The rise in global temperatures is a significant and ongoing challenge to our world. As investors for our client accounts, we believe we have an important part to play in identifying and investing in companies that will benefit from the opportunities that arise from the rapid shift to a low carbon world and identifying the risks of investing in companies unprepared to make this transition.
As long-term investors, we understand that climate risk will continue to influence company strategies well beyond the tenures of current managements and boards. Creating a framework to encourage and facilitate long-term reporting is important. We also note that companies that can get ahead of impending climate change initiatives and work with governments to achieve their goals may benefit from first-mover advantage.
Our approach to engagement on climate risk is to focus on sectors and companies where climate change poses the greatest material risk to our clients’ investments.
2021 engagement case studies
In partnership with our investment analysts and portfolio managers, actively engaging with companies that are users of fossil fuels (demand-side companies) on how they are managing the risks of climate change and GHG emissions remains a major focus of our stewardship efforts.
Shin Etsu Chemical, Japan
The chemical and petrochemical sector is responsible for over 5.8% of global greenhouse gas (GHG) emissions and the industry faces significant risks from tightening legislation if it fails to decarbonize swiftly. Concerns have been raised around the Japanese chemical company’s climate targets as well as its climate-risk reporting.
Concerns that Shin Etsu’s emissions reduction target (set to achieve 55% reduction in carbon intensity in 2025 compared with 1990) was significantly misaligned with the Paris agreement led us to engage the company in 2020, asking them to review and update their target. We also urged the company to deepen its analysis of climate change scenarios at that time, so that investors can better understand its climate-related risks, opportunities and strategies.
In 2021, the company published an updated climate disclosure and we had a follow-up engagement to assess the progress made. Some progress had been made with regards to its scenario analysis as the company presented risks/opportunities analysis based on 2 degree and 4 degree scenarios, and the impact of these issues have been rated in terms of scale (small/medium/large), and major countermeasures listed.
With regards to target setting, they explained the reason why the company has not yet committed to carbon-neutral targets is because management is reluctant to do so when there is no credible strategy for achieving them at present. While we believe the corporate culture takes commitment-setting very seriously, we suggested that the company should present realistic and ambitious targets within a timeframe to which the management could commit.
The company is examining how to reduce scope 1 emissions in a cost-effective way, including through the use of carbon-neutral natural gas.
Outcomes and next steps
We note the positive progress the company has made and we believe that there is sufficient momentum for further improvements in 2022. As next steps for the company, we suggested it would be useful if they provided the breakdown of GHG emissions by line of business and provide a more concrete explanation to the market of the planned roadmap ahead.
The rapid increase in emissions over the last three decades has been mainly driven by emerging markets, with GHG emissions from rapidly developing countries surging. However, in emerging markets, we have the opportunity to support companies to leapfrog the developed markets on their decarbonization journey and innovation in low-carbon technologies.
PTT Plc, Thailand
Thai state-owned oil and gas company PTT Plc presented us with concerns in regards to their emissions intensity targets, which seemed misaligned with the emissions reductions required to meet the Paris agreement and suggested a long-term reliance on fossil fuel-based energy.
We spoke with the company in May 2021. Representatives walked us through the company’s emissions reduction targets. We questioned the company’s Scope 1 to 3 emissions intensity targets which, at the time, aimed to limit its total scope 1 and 2 emissions to below 40.2 million tons of CO2 equivalent in 2030, which was a 25% increase relative to its actual emissions in 2020. We expressed our concern around the targets and any rapid expansion of oil and gas production that may accompany them. The company explained its early plans to diversify into non-energy businesses.
Outcomes and next steps
Later in the year, the company presented to investors its updated vision, including new targets for carbon reduction and clean energy. This included commitment to a 15% reduction of total Scope 1 and 2 emissions by 2030 from 2020 levels, and net-zero emissions by 2070. The targets are significantly more progressive than prior ones. In addition, the company aims to have a 12 gigawatt (GW) capacity target for renewable energy and to increase its capital spending allocation for renewable energy and new non-hydrocarbon business from 20% to 36% for 2021-2030.
We welcome PTT’s advanced commitment to climate-risk mitigation and will continue to engage to understand their plans to deliver on their targets and to encourage greater alignment of goals with the Paris agreement. We will seek continued information around the risks and financial return for the company in investing in sectors relatively unrelated to its core business.
As bondholders, while we do not have voting rights per se, as capital providers we value a direct line of communication to management and conduct engagements around climate risk where this is material to the companies to which we are providing credit. Engaging high-yield issuers is important given these companies are often earlier in their journey around managing ESG risks.
Cheniere is a liquified natural gas (LNG) company based in Texas. We had raised concerns around the adequacy of the company’s climate change-risk disclosure, specifically around both the risk to physical assets and its plans to manage transition risks.
In 2020, we had raised our concerns that they were not providing adequate disclosure around the potential risks to the company’s physical assets in hurricane-prone locations and potential demand decline for gas. We encouraged Cheniere to produce a TCFD report, including climate scenario analysis.
In June 2021, the company released their Corporate Social Responsibility report, which included an improved TCFD section, and a separate scenario analysis report. In addition to this, in the last 12 months the company has: published a peer reviewed life cycle analysis assessment for better emission accounting; discussed their quantify, monitor, report and verify (QMRV) initiative with five other natural gas producers to evaluate GHG emissions performance at over 100 wells; shared future plans to evaluate cost effectiveness of different methodologies to measure emissions, (e.g. drone based, aerial, planes satellites, etc. and explored cargo emissions tags), which are intended to enhance environmental transparency by quantifying the estimated emissions of LNG cargoes from wellhead to the cargo delivery point.
Welcoming these outcomes, we then had a follow-up engagement with the company to understand their path forward on climate. We encouraged the company to start socializing the efforts they are taking around QMRV to promote common standards. We encouraged the company to consider the IEA’s net zero scenario in its analysis next year, given it is a widely-cited roadmap for the global energy sector to reach net-zero by 2050. We asked how the scenario analysis has impacted how they think about future investment. They explained that future investments are evaluated based on cash flow collections on sales and purchase agreements (SPAs) being sufficient to make returns with carbon pricing being a consideration.
Outcomes and next steps
We are encouraged by the positive progress the company has made in response to our engagement and will continue to monitor their progress in 2022. We will review future reporting for net-zero scenario analysis and outcomes of their QMRV initiatives. We expect them to set emissions targets for Scopes 1 and 2 emissions. We recognize, however, that the nature of their assets means that it will likely take longer to set these goals than at more mature companies.
While most of our engagement is conducted alone, we believe that collaborating with other investors and stakeholders that share common values with us can help reinforce and, where needed, escalate our engagement efforts.
POSCO, South Korea
We are members of the Climate Action 100+ investor initiative, which engages with the largest 100 emitting companies. The group, which represents more than USD 47 trillion in AUM, has been engaging with POSCO and we joined the collaborative engagement effort in 2021, leveraging our longstanding relationship with the company, to raise the investor voice asking POSCO to share more detail on its decarbonization strategy and capital planning.
In 2021, the Institutional Investors Group on Climate Change (IIGCC) issued a report, “Global Sector Strategies: Investor Interventions to Accelerate Net Zero Steel”, outlining specific challenges the sector faces in closing the gap to net-zero and proposes actions that companies and other stakeholders can take. In our role on the collaborative engagement, we met with the company to discuss the report and the company’s decarbonization plans.
Despite the cost challenges, the company acknowledged the opportunity around increased demand for low-emissions steel and explained it has been collaborating with peers to invest in hydrogen technology for steel making. The company has shared this knowledge through the Hydrogen Iron & Steel Making Forum 2021, the world’s first international forum on hydrogen steelmaking. We asked for an update on the company’s HyRex project (R&D which was started more than 10 years ago, using 100% hydrogen as iron-reducing agent).
We explained to the company that we want greater clarity on POSCO’s capital planning towards net-zero by 2050. At the moment, the company relies on green bonds and loans, but to achieve net-zero it will require more capital. They expressed caution around the potential shareholder reaction should there be more disclosure of its capital plan. We highlighted the importance of transparency and that investors are already aware of the financial challenges around decarbonization.
The company asked investors to consider Asia’s challenging landscape for developing renewable energy infrastructure and moving away from coal-fired power. We recognized the government policies in Korea are not favorable for renewable energy, but we pointed out that the cost of development for wind and solar has come down drastically, making them much more competitive. We suggested the company take a longer-term view and highlighted the business risks in the mid-to-long term of inaction/slow reaction to climate change risks. We encouraged POSCO, other energy users and suppliers to work together with the government for an all-win solution.
Outcomes and next steps
We note that the company was receptive to investors’ feedback and intends to consider the feedback in its sustainability plan. We are monitoring progress on how this further develops.
Voting on climate change
We leverage our shareholder rights pro-actively, through direct engagement with companies on climate change risk, but we also express our views through our proxy voting activity. We will consider voting against director elections, executive compensation or other management resolutions where we are not satisfied with the steps taken by the company on climate change risk, the quality of the engagement discussion or its progress.
Voting on climate change shareholder proposals is another important way of expressing our views where we think management could better manage climate risk. This year we have also seen the emergence of so called ‘Say-on-Climate’ votes, whereby companies are putting forward their climate action plans for shareholder approval. Investors need to ensure that targets set by companies are robust and properly implemented, and that action can be taken where this is not the case.
2021 voting case studies
Voting issue: Climate risk and director elections
A decade of stock underperformance and balance sheet deterioration raised questions about the strategy from the management and board oversight at oil and gas company, Exxon Mobil. At the company’s 2021 AGM, activist hedge fund Engine No. 1 put forward four of its own nominees for the Board.
ExxonMobil’s high capital intensity strategy created concerns in its core business: spending was geared towards long-cycle investments which would be exposed to energy transition risks, given the long duration and broad range of oil and gas demand and price outcomes. Also, the company‘s exposure to decarbonization technologies was not of sufficient scale for it to potentially thrive as part of the solution to climate change. Commercial progress has been slow in the new low-carbon businesses it has been working on for two decades.
Outcomes and next steps
After significant due diligence on Engine No. 1’s positions and nominees, in addition to our longstanding engagement with ExxonMobil’s board and management team, we voted for three of activist Engine No. 1’s director nominees at ExxonMobil. We supported three nominees who we believe possessed the energy experience and expertise required in particular to help the company navigate this period of structural change in the energy industry. All three director nominees we voted for were elected on to the board.
Voting issue: Climate risk and shareholder resolutions
Woodside Petroleum, Australia
A climate-related shareholder resolution was filed by Market Forces at this Australian natural gas producer’s AGM in April 2021. The proposal asked the company to disclose how its capital expenditure and operations will be managed consistent with the Paris Agreement.
The company had announced updated short- and medium-term emissions reduction targets in November 2020 and reported against the TCFD framework in its annual report 2020. It also appointed a climate expert reporting directly to the CEO to lead the company’s work on climate transition. We welcome the steps the company has taken to strengthen its climate reporting and targets.
Outcomes and next steps
The shareholder proposal specifically requested the company to disclose plans to manage down its oil and gas production assets. We disagree that this pathway is the only one consistent with the achievement of the Paris Agreement. We therefore decided to vote against the resolution, which we felt was overly prescriptive. We will reach out to the company for a follow-up discussion on its climate work especially related to its scope 3 emissions, as well as its climate advisory vote at the 2022 AGM.
Certain client strategies invest on the basis of sustainability/Environmental Social Government (ESG) criteria involves qualitative and subjective analysis. There is no guarantee that the determinations made by the adviser will be successful and/or align with the beliefs or values of a particular investor. Unless specified by the client agreement or offering documents, specific assets/companies are not excluded from portfolios explicitly on the basis of ESG criteria nor is there and obligation to buy and sell securities based on those factors.