Adam Matthews of the Church of England Pensions Board says initiatives like Climate Action 100+ have laid the foundations for the unprecedented partnerships across value chains that are needed going forward in high-emitting sectors like aviation, automobiles, shipping, energy and steel
The transition to a low-carbon economy could be deeply disruptive. It could result in the undermining of many large businesses and their business models and could see pension fund beneficiaries retiring into a world both impacted by the extremes of climate change and where their pension funds have not delivered the returns they need to enjoy their retirement.
But we are not necessarily looking at a lose-lose situation. There is the potential for a unique, effective and potentially game-changing partnership of mutual and wider societal interest to be formed between company boards and institutional investors. Importantly, 2019 provided the foundations for this partnership, and 2020 will be the year it can be formed.
Essentially, five things happened in 2019 that make this proposition possible.
First, we now have a model to drive ambitious change. Towards the end of 2018 and during 2019, we saw investors working together under the umbrella of initiatives such as Climate Action 100+ to deliver real changes in company practice and performance. High impact companies such as Repsol and Maersk have committed to net-zero carbon targets by 2050. Others, such as Shell, have come to a joint position with investors to put in place an engagement framework that supports the transition of their business to reduce their carbon intensity. Importantly, both Repsol and Shell, along with other companies responding to investor engagement, have reinforced their wider approaches by starting to address misalignment in climate lobbying by industry associations.
Investors are beginning to shift attention to the energy demand side, which is where many of the solutions lie
Second, we see that it is feasible for companies to be aligned with the goals of keeping global temperature rise below 2 or even 1.5 degrees Celsius above pre-industrial levels. For example, the Transition Pathway Initiative’s (TPI) analysis of the global electricity sector shows 31 (28%) of the 109 assessed companies being in line with a below 2C pathway. Of course, this should not hide that 29 energy companies (22%) still do not have either a policy on climate action or do not recognise climate change as a relevant risk. That is quite an astonishing abdication of risk management by those company boards.
Third, investors are beginning to shift attention to the energy demand side, which is where many of the solutions lie. How autos, shipping, aviation respond will be key. However, we need to be clear we have our work cut out as these sectors have yet to shift gears and accelerate into the low-carbon fast lane. Direct emissions from transport currently account for nearly one quarter of total energy-related CO2 emissions worldwide. And TPI’s latest research on 57 of the world’s largest transport companies finds that fewer than one-fifth (19%) are on course for a 2C future. The fact that one-fifth of are on track shows it can be done but we need change throughout these sectors.
Fourth, the intellectual clarity provided by the Inevitable Policy Response work of the Principles for Responsible Investment (PRI), with Vivid Economics and Energy Transition Advisors, provides a basis for investors to understand the rapid policy changes that are likely to become inevitable as the realities of climate change become increasingly apparent. Critically, it undermines the argument that climate is only a long-term issue for investors and makes it clear that strong climate-related policies are coming in the near-term. To take just one example, the analysis makes it clear that thermal coal is likely to be rapidly phased out, directly challenging the continued growth in supply still advocated by certain industry association lobby groups that regrettably still receive the benefit of the doubt from too many investors.
Fifth, asset owners are asking themselves what it means to be aligned to the Paris Agreement. For example, the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative, jointly chaired by APG of the Netherlands and the Church of England Pensions Board, and supported by over 60 major institutional investors with over €13 trillion in assets under management, is developing a practical and useable framework for investors to be able to understand what it would mean for a pension fund to align with the goals of the Paris Agreement.
Another complementary and much-needed initiative was launched by PRI and UNEP-FI at the UN Climate Summit in September. Representing nearly $4tn in assets under management, the United Nations-convened Net-Zero Asset Owner Alliance is capturing commitments by asset owners to align portfolios with a 1.5C scenario. Such commitments will, I suspect, become an expectation from several governments as we run up to the Glasgow 2020 UN Climate Conference.
2020 has to be the time a new partnership is formed between the company board room and institutional investors
The consequence of these two initiatives is that more funds will make such net-zero/Paris commitments, leading them to drive change across all asset classes. It will reinforce the engagement asks being made by Climate Action 100+. It will probably also drive demand within passive investments for the kind of approach under development between TPI and FTSE Russell that integrates forward-looking analysis into indices, thereby directly rewarding those companies that are demonstrably aligned with Paris, and penalising those that are not.
While 2019 marked a watershed in terms of emerging practice and in terms of changing investors’ attitudes and views, we do not yet have the level of ambition needed if we are to succeed.
This is why 2020 has to be the time a new partnership is formed between the company board room and institutional investors. A partnership that is based upon systemic change and practical outcome that can work across the full value chain and across all asset classes to develop net-zero carbon paths for aviation, autos, shipping, steel and cement, to name but a few.
Taking aviation as an example, such a partnership would bring investors together not only with the major airlines but with energy providers and the engine and plane manufacturers. Together they can identify the pathway and the technological and regulatory challenges that need navigating, as well as the financial incentives that could be brought into play to turbo-charge achieving the goal.
Much of the analytical work has already been done, but investors need to be at the table both applying pressure for action and looking at where new financial incentives can be created to drive such an approach. For example, should we be creating low-carbon transition bonds? Such bonds could play a key role in unlocking the application of technologies aligned to the transition.
The partnership will also require investors and companies to engage with regulators. Rather than depend on the lobbying of incumbent fossil fuel industry associations or auto associations a new standard should be developed in 2020 for positive climate lobbying.
Asset owners within Climate Action 100+ are uniquely placed to instigate this new approach with companies
This is something that has emerged from the foundational work of funds such as AP7, Aberdeen Standard, BNP Paribas AM and the Church of England Pensions Board. Such a standard will bring together those leading companies already addressing lobbying misalignment in their industry associations with progressive investors to set a new standard that works across the value chain in support of net-zero carbon pathways.
Asset owners within Climate Action 100+ are uniquely placed to instigate this new approach with companies. We have already been challenged by some, such as Shell’s CEO, Ben van Beurden at PRI in Person in Paris this year, to work together. The opportunity is there and the pillars that have been put in place in 2019 provide the basis for such a partnership. I believe this is possible and that is why I go into 2020 with hope that such a new partnership to be forged.
This partnership will change the way corporate boards and investors interact but do so both in their own as well as wider societies’ interest to address climate change. If we are to succeed, investors and companies will, though, need to think systemically and ambitiously as there is no longer time for half measures and incrementalism.
Adam Matthews is co-chair of the Transition Pathway Initiative and director of ethics and engagement at Church of England Pensions Board
This article is part of our in-depth Decade of Delivery commentary from sustainability leaders. To view all articles, please see our January 2020 digital magazine.#deliverydecade Climate Action 100+ Transition Pathway Initiative Repsol Maersk Shell responsible investing divestment Net-Zero Asset Owner Alliance PRI