The disappointing results from the recently held COP30 Climate Summit in Brazil showed how leading politicians can’t agree on the necessary actions to keep temperature rise less than 1,5°C. To mitigate the significant negative consequences, private companies, investors, consumers and NGOs have to do even more than they already do.

Institutional investors can first and foremost invest in climate solutions and influence the companies they invest in to improve their climate management and performance through engagement and voting in order to reach net zero emissions in 2050 at the latest. Hundreds of asset owners and asset managers all over the world already do this to a large extent to reach their own Net Zero goals. However, with the lagging political results and the current ESG backlash, the pressure on responsible companies and investors has become even stronger.

Concentrated carbon emissions

Institutional Investors can use many different approaches to climate engagement and identification of engagement targets, including companies with the highest Scope 1, 2 and 3 emissions, highest financed emissions in their own portfolios, specific focus on issues like lobbying and just transition, or just highest market value.

Engagement International has experienced especially positive results by engaging with publicly listed companies showing the largest gap between high climate related risk and opportunity exposure and a low level of management, when it comes to handling the risk. We call these engagement targets Climate Top1000+ Laggards.

Our point of departure is the MSCI ACWI IMI investment index, including 8271 companies covering 99% of the market value of all publicly listed companies in the world.

1,115 of these are responsible for 99% of the potential future emissions from all the index companies’ oil, gas and coal reserves, 92% of their current Scope 1 and 2 GHG emissions, and 82% of their total Scope 1, 2 and 3 emissions. Most of the highly climate risk exposed countries are concentrated in 13 “Hot Industries”.

The calculation is based on MSCI data and a simple summing of all companies’ potential and current emissions, and therefore ignores a significant overlap. However, it clearly demonstrates that the emissions are strongly concentrated in a small group of 13% of all index companies. The picture is similar in most non-biased investment portfolios and should lead to a special focus on these, when it comes to climate engagement.

Most investors would expect that these highly exposed companies will show an especially high level of climate management, when it comes to handling the risks and business opportunities. However, according to our analysis, 332 or 30% of the most climate exposed companies show a significantly low level of climate management, as they have no formal climate net-zero commitment, no GHG reduction targets or no disclosure of GHG emissions. We call them “Climate Top1000+ Laggards”. 81 “Laggard-Laggards” have not implemented any of these basic KPIs or milestones that normally would mark the beginning of a transformation to climate net zero in accordance with the Paris Agreement.

15 of the Climate Top1000+ Laggards can be found in the blue-chip investment universe MSCI World. It corresponds to just one percent of the 1309 constituents. The frequency of Climate Laggards is 10% or ten times as high in the MSCI Emerging Markets index, while it is 3,4% among the smaller and middle-size IMI constituents and 4% in MSCI ACWI IMI covering all companies.

22 or 1,6% of the 332 Climate Top1000+ Laggards are European, while 2,1% are US companies. 64,4% or two thirds are headquartered in China and other Asian countries. Highest number and frequence of Climate Laggards can be found in Indonesia, China/HK, Thailand, India – and outside Asia, Saudi Arabia.

When it comes to industries, most Climate Laggards come from Steel and Cement, Electric Power and other Utilities, Oil & Gas, Chemicals and Industrials in general. Seven banks – all Chinese – are also represented among the identified Climate Top1000+ Laggards.

Poor management linked to higher emissions

One dimension is climate management, another and even more important is the climate impact in terms of GHG Scope 1, 2 and 3 emissions. To reach the end goal of Climate Net Zero before 2050 at the latest, improvement of climate management should lead to a lower and decreasing emissions. Our analysis of the Climate Top1000+ Laggards indicates that there seems to be a positive correlation. According to MSCI ESG Research, 70% of the Climate Laggards with available data shows more than 10% higher Scope 1 and 2 intensities normalised by sales than the peer-group-median. 25% shows more than 10% lower intensities than the peer group.

However, the MSCI data also shows that 44,2% of the Climate Laggards have actually improved their Scope 1 and 2 intensities by more than 5% through the last three years. Almost the same share, 41,2% shows more or less stable emissions, while 14,6 of the Climate Laggards have worsened their emissions with more than 5% over the last three years.

Just 1,4% or four Climate Laggards show aggressive efforts regarding cleaner energy. 73,9% with available data show some efforts, while the clean energy efforts are limited in 24,7 companies.

Engagement with Climate Top1000+ Laggards

First step in our engagement with Climate Top1000+ Laggards is to conduct a due diligence of investor client’s portfolios to identify the possible Laggards. It is flexibly up to the investors to decide which and how many of these identified engagement potentials they want to engage with through Engagement International together with other investors.

We aim to keep our engagement methodology aligned with the most important international standards, including IIGCC’s Net Zero Investment Framework, which is also used for the Climate Action 100+ network that many institutional investors are participating in.

According to the framework, Net-Zero alignment demands that companies should be fully aligned with six milestones: net-zero commitment, GHG reduction targets, disclosure of emissions, decarbonization strategy investment plan (CapEx) and performance, when it comes to emissions.

Our experience tells that focus on a few of the climate milestones leads to best results. Hence, for climate laggards we start engaging on the first three basic milestones. When these are reached, we continue to focus on the decarbonization strategy, CapEx and performance. When these six Core Net Zero Alignment Milestones and net zero are achieved, we continue to engage regarding five additional Consolidation Milestones: risk and opportunity recognition, climate adaptation, climate governance, just transition and transparency.

The engagement is conducted through a solid and proven process with biannual dialogues either face-to-face, via conference calls or written correspondence.

After each engagement round, the engagement actions, dialogue, results and milestone assessments are reported to the clients.

In case of missing engagement results, we recommend our investor clients to escalate the engagement efforts by different steps, including formal letters to the top management and board, proxy voting and engagement with investment managers. As a European based and independent engagement provider without own investments, our entire focus is on creating value for our investor clients based on widely accepted international norms and recommendations.

As a European, independent engagement provider without own investments, our entire focus is on creating value for our investor clients based on widely accepted international norms and recommendations.