, we have created a new, additional climate engagement approach that can support investor clients to reduce carbon emissions from their equity and corporate bond portfolios – effectively and aligned with the net-zero goal, without excluding entire industries. We call it “Preliminary Climate Top1000+ Engagement”.
Using data from MSCI ESG Research and the Transition Pathway Initiative (TPI), we have identified 1,000+ companies among the total, nearly 10,000 listed companies in the MSCI ACWI IMI universe that are most exposed to climate risks and opportunities in terms of fossil fuel reserves, scope 1, 2 and 3 emissions in tonnes and intensities per invested million USD (EVIC). They stand for more than 90 percent of scope 1 and 2 emissions and 75 percent of scope 3 from all listed companies in this investment universe (ignoring some double counting). Hence, these are the companies to engage with to create both maximal real world and financial impact.
An increasing number of the Climate Top1000+ companies — mainly operating in 10 hot industries — are on the right track and have already their own set commitments, reduction targets, decarbonisation strategies and management systems in place to be aligned with the net zero goals. Hence, we have started on the other end of the scale – by identifying the laggards that still miss these instruments and need a push by investor engagement to get on the right path.
As such, we have identified about 350 of the Climate Top1000+ as laggards and are now flagging these companies as potential engagement cases in our investor client’s portfolios. However, it is always up to our clients to flexibly select which and how many engagement cases they want to be a part of through Engagement International, in concert with other investor clients.
Preliminary engagement and proxy voting
To minimise the costs and maximise the number of companies to be engaged with, we provide this new service as “preliminary engagement” instead of our normal “ordinary engagement”. The main differences are that: 1) The new preliminary engagement is based on e-mail correspondence instead of face-to-face or video and conference call meetings; 2) Initially, we focus on 1–3 basic climate milestones instead of our usual 10-milestone framework and 3) We report on engagement actions, ratings and results in Excel format, instead of our standard comprehensive Climate Engagement Reports.
In addition, our climate engagement dialogues can be combined with proxy voting through our partner Minerva Analytics, either from the start or as an escalation step, if the constructive engagement bears no fruit.
The main investor benefits of our climate engagement are: 1) A consistent and solid approach to reduce portfolio emissions aligned with the net-zero goal; 2) A holistic overview and information on individual company’s climate-related risks and performance, useful for dialogues with asset managers and 3) Real world and financial impact through independent engagement dialogue, without excluding entire industries with high climate exposure.
Read more about our ordinary engagement process: https://engage-int.com/how-to-engage-on-climate-net-zero/