Companies’ Climate Targets Lack “Credibility”
Panellists at the ICGN stewardship forum call for more transition-focused action from companies and targeted engagement by investors.
A continuing absence of credibility in companies’ climate commitments requires investors to step up engagement on the issue, speakers at an industry event in London have warned.
Speaking at the International Corporate Governance Network’s (ICGN) Global Stewardship Forum, members of the investment community assessed the progress made to date, highlighting ongoing challenges and shortcomings.
“The only real credibility is action,” said Courteney Keatings, Senior Director of ESG Research at proxy advisor Glass Lewis. “We’ve seen lots of companies have really good disclosure. While we do want to see all the plans laid out so that we can make these assessments, the reality is, if you’re not going to follow through with your plan – does it matter?”
Pointing to the Transition Pathway Initiative’s (TPI) latest ’State of Transition Report’, Faith Ward, Chief Responsible Investment Officer at the Brunel Pension Partnership, highlighted that none of the companies fulfilled all the criteria set by the survey.
Working in partnership with the London School of Economics and Political Science’s Grantham Research Institute on Climate Change and the Environment, the TPI Centre recently added a fifth level to its Management Quality and Carbon Performance Methodology – which tracks the quality of companies’ governance of greenhouse gas emissions and of risks and opportunities related to the low-carbon transition.
“There’s been lots of progress since the TPI started that can be tangible in terms of where companies are,” said Ward. “Lots of companies have now set the ambition to be net zero. The TPI has created five levels of what ‘credible’ needs to look like – it’s not only [about] setting the ambition, but having an implementation plan underpinned by your capital expenditure and in your actions.”
Brunel is one of eight regional pooled local government pension schemes in the UK and has around £31 billion (US$41 billion) AUM.
Timid progress
Having assessed more than 1,027 of the world’s highest-emitting public companies, collectively representing US$39 trillion across 17 sectors, the TPI assigned an overall management quality score of 3.1. Although 30% of the companies aligned with a 1.5°C objective by 2050 – a figure four times higher than in 2021 – the report noted +61% in cumulative exceedance of 1.5°C emissions-intensive pathways, weighted by market capitalisation.
Speakers said it was increasingly important for investors to understand the climate-related implications of portfolio companies’ future capital expenditure plans to understand their pathways to net zero.
“[Capital allocation] is a complex area where engagement is important to unpack and encourage further disclosure more tightly aligned with transition plans,” suggested Enrico Colombo, Senior Director of Stewardship at global asset manager Nuveen. “All the different timeframes and timescales of capital allocation come generally in the transition as multi-decade – when some of those investments start to pay off and demonstrate their environmental impact in the return profile.”
Only a third of investors currently have the understanding that capital allocation is a “core requirement” of decarbonisation strategies, Ward insisted.
“We’ve actually baked this into our voting strategy,” she added. “There’s lots of companies to engage with, setting that as a hard ask and saying that it will require portfolio construction changes. This is material information that will be fundamental to have in the next few years.”
The regulatory and policy environment are also important factors that can change rapidly, and act as significant determining factors for the ability to carry out certain projects, Keatings highlighted. In some jurisdictions – including the EU, Japan or the UK – there has been some uncertainty over which green technologies would be favoured through government incentives such as tax credits.
“We’re going through some interesting times right now in the US with regards to the broad regulatory environment. That’s going to change the economic feasibility of CCUS [carbon capture utilisation and storage] for companies in some areas,” she said. “When we look at disclosure on a broad basis, it is lacking. It is not sufficient to make informed decisions on. This is definitely a topic of conversation that our clients have shown growing interest in.”
Charting the path ahead
The TPI framework rates companies’ carbon management and governance practices from Level 0 (‘Unaware’) to Level 5 (‘Transition Planning and Implementation’), with companies below Level 3 considered as laggards.
The report underscored that most companies (57%) are currently at Level 3 – whereby they have recognised climate change as a relevant business risk and opportunity, developed a policy commitment to act, set emissions reduction targets, and disclosed Scope 1 and 2 emissions.
Many companies also go beyond Level 3 requirements, with more than four in five having quantitative targets covering at least one of Scopes 1, 2 and 3 – and a similar share having long-term emissions targets stretching beyond five years.
Although the TPI observed “steady progress”, it said companies are broadly still “well short” of having a strategic approach to climate risks (Level 4) – while fewer than 5% score on any indicator for Level 5, and no company satisfies all Level 5 indicators. Describing best practice as having detailed and actionable transition plans that align business practices and capital expenditure decisions with decarbonisation goals, the TPI found this to be “very rare”.
“This report gives you a mixture of considerable hope, but it’s also a reality check,” said Ward. “It’s a good indication of what we need to target in terms of areas of stewardship. No companies are ticking all of the boxes, and none of them are ‘five stars’.”
During the discussion, the panellists also reiterated the crucial nature of Scope 3 emissions disclosure.
“It is absolutely essential and I need it now,” Ward hammered home. “About 80% of total emissions are likely to be Scope 3. Companies need to control their own narrative. If they don’t, someone else will do it for them.”
Insisting that supply-chain (i.e. Scope 3) disclosures should be considered separately, as opposed being adding to Scope 1 and 2 analysis, Ward suggested that only half of “high-impact, high-value companies” are currently reporting material emissions – underscoring the need to distinguish between “irrelevant” sources of information – related to people’s business travels, for example – and useful ones.
Meanwhile, Keatings noted that companies should conduct their assessments in relation to their shareholder bases, and inform themselves on the basis of engagements.
“We should acknowledge that a large subset of investors is never going to look at [climate commitments] or take it into account – but because so many and increasing numbers are, more disclosures is usually good,” she said. “You have to weigh the resources required to find these disclosures depending on the type of company you are, and how difficult it is to make those assessments.”
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