Two issues central to combatting climate change most concern investors, Robeco’s Active Ownership team warns in its quarterly report.
The first is transition risks that are linked to changing business models as companies progressively decarbonize, moving the investing landscape and potentially leading to stranded assets, they say. The second is the physical risks related to extreme weather patterns that could cost billions in damage, reparations or higher energy costs.
The Active Ownership team is trying to help companies adapt through an extensive ‘Climate Action’ engagement program targeted at high carbon emitters that begins in earnest this year. Robeco also launched a climate change policy in 2017 to align investment practice with limiting global warming to between 1.5 and 2 degrees Celsius, in line with the Paris Agreement of 2015.
“Investors are concerned about two key areas: transition and physical risks,” say Engagement Specialists Cristina Cedillo and Sylvia van Waveren in the Robeco Active Ownership Report for Q1 2018. “Transition risks are linked to the implications of climate-related policies requiring the reduction of greenhouse gas emissions and the adoption of clean technology. For example, a tax on carbon would disincentivize an electric utility company from generating energy from coal, and instead encourage energy generation from renewables.”
“This could potentially lead to stranded assets – situations where man-made capital such as coal plants has to be retired prematurely due to direct or indirect climate policies, or to the falling costs of alternative, cleaner technologies. Fossil fuels are at most risk of becoming stranded if they cannot be burned in order to limit global warming. Those companies that are not prepared for the energy transition will face significant financial challenges as regulations change and energy priorities shift.”
This energy landscape is already changing, as generating companies switch from coal to less pollutive gas, and as more renewable energy from wind or solar comes onstream, they say. “Coal plants in the US are a case in point for carbon-intensive energy sources which are losing competitiveness against lower-emitting sources,” say Cedillo and Van Waveren.
“For decades, coal has been the dominant energy source for generating electricity in the US. However, in 2016, natural gas-fired generation surpassed coal generation in the country on an annual basis for the first time. Natural gas emits about half the amount of CO2 per megawatt-hour of electricity than coal, and is therefore considered by many to be a ‘bridge fuel’ that can help in the transition to a low-carbon economy.”
“Moreover, the share of coal in the US energy mix has also been reduced by the expansion of renewables such as wind and solar power. This growth has been driven by state and federal policies supporting greater investment in renewable energy technologies and the adoption of them.”
Meanwhile, global warming is causing sea levels to rise due to melting ice, and is dramatically changing atmospheric patterns. “Physical risks are linked to extreme weather events such as floods, droughts or hurricanes,” they say. “Although they can be hard to predict as global weather patterns become more unstable, these risks can also have a significant financial impact.”
“The costs of California’s drought between 2012 and 2016 raised electricity costs by USD 2 billion. Electric utilities saw a steep reduction in their low-cost hydroelectric power generation, some of them by as much as half. As a result, energy demand had to be compensated with other, more costly sources of fuel. Some companies reported replacement costs of as much as USD 200 million in a single year.”
Fortunately, asset managers are aware of the risks and taking the appropriate action to mitigate them, the engagement specialists say. “The financial industry is becoming increasingly aware of climate-related risks. There is a growing sense of urgency to understand how investee companies, and the economy in general, will be impacted by climate change, and to what extent they are seizing emerging opportunities.”
“The recommendations of the Task-Force Climate-related Financial Disclosures (TCFD) issued in the summer of 2017 are expected to contribute to this. The TCFD’s voluntary disclosure framework recommends that financial and non-financial organizations provide climate-related disclosures in their annual filings, including scenario analyses that assess the business impacts of climate risks. Robeco supports this initiative, as we believe that such disclosures will help us make better-informed decisions on the climate risks and opportunities of our investments.”
Engagement with the world’s largest corporate greenhouse gas producers is also part of the solution. Robeco is a staunch supporter of Climate Action 100+, an investor-led initiative launched in December 2017. It aims to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures. The initiative has already attracted 256 signatory investors collectively with a total of USD 28 trillion in assets under management.
To support this, Robeco launched a three-year engagement theme in the first quarter of 2018 focusing on the oil and gas, utilities and chemicals industries. “We will be co-leading engagements with three companies, and will engage on both an individual and collaborative basis with a total of 13 companies,” the team says.
The new program builds upon Robeco’s previous climate change-related engagement initiatives that focused on companies in the real estate, utilities, automotive and oil and gas sectors over the past five years, and the climate change policy in general.
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