SI Dilemma: Staying the course on climate; why engagement remains vital

At the same time, over 60 new investors have joined CA100+ for Phase Two, attracted by the power of collaboration. CA100+ currently consists of over 700 investors and it is still growing, having seen constant member growth since its launch. How should we assess these developments? Let’s take a closer look at the history and future of this collaborative engagement, the growing alignment between joint engagement and transition investing, and Robeco’s perspective.

CA 100+ is an investor-led initiative launched in 2017, focused on ensuring that the world's largest listed corporate greenhouse gas emitters take the necessary action on climate change. In other words, the focus is on driving progress in the transition to a low-carbon economy. Robeco is a long-term active member of the coalition, currently co-leading engagements with 12 focus companies: Anglo American, Berkshire Hathaway, BHP, CEZ, Ecopetrol, LyondellBasell, Marathon Petroleum, Petroleo Brasileiro, Phillips 66, Rio Tinto, TotalEnergies and Valero.

CA100+ has played a critical role in making companies aware that climate change and the required energy transition are financially material risks that corporates must manage. Most companies within the scope of the initiative have recognized the need to take climate action and have started taking steps toward this end. Some 77% of focus companies have pledged to achieve net-zero emissions by 2050 or earlier, focusing at least on Scope 1 and 2 emissions.¹

More specifically, in line with requests from investors, a growing number of companies have set externally-verified targets under the Science-Based Targets initiative (SBTi) as part of their commitment to reach net-zero emissions by 2050 or sooner. Robeco co-led the engagement with the Czech utility CEZ that resulted in its targets being approved by the SBTi and the company developing an ambitious strategy to reach net zero by 2040². Our engagement with LyondellBasell has also seen the company greatly increase its ambition and submit targets to the rigorous SBTi approval process.

Climate oversight is included in the governance toolbox of most companies. Currently, 93% of the world’s biggest listed emitters have implemented board committee oversight of climate change risks and opportunities. Many companies also have a clear eye on reporting; 90% of companies in scope have explicitly committed to align disclosures with the recommendations by the Taskforce on Climate-related Financial Disclosures (TCFD), now the global standard for climate disclosure and reporting.

The progress is, however, far from enough. Despite progress made in setting high-level net-zero commitments and intermediate emissions reduction targets, there still is a widespread lack of concrete action plans. Some companies in the oil and gas sector in particular have even weakened their targets and low-carbon capital expenditure plans, undoing some of the promise of previous years.

Implementing decarbonization plans in order to achieve meaningful emissions reductions is exactly what Robeco and other investors are focusing on in the current phase of the initiative. We ask companies to clarify short-term targets, fine-tune their decarbonization strategy, and connect capital allocation to these plans. High-emitting companies that are not moving toward aligning with the goals of the Paris Agreement face increasingly pertinent financial risks.

The business case for continued collaborative engagement is crystal clear, despite some investors deciding to leave the initiative. It has led to responses from various perspectives. US climate envoy John Kerry mentioned that asset managers are “turning away from science”, questioning if the departing investors are “acting on the right side of history”.

CA100+ mentioned that hundreds of investors from around the world remain committed to pushing companies to cut their greenhouse gas emissions. Some US investors explicitly reconfirmed their commitment to CA100+, referring to the notion that engagement is a vital part of their fiduciary duty. Interestingly, the recent launch of Nature Action 100 rapidly saw over 200 institutional investors sign up³, showing ongoing faith in collaborative initiatives.

These developments are taking place against the backdrop of increasingly complex regulatory environments, where the scope and boundaries of investor fiduciary duties are being contested. How to balance short-term financial performance with long-term climate goals is a growing dilemma. Climate change poses significant impacts to the environment and society at large, and these are expected to increase over time, according to the latest science.

In my view, the systemic risks and impacts posed by climate change to portfolios as a whole cannot be ignored or sacrificed for the sake of a short-term focus on the returns from a small group of high-carbon stocks. Engaging with investee companies on advancing the net-zero transition, and thereby contributing to long-term value creation, remains a key instrument available to investors in fulfilling their fiduciary duties. The imperative for deploying this instrument is only getting stronger, and in fact investors are also starting to engage with governments to better address the systemic risk of climate change.

It is regrettable to see some investors stepping down. However, despite the negative perception the departures create toward external observers, in practice most of those former members played a limited active role in the initiative.

In addition, we observe that some of the leavers are at the same time doubling down on transition finance, seemingly as an alternative to engaging on real-world emissions reductions. The inherent contradiction is that transition finance is exactly what Climate Action 100+ is propagating for: companies setting concrete decarbonization strategies and allocating capex accordingly.

True responsibility involves protecting and generating value on both aspects of this transition; we cannot focus solely on opportunities of the future while neglecting the risks of the present.

At Robeco, we are staying the course. We continue to focus on creating wealth and well-being by investing in the transition and accelerating it via engagement. Accelerating the transition is undoubtedly needed according to science; we have a narrowing window for limiting warming aligned with the Paris climate agreement.

Staying the course is the right thing to do both from a financial and an impact perspective; the transition is inevitable. Negative externalities like carbon emissions and biodiversity degradation will increasingly be priced in. This can already be observed in carbon border adjustments mechanisms and the push for carbon markets, and it will undoubtedly become even more financially material in the future.

Accelerating climate action in invested companies is a key component of Robeco’s net-zero roadmap. This is about being prepared for the future, both via investing in the transition and engaging with companies that need to step up. Being prepared makes perfect sense.

Companies with transition challenges clearly benefit from constructive dialogue with investors. This is a clear win-win-win situation, where effective engagement does not only benefit the company and its investors, but also broader society.

Footnotes

¹2023-Key-Findings.pdf (climateaction100.org)
²Investors welcome SBTi validation of Cez Group’s carbon reduction targets | Climate Action 100+
³Investors – Nature Action 100