In July 2021, the World Benchmarking Alliance (WBA) launched a benchmark on the 100 most influential Oil and Gas companies. The findings were bleak and showed that these companies are very far off being aligned with a 1.5 degrees trajectory. The sector is currently set to burn through its carbon budget for meeting Paris Agreement’s 1.5 degrees goal by 2037, and only 13 of the 100 companies have low carbon transition plans that extend at least 20 years into the future. Click here for the ranking and individual company scorecards
As someone who has worked with investors for the last decade and someone who is fully sold on the mission of the WBA (to “Build a movement to measure and incentivise business impact towards a sustainable future, that works for everyone”) these findings left me contemplating…what should investors do now?
If listed equity investors look at these findings and decide to divest from these stocks it will not lead to the positive real-world sustainability outcomes. There are still many investors around the world who will buy the stock. Even if this wasn’t the case, divestment could potentially impact share price and the risk of this may incentivise companies’ senior management to change their approach, but again in itself it wouldn’t necessarily lead to an improved environmental or social situation.
There are some useful developments to help support investors in navigating all of this, for example, the Net Zero Investment Framework published in March 2021. However, it appears that there are still many investors just focussing on how climate change presents financial risks to their investments, rather than going beyond this by setting decarbonisation targets for themselves. Those that have done the latter are still at risk of focussing more on portfolio decarbonisation (e.g. selling high carbon assets to meet short term absolute carbon emissions targets) rather than finding solutions for real world decarbonisation.
Ninety One’s CEO Hendrik du Toit, a WBA Ambassador and Ally, highlighted this risk in a recent article, emphasising that “’Portfolio purity’ will not bring about the change needed to tackle the climate crisis”. In addition, not only does portfolio decarbonisation not necessarily contribute to the climate transition, it can also create unintended social consequences (such as those outlined by Hendrik). So, this adds to the investment puzzle. It clearly reminds us that the “S” cannot be seen as an “add on” or a “nice to have” that we’ll all get round to in a few years’ time. A “just transition” needs to fully embed in current climate transition plans. Not only to avoid negative social impacts, but also because workforces and communities are essential enablers (or potential delayers) to countries and companies actually achieving climate transition targets. Read more on Just Transition here.
Noting the limitations around divestment, what appears to be crucial right now is that the investors who want to support real world sustainability outcomes need to use their influence. We’ve witnessed an increase in “active ownership” over the last few years but we don’t need business as usual or broad-brush engagement approaches. In other words, it’s not just about asking holdings “what are you doing on the climate transition?” or just playing a passive role in a collaborative engagement.
Investors committed to this agenda now need to ensure they are making clear and demanding engagement asks of companies and embedding this into their voting practices. They need to look for and support companies that not only have long term targets, but also have clear interim targets that align with the most recent, science-based scenarios. Investors can then assess if these companies are showing signs of actually transitioning. For instance, is there evidence of consistent reduction of emissions and increasing CAPEX at the necessary levels? All of this is relevant across high-emitting sectors. Read more on the evidence from the Oil and Gas Benchmark here.
Investors holding oil and gas companies can now push further by specifically asking for holdings to align with the IEA‘s recommendation to stop exploring oil and gas this year. This is a pretty clear and very significant engagement ask but one that the science indicates is needed for a 1.5 degrees transition. A key step to accelerate these actions is for investors to encourage their voting and ESG data service providers to offer the tools to support the 1.5 degrees transition. It’s therefore valuable to see the commitments taken by those who have recently joined the Net Zero Financial Service Providers Alliance. This group appear to have recognised they are key actors and not passive players in this transition.
Some the actions above (i.e. the voting) are tools within listed equities, but it’s important to remember that these often make up only one asset class or activity within a financial institution or at least within a financial institutions’ sphere of influence. Investors concerned by these findings can also be exploring ways that they can significantly limit (ultimately stop) their links to providing loans and credit to further fossil fuel exploration and extraction. Whether this is through their own direct activities or through influencing the banks that they invest in.
There is useful guidance for investors on how to assess and influence banks to be more Paris-aligned (e.g. see page 6 of this IIGCC publication) and indications of engagement stepping up (e.g. see the Asia Research and Engagement (ARE)’s new investor engagement, which has an initial focus on carbon risk and coal specifically at financial institutions). There appears to be a shift occurring on this with 25% of global banking assets now signed up to the Net Zero Banking Alliance. However, this initiative and others linked to the Glasgow Financial Alliance for Net Zero are still facing criticism for not yet fully integrating the latest IEA recommendations. So, we now need to start seeing the results of such coalitions, with commitments being reflected in actual coal, oil and gas lending and underwriting practices, as well as clear reporting on progress.
Beyond getting on with voting, engagement and capital allocation, honest and open insights from investors on all this would be useful. This may help asset owners, end-savers, intermediaries, policy makers, media outlets and civil society organisations understand better and hopefully support those investors who are trying to set up an approach that really aims to tackle real–world sustainability challenges.
The reality is that most investors are constrained by current mandates and products that are not set up to focus on decarbonisation or even longer-term risks/ opportunities. It will be useful and refreshing to hear investors being more vocal about the real constraints they face, as this will help to unpack the current barriers. This insight needs to come from individuals “on the ground”, so from investment analysts, fund managers, policy teams and C-suite at institutional investment firms and not packaged up through careful communication campaigns. Of course, we can’t then just listen and accept these constraints and stop there. However, this sharing of constraints should enable better understanding of the day-to-day realities of investment professionals and investment firms in order to accelerate diagnosis and identify outcomes-driven next steps, both voluntary and regulatory.
All of this needs the headspace and calendar–space to step back from the day to day, to reflect on lessons learnt and to be thinking innovatively and collaboratively. This is a big ask in the current manic world of investments and sustainable finance. So … this isn’t just about adding to investment professionals’ long “to do” list. It’s also a call to action for wider actors. Its key that we listen and try to understand the current constraints that investors are facing. And rather than talk past each other, let’s learn each other’s languages, share expertise, and help coordinate to have a stronger voice. Let’s find ways that we can influence policy makers and regulators together. Let’s partner to influence all the key actors within the investment value chain to unlock the urgent steps needed in this decade of action.
Take a look at the WBA’s Decarbonisation and Energy benchmark findings here and find out more about the WBA’s Just Transition assessments and planned Collective Impact Coalition at our online and in person events at COP 26: Join us: Road to COP26 – World Benchmarking Alliance.
Contact Nikki Gwilliam-Beeharee, our Investor Engagement Lead by emailing her at email@example.com