Asset Owners Dismayed by Decarbonisation Efforts

Net-zero pledges not supported by tangible action, says NBIM, as investors increase engagement to jump-start emissions cuts.

Corporate efforts towards decarbonisation of their business models have stagnated during the pandemic, according to panellists at a Transition Pathway Initiative (TPI) webinar yesterday.

Although many companies have set net-zero greenhouse gas (GHG) emissions targets, ambitions are “not always underpinned by a clear roadmap”, resulting in underwhelming progress over the last 12 months, said Adriana Carvallo, Senior Analyst at Norges Bank Investment Management (NBIM). NBIM, the world’s largest sovereign wealth fund, has US$1.1 trillion in assets under management (AUM).

“The pace of decarbonisation is simply not fast enough if corporates are to achieve their 2050 targets. We need to see stronger alignment to net-zero priorities,” she said.

For example, companies relying on carbon offsets to aid their decarbonisation efforts aren’t providing enough information as to the extent these will be used to achieve net-zero compared to absolute reductions, Carvallo said. “This is something NBIM is specifically asking its investee companies to provide more information on.”

TPI’s 2021 ‘State of Transition Report’ assessed 401 global companies (representing 16% of global market value) across 16 carbon-intensive sectors on their decarbonisation strategies, management quality and performance between mid-2020 and 2021. Some of the companies assessed are also subject to requirements posed by the Climate Action 100+ Net Zero Benchmark, the report noted.

Last year, 14 of these companies had “genuine net-zero targets covering their most material emissions”, the report said. In 2021, this doubled to 35. However, none of the assessed sectors have been decarbonising at the rate required to achieve the 2050 targets companies have set themselves, the report said.

The report further noted that 15% of companies align with a below 2°C Paris-aligned benchmark by 2050. Only 2% align with a 2°C target, whereas 47% of corporates assessed have yet to commit to a specific Paris-aligned target.

“These numbers are disappointing because it shows corporates still aren’t doing enough to make targets or follow through on them,” according to Trish Halper, Deputy CIO at Wespath Investment Management (US$28 billion AUM), the investment arm of the United Methodist Church in the US, also speaking at the webinar.

Management of net-zero transition

If corporates don’t want to “fall out of favour” with investors, then they need to accelerate their decarbonisation efforts by bolstering their internal management and operational capabilities, said Bess Joffe, Head of Responsible Investment for the Church Commissioners for England (US$8 billion AUM).

TPI, a global initiative assessing companies’ preparedness for the transition to net-zero that’s now backed by 100 investors with US$25 trillion AUM, updated its Management Quality framework rankings within the report, noting that companies have faltered in their progress developing their management and operational capabilities.

Companies are scored according to the framework’s 19 indicators on an annual basis, spanning levels 0-4. Indicators focus on whether, and to what extent, a corporate has implemented carbon management practices, such as disclosing its carbon emissions, setting net-zero targets or formalising its commitment to climate action.

The report noted that the majority (69%) of companies remained at Level 2 (‘building capacity’) or Level 3 (‘integrating into operational decision-making’). The average score of all companies’ management quality was 2.6.

Companies with a higher Management Quality level disclose better data on emissions targets and reductions, the report added, noting that companies that achieved a Management Quality Level 4 in 2017 reduced their emissions by an average of 5.3% between 2017 and 2019 – nearly four times more than Level 0-3 companies.

Halper acknowledged that corporates have struggled in the past year to enforce climate-related managerial and operational changes due to the impact of the Coronavirus pandemic, which has shifted priorities away from climate and towards workplace management and employee benefits. This is probably why the majority of company scores didn’t change in the past year, she said.

“[TPI’s report findings] could have been a lot worse,” Halper said. “But my initial reaction was still to be disheartened by the lack of progress here.”

Asset owners increasing engagement

Active engagement with both asset managers and investee companies is a key focus for asset owners this year, panellists said.

NBIM has been engaging with corporates on their net-zero ambitions and the information provided within their disclosures, but “a lot more needs to be done in terms of tracking performance” and making sure corporates are continuously improving on their decarbonisation targets, Carvallo noted.

“Asset owners play an important role in ensuring there’s continued progress towards a greener economy,” she said.

However, progress towards net-zero is a journey and asset owners aren’t expecting perfect performance straight away, Halper added.

“It’s our job to do our due diligence and engage with asset managers and corporates on these issues and to offer support,” she said.

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