‘Engagement will only be credible if investors are prepared to divest’

Nordea's Eric Pedersen gives examples of where investor engagement with companies has and has not worked

Investors must reduce the carbon footprints of investment portfolios. However, this will not be a meaningful part of the solution to climate change unless lower portfolio carbon footprints are clearly linked to reductions in real-world emissions.

Investors can game the carbon footprint, by gradually tilting portfolios away from high-emitting but economically critical sectors such as steel, cement and utilities – while increasing exposure to perpetually lower-emitting sectors such as IT, healthcare and communications. This is guaranteed to lower a portfolio’s carbon footprint but will have no meaningful link to real-world emissions. It is also not a particularly sound investment philosophy.

Engagement

To make a real difference investors must build climate strategies around the notion emissions must be reduced at company level.

There are two ways to do this. The first lever at our disposal is to engage with companies to deepen the commitment to decarbonisation. It is a plain fact there are not enough companies sufficiently ambitious on climate change, and simultaneously attractive as standalone investments. This will only change if companies adapt.

Investors and regulators both have a major role to play in providing companies with the incentives to change and we have seen proof this can work. Xcel Energy is a good example. Xcel is a major electric power company supplying electricity and natural gas to retail customers in the US. Before our engagement began in 2018, as part of the Climate Action 100+, the company based 60% of its electricity generation on coal and other fossil fuels.

Nine months after the engagement started, Xcel became the first US utility to commit to delivering 100% emissions-free electricity by 2050. The company also committed to an 80% reduction in emissions associated with electricity by 2030. Xcel included climate KPIs in its CEO remuneration for 2019-2021 and published its inaugural Task Force on Climate-related Financial Disclosure report in 2020.

Industry-wide collaboration can also be powerful. Last year collaborative engagement against the construction of the planned coal fired Vung Ang 2 power plant in Vietnam began. The construction of new coal-fired power plants is inherently inconsistent with what the world is currently trying to achieve in the fight against climate change. During the engagement period, companies such as KEPCO, Samsung C&T and Mitsubishi Corporation – along with banks SMBC and Mizuho – have all made commitments to end involvement in new coal projects moving forward.

Forward-looking data

However, there are also many examples of where corporate engagement has not led to adequate progress. Engagement will only be a credible strategy if investors are prepared to divest when companies fail to respond to shareholder demands.  

Therefore, this second lever is critical. Investors need to take a forward-looking view of company decarbonisation ambitions and actively deselect investments failing to demonstrate a sufficient commitment to cutting emissions over time.

This is particularly important in high-emitting sectors such as energy and utilities, where the fossil fuel legacy still looms large. The necessary progress will be hopelessly delayed if companies in these sectors continue to get funding without committing to a timely phase-out of fossil fuels. About 60% of our funds currently follow our Paris-Aligned Fossil Fuel policy, which prohibits investments in all fossil fuel companies lacking sufficient transition plans.

See also: – Most ESG and climate funds not Paris-aligned

Mexican fully state-owned oil and gas producer Pemex is a good example here. More than 90% of its revenue is from crude oil and refined oil products and there is little chance of this changing – given the company’s business plan does not foresee a prioritisation of renewable energy.

Eric Pedersen is head of responsible investments at Nordea Asset Managemenand an ESG Clarity editorial panellist.

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...