Our approach is to integrate ESG into our analysis and decision making...
Several large companies across a range of sectors and countries backed the UN’s ‘Race to Zero’ initiative on World Environment Day (5 June). Companies pledged to be netzero emitters by 2050, including beverages company Diageo, engineering giant Rolls-Royce and fast fashion companies Inditex and H&M. Now each of the six largest European oil & gas majors have announced plans that will bring them, they say, to net zero carbon emissions by 2050, as per the terms of the 2015 Paris Agreement, although the details and real commitments behind these headlines vary considerably. Italian multinational Eni stands out as the having the most ambitious plan, adopting targets for both carbon intensity and absolute Scope 1, 2 and 3 emissions, for all the products it sells.
UK-based BP announced a write-down of up to US$17.5 billion (£14 billion) from the value of its oil and gas assets – its largest write-down in a decade – because its oil price forecasts for the next three decades have fallen by almost a third. The cut to BP’s global oil price forecasts, to an average of US$55 a barrel between 2020 and 2050, could mean the oil company is forced to leave some oil and gas discoveries in the ground if the projects prove uneconomic to develop.
BP’s auditors, Deloitte, explicitly noted in the 2019 Annual Report that its previous impairment prices were not consistent with the Paris goals, based on a comparison to third-party scenarios. This was despite BP believing its strategy is ‘consistent with the goals of the Paris Agreement’.
Climate scenarios for the financial world
The Network of Central Banks and Supervisors for Greening the Financial System (NGFS) is a group of 66 central banks and supervisors and 13 observers committed to sharing best practices, contributing to the development of climate and environment-related risk management in the financial sector and mobilising mainstream finance to support the transition towards a sustainable economy. In June it published a report exploring eight climate change scenarios, which include three representative scenarios:
- Orderly: Early, ambitious action to a net-zero CO2 emissions economy;
- Disorderly: Action that is late, disruptive, sudden and/or unanticipated;
- Hot house world: Limited action leads to a hot house world with significant global warming and, as a result, strongly increased exposure to physical risks
In particular, these scenarios set a framework for economic impacts and the likely policy ‘intensity’, represented by shadow emissions prices (carbon pricing is close to or exceeding US$100 per tonne in 2040 for all orderly scenarios and more than US$400 per tonne for the disorderly – effectively the late and hard policy reaction). This work may help frame future policy initiatives for the industries regulated by these entities, but also influence the future path of monetary policy. These scenarios follow on from the Bank of England (BoE) discussion paper from December last year ahead of its ‘2021 biennial exploratory scenario on the financial risks from climate change’.
Building back better
As governments look to the post COVID-19 recovery, the International Energy Agency (IEA) published a report suggesting that governments can spur economic growth and jobs at the same time as cutting greenhouse gas (GHG) emissions. Its pandemic recovery plan seeks to show governments how they can help their economies recover, at the same time as putting energy and other sectors on a track for lower carbon growth.
The plan would require investment of US$1 trillion per year globally in the 2021–2023 period, and provides policymakers with a roadmap to recovery. The plan outlines measures that governments can take across six key sectors: electricity, transport, industry, buildings, fuels and emerging low-carbon technologies.
The plan sets out policies and targeted investments for each key sector, including measures designed to accelerate the deployment of low-carbon electricity sources, such as new wind and solar, and increase the spread of cleaner transportation such as more efficient and electric vehicles as well as high-speed rail.
It also includes measures to improve the efficiency of industrial equipment; to make the production and use of fuels more sustainable; and boost innovation in technologies, such as hydrogen batteries, carbon-capture utilisation & storage and small modular nuclear reactors.
One success to note is the change we have seen at Lukoil, the Russian oil & gas group...
Furthering our engagement
We have been extensively engaging with companies in emerging markets for a considerable period of time, leveraging the relationships we have built up with them as long-term investors. One consequence of this is that we find an increasing number of investee companies approaching us to seek input into how they approach sustainability and ESG.
To build on this momentum we have, over the course of the last quarter, started to proactively reach out to companies recently added to the strategy to outline the type of investor we are and what they can expect from us in this capacity. It has also been an opportunity to outline any particular areas that are likely to be a focus for engagement. The response from the companies we have contacted so far has been immediate and very positive and will set out some of the engagement that we expect to take place over the coming quarters.
Climate change research paper
We have just published a climate change research paper setting out the main drivers and consequences of climate change – a reminder of the need for action to address it and how we, as investors are approaching the issue for our clients. In particular, the paper examines how we approach analysis and integration of climate change into our process, our active ownership strategy on climate change and how we work with our clients and report to them on climate change. We also look at the issue of climate change disclosure – in particular, the growing momentum behind the Task Force on Climate-related Financial Disclosures (TCFD) framework and the need for decision-useful information. The paper also looks at our proprietary modelling work, examining the value at risk presented by carbon pricing.
Although the proxy seasons in Europe and the US are well past their peaks, there has continued to be a trickle of meetings over the course of the month, and we have engaged with a number of companies in the run up to these meetings.
At the start of the month, we engaged with a US-listed emerging market company with whom we have been discussing the issue of diversity for some time. While the company has made some progress on the commitments it has previously made, we were concerned about the nomination process for future directors, which was highlighted in the recent appointment of a new director. The company has made a commitment for greater disclosure and clarity on the process, so we will continue to monitor the progress it makes.
In Australia, we have been engaging extensively with the sustainability teams at a number of companies held, continuing to build up knowledge and understanding of the key issues and strategies being taken. It is interesting that, in many cases, we are one of the few investors pro-actively posing sustainability questions and there is clear willingness to engage.
Following Rio Tinto’s destruction of a 46,000-year old Aboriginal heritage site at the Juukan Gorge iron-ore deposit in the Pilbara in Australia, we engaged with the company’s head of investor relations to understand the background to this. The firm explained that the area has been negotiated with the local Aboriginal people for more than 13 years (finalised in 2013), during which over 7,000 artefacts were removed, and meetings have taken place formally every six months. Rio Tinto has apologised for the distress caused, launched an inquiry into how this breakdown in communication occurred and will be conducting a full review of its processes. The company believes that its process has worked well in the past, with full support of local indigenous groups. The Aboriginal Heritage Act (ACT) is also under review and Rio Tinto will be including findings of its review into the discussion on how to improve the act. We are keen to hear how such situations will be avoided in the future.
One success to note is the change we have seen at Lukoil, the Russian oil & gas group. We have previously engaged with the company on disclosure and management of GHG emissions which, until now, has been clearly lacking. As a first step to address this Lukoil has endorsed a new set of stronger environmental commitments as part of its Health, Safety and Environmental Policy. The key commitments are around use of best-in-class technologies, earlier introduction of environmental risk assessments and adoption of GHG Protocol Standards for accounting and reporting.
In July we are launching our new flagship quarterly stewardship report which will outline our key thoughts and activities for the quarter and how our stewardship work is evolving.
We are also preparing a seminar which will look at our approach to Stewardship and ESG, our approach to sustainability and some insights from our work in emerging markets.
The other area of work will focus on the ongoing consultations on upcoming legislation, with an opportunity to input extensively into how these develop via our trade bodies and representation on their key committees.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
The information provided should not be considered a recommendation to purchase a particular strategy / fund or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.