Just over one year on from the launch of Climate Action 100+ at the One Planet Summit in Paris, what have investors achieved?
Setting the scene
Climate Action 100+ is a major global initiative that aims to help limit global warming to less than 2°C by engaging with over 100 of the world’s biggest greenhouse gas emitters. Global carbon emissions jumped to a record high of 37.1 billion tonnes in 2018, according to a Global Carbon Project report, driven by rising coal use and road traffic volumes. UN scientists warn that to limit global warming to the Paris Agreement goal of 1.5°C, greenhouse gas emissions need to fall by 45% by 2030. Current commitments put the world on track for around 3°C of global warming, posing significant risks for society and the economy.
Deadly wildfires in California, a record-setting heatwave in Europe, and hurricanes tearing up the U.S. east coast – in 2018, the devastating impact of climate change became impossible to ignore.
In October, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) issued a clarion call for action, warning there were just 12 years left to keep global warming to a maximum of 1.5°C. This would mean cutting carbon pollution from 2010 levels by 45% by 2030, requiring rapid transitions in all walks of life from energy and industry, to transport and cities.
Such a challenge can seem overwhelming for us as individuals, but by banding together, investors can be a powerful force for change. To this end, Hermes was among some 310 investors with over $32 trillion under management who signed up to the Climate Action 100+ initiative, a five year plan to help achieve the goals of the Paris Agreement.
As signatories, investors agree to engage with more than 100 of the world’s largest corporate greenhouse gas emitters to curb emissions, strengthen climate-related financial disclosures, and improve governance on climate change risks and opportunities.
The initial list of 100 companies, drawn up in December 2017, targets the systemically most important emitters – together accounting for around 85% of annual greenhouse gas emissions from fossil fuel combustion. Warming of 2°C is expected to result in additional climate-related damages of $8.1-$11.6 trillion globally before 2050 – a significant risk to investor portfolios.
In July 2018 an additional 60 companies, known as the “+” list, was added. This is comprised of companies that have a significant opportunity to drive the clean energy transition or may be exposed to climate-related financial risks that are not captured solely by emissions data.
Hermes EOS is leading or co-leading the engagement on 27 companies, including oil majors ConocoPhillips and Chevron, miner Anglo American and electronics manufacturer Hon Hai Precision Industry, which makes components for Apple. We are also collaborating with other investors on another 14 companies.
As a lead or co-lead investor, we are one of the main points of contact between the company and the initiative, co-ordinating meetings, providing updates and ensuring the engagement progresses.
Under the CA100+ initiative, the engagement agenda has three areas of focus. Firstly, it aims to secure commitments from companies that they will implement a strong governance framework setting out the board’s accountability and oversight of climate change risk.
Secondly, companies must take action to reduce greenhouse gas emissions and align their business models to the goals of the Paris Agreement. Thirdly, they must provide better disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), so investors can better understand the inherent risks that climate change poses to their portfolios.
Alongside the pension funds of the States of Connecticut and Illinois and the Needmor Fund, we began our engagement by filing a shareholder proposal in 2016 calling for an independent chair at the company. The arrangement, we believed, would provide the basis for proper oversight by the board over the company’s management.
Our dialogue continued into 2017, when we met with the company’s corporate secretary and chief administrative officer to discuss the progress it was making on governance and compliance and to ensure that change was underway. We also co-signed a letter, alongside 100 institutional investors with $2 trillion of assets under management, to 62 of the world’s largest banks requesting that they implement the recommendations of the Task Force on Climate-related Financial Disclosures.
In the first half of 2018, our engagement led to a positive meeting with Wells Fargo’s independent chair. She outlined the board’s approach to the difficult issues it had to address, and we offered our support. Subsequently, we continued to exchange views with the company. We reiterated the importance of delivering a market-leading climate change strategy to restore trust among its stakeholders and to take advantage of the business opportunity that climate change presents. We also made further suggestions on the company’s pay, culture and internal controls.
In 2019, activity will step up, with Hermes EOS co-chairing a sub-group on shareholder resolutions in Europe. These are important tools for engagers, particularly where change is needed urgently but progress has been slow. The good progress made at Anglo American followed the successful filing of a shareholder resolution at the company in 2016. Often, the mere possibility of a shareholder resolution can help bring about change, as was the case at Royal Dutch Shell in 2018, where it helped to trigger its announcement that it would set carbon intensity targets. Currently, resolutions are under consideration at several European companies concerning the alignment of their capital expenditure to the goals of the Paris Agreement. Another potential focus for shareholder resolutions, following their success at mining companies in 2018, is
to ensure companies’ public policy positions are aligned with those of their trade organisations, a hot topic because of the power wielded by industry bodies in policymaking.
However, it is important to recognise that engagement can be challenging, and getting support from company boards takes time. Some auto manufacturers have been defensive or reluctant to engage with investors on the business model implications of the transition to a low carbon world. Several have adopted a ‘wait and see’ attitude, rather than being proactive in trying to change consumer behaviour. Faced with the need to radically rethink their operations and product offering, some companies prefer to pass the buck, blaming governments for
failing to roll out electric vehicle charging points quickly enough, or sluggish consumer demand.
CA100+ is also tackling the demand side of the fossil fuel equation via power generators, grid operators and distributors. As co-lead for the European utilities sector, Hermes EOS has helped to establish a five-year strategy that outlines investor expectations for the sector as well as the potential tools for engagement with 11 companies.
As part of this sector strategy, a letter was sent to European utility companies calling on them to set out their transition plans consistent with the goal of a 1.5°C future, including the compatibility of their capital expenditure plans. The letter, which was also published in the Financial Times, followed hard on the heels of the UN climate talks in Poland in December and was backed by investors collectively representing $11.5 trillion.
The utilities companies were asked to set out explicit timelines and commitments for the elimination of coal use in EU and OECD countries by no later than 2030, defining how they would manage near-future write-downs from fossil fuel infrastructure. We also asked companies to support the development of climate policy aligned with the Paris Agreement and to ensure that their trade associations were aligned with this objective. Laggards or non-responsive companies can expect investors to employ bolder tactics in coming years if they continue to be misaligned with global decarbonisation goals.
Eurelectric, a sector association representing the electricity industry at a European level, responded via a letter to the Financial Times in December. This stated that it was firmly committed to leading the energy transition, with the aspiration of achieving full carbon neutrality well before the middle of the century. “We look forward to working more closely with investors to deliver on the Paris agreement and accelerate the energy transition,” it added.
This article features in our Q4 2018 Public Engagement Report.