The issue of corporate lobbying activity by companies on climate change, and how responsibly it is carried out, is fast becoming a central issue for global investors
The argument that investors should engage with companies to encourage them to better manage climate risks and opportunities is now well established. Climate change is an investment theme in its own right and is also a tool for the deeper analysis of potential winners and losers.
When companies lobby to delay or undermine climate change policy, they increase the risk to investor portfolios from the physical impacts of climate change and from the likelihood that – as the economic costs of delay stack up – governments will need to take even more stringent measures to drastically reduce greenhouse gas emissions.
Similarly, at the individual company level, the potential impacts are also clear. In the absence of effective, well-designed policy, companies are not incentivised to prepare for the low-carbon transition, and will be left with stranded assets and business models that are not fit for the low carbon economy of the future. Companies may face criticism and negative reaction from their customers, investors or other stakeholders if there is a clear direct or indirect link to delaying or blocking climate policy. This is particularly pertinent in sectors such as oil and gas, and mining and extractives, where companies are already under significant pressure because of the carbon characteristics of their products and services.
While the risks are both evident and significant, the problem for investors is that the issue of corporate lobbying remains opaque. There is no standard framework to help the industry navigate company lobbying activity on climate change or to assess how “responsible” such efforts are in the context of the Paris Agreement.
Work is underway. In June 2020, AP7 – the largest of Sweden’s AP pension funds – BNP Paribas Asset Management and the Church of England Pensions Board announced a partnership with Chronos Sustainability to develop a framework that will enable assessment of whether and to what extent corporate lobbying – whether delivered at first-hand or through an intermediary such as a trade association – is aligned with the goals of the Paris Agreement.
Once developed, the framework will bridge the current knowledge versus action gap that currently prevails. It will help inform discussions between investors and companies, inform voting decisions and offer deeper portfolio analysis.
The partnering organisations are now consulting with a range of global stakeholders on the scope and content of such a framework, with the consultation scheduled to run until 24 July 2020.
We invite the participation of anyone involved in or in some way affected by the shaping, delivery and impact of corporate climate change lobbying practices, including every corner of the investment market, people who work in companies and industry associations that are undertaking lobbying, policymakers who are lobbied, investors, academics, civil society organisations, journalists and members of the public who see lobbying in action.
For fund selectors and their clients, action is important.
So, what should fund selectors do? In brief, there are three distinct actions:
- Respond to and encourage their clients to respond to the consultation. Without weight and breadth of voices, the needs and interests of fund selectors will be neglected so please do participate.
- Support the framework that results from this process. By reinforcing the signals being sent to companies about the importance of responsible climate change lobbying, fund selectors can deliver on their active ownership obligations.
- Use the framework when it is developed for example to:
- Inform discussions with companies
- Inform voting decisions
- Analyse their portfolios (e.g. are the companies held in “green” or thematic portfolios actually good performers on this issue?)