Climate Net Zero Engagement
A growing number of institutional investors are adopting a “net-zero by 2050 approach” to assess the alignment of their invested companies with the Paris Agreement objectives. Recognising the intricacy and duration of this process, Engagement International is actively engaging with companies within their portfolios that face significant climate-related risks and opportunities and are demonstrating inadequate climate management practices. The primary goal is to motivate these portfolio companies to enhance their climate management efforts and decrease their greenhouse gas emissions in accordance with a net-zero trajectory.
Engagement themes
Climate Top100 Engagement
Since 2016, we have engaged bi-annually with the Climate Top100 companies identified in our investor clients’ portfolios. These are listed companies that are contributing the most to climate change in terms of potential emissions from fossil fuel reserves and current scope 1 and 2 emissions.
The engagement’s goal is to encourage companies to reduce carbon emissions in line with the Net Zero goal of the Paris Agreement. It involves milestones such as a clear Net Zero commitment, Science Based GHG reduction targets, emission disclosures etc.
As recommended by the Science Based Target Initiative and IIGCC-led Net Zero Investment Framework, our engagement is closely linked to 3–10 climate milestones, depending on the transition stage of the individual engaged company.
Engagement with Climate Top1000+ Laggards
More than 80% of the total scope 1, 2 and 3 emissions from all 9,000+ companies in the MSCI ACWI IMI universe comes from just about 10% or 1000+ of the companies, typically concentrated in 10 high-impact industries.
About 330 of these very climate risk-exposed companies are laggards when it comes to their management of the most basic climate milestones in the Net Zero Framework. Hence, they are obvious engagement potentials with the engagement goal of improving their level of management regarding these and other milestones.
Engagement with Top Investor-Financed Emitters
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 10 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. Step two is to rank the portfolio companies according to the financed emissions and identify the top emitter portfolio companies that in total contribute to at least 70% of the emissions.
Many institutional investors already engage with some of these companies directly, through their investment managers or via climate networks, such as Climate Action 100+. Engagement International can supplement these efforts by conducting net zero engagements with investor-selected top emitters that have not yet been engaged by these other channels.
The engagement goal is similar to the goals set for Climate Top100 companies and Climate Top1000+ Laggards, to encourage high-emitting portfolio companies to improve their climate management, with a particular focus on 3–10 milestones for net zero alignment.
Engagement with Banks
Net Zero Climate Engagement with Banks covers banks and other relevant companies from the financial sector identified in the client’s current holdings portfolio.
Banks play a central role in financing and facilitating the real economy, so their decarbonization strategies are crucial to achieving global climate goals. However, many banks continue to finance and provide insurance to industries driving climate change and loss of biodiversity. In the eight years since the Paris Agreement was signed, the world’s 60 largest banks have made USD 6.9 trillion available to the fossil fuel industry. On the other hand, Net Zero Banking Alliance launched in 2021 was joined by 145 banks representing 41% of global assets, and half of them set mid-term emissions reduction targets for their financed emissions.
A growing number of investors seek to better understand banks’ climate policies and encourage them to set GHG emissions reduction targets that incentivise real economy’s decarbonization as well as to reduce the banks’ exposure to regulatory and physical risks stemming from the climate change. Investments in the fossil fuel industries, past and present, are of particular concern, as banks should already plan for ending its involvement with exploitation of oil, gas and thermal coal.
Moreover, financial institutions are required to publish key metrics on material climate-related and environmental risks and how they manage them in line with the European Commission’s Guidelines Initiatives like Science Based Targets Initiative (SBTi) and Institutional Investors Group on Climate Change (IIGCC), which produce their own reporting guidelines for banks.
Our engagement bases on six to nine comprehensive milestones, grounded in IIGCC’s Net-Zero Standard for Banks and Principles for Responsible Banking, among others. It focuses on the banks’ short-, mid- and long-term strategies for reducing both financed and facilitated emissions, starting with high-emitting sectors. This engagement is supported by robust ESG and climate governance, and consistent with financial and non-financial reporting. Additionally, it addresses banks’ policies on land conversion.
