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Engagement as a means to lower the carbon footprint of our portfolios

04-02-2016 | Insight | Sylvia van Waveren

When national governments are starting to actually implement global warming policies after COP21, stranded assets will become an unprecedented problem for sectors relying on fossil fuels. Research by Nature magazine published in January 2015, suggests that one-third of oil reserves, half of gas reserves and 80% of coal reserves might go unused up until 2050. The research identified the largest risks as being to coal reserves in China, India, the former Soviet Union, and oil & gas reserves in the Middle East.

The call to limit global warming has fallen at investors’ doors as the owners of companies whose activities are contributing to climate change. One thing investors can do is simply  divest high-carbon companies., In our view this is not the most effective way to decarbonize portfolios or deal with stranded assets. Most of these fossil fuel reserves are owned by governments, not companies. For those reserves that are held by corporates, divestment simply means one institution buying what another is selling.

The better solution is to encourage carbon companies to change their business models. Our team has been engaging with carbon-intensive companies for some time now exactly trying to do so. The focus is on the biggest generators of C02. These are the utilities, including electricity generators which burn fossil fuels to generate energy and account for one-third of all global carbon emissions. Other sectors are real estate, oil & gas and transportation.

Our engagement with the utilities sector is already well underway. It is aimed at encouraging the implementation of proactive and ambitious environmental strategies, operational excellence in thermal generation, business model innovation, and participation in public policy debate. Over the course of the engagement, we expect to see electric utilities taking steps towards their own de-carbonization.

The owners of retail buildings which can generate large quantities of C02 have also been targeted in our engagements. Here the engagement is aimed at climate change management, license to operate, environmental management systems, owner engagement with occupiers, and energy and carbon reductions. For 2016 we plan to engage the oil & gas sector in our carbon engagements.

Engagement with companies is not only about having a dialogue. It's also about seeing the company’s impact for yourself and be prepared to interact in depth with the industry. Thus we went on a field trip to West Canada to visit the third-largest oil reserves in the world - the Athabasca oil sands. To see how the oil companies recover oil from the oil sands, and under which conditions its environmental impact can be reduced. An important part of the trip focused on the Carbon Capture and Storage technology, which could be such a condition for the sustainable recovery of oil from oil sands.

A number of large asset owners, including the Norwegian Government Pension Fund and CalPERS of the US have joined us in selecting engagement as their main approach to deal with carbon-intensive investee companies. Another approach would be to join co-file initiatives of shareholder resolutions such as the ‘Aiming for A’ campaign in the UK, which has successfully persuaded Royal Dutch Shell and BP to disclose their climate strategy and the resilience of their portfolios against carbon limits. Shareholder resolutions are appearing now at mining companies and utility companies as well and we are preparing ourselves to co-filing some of these resolutions.

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