Firms face increased investor scrutiny at AGMs over failings on interim targets, Scope 3 and capex disclosures.
More urgent action is required from the world’s largest corporate emitters of greenhouse gases (GHG) to align with a 1.5 degrees Celsius future, said investment engagement initiative Climate Action 100+, whose 700 investor members have US$68 trillion AUM.
Releasing its second round of Net Zero Company Benchmark assessments, which measures the progress of 166 carbon-intensive companies in aligning with the Paris Agreement, Climate Action 100+ said the vast majority of companies had not set Paris-aligned medium-term emissions reduction targets. A majority had also failed to fully align their future capital expenditures with the goals of the Paris Agreement. This is despite an increase in net zero commitments by companies since March 2021.
“Given that these companies represent the world’s largest corporate GHG emitters, their ambition and pace of change is critical to a successful transition and needs to accelerate,” said Stephanie Maier, Global Head of Sustainable and Impact Investment at GAM Investments and chair of the global Climate Action 100+ Steering Committee. “The latest IPCC report starkly outlined the social and economic imperative for this. As a consequence, we should expect a ratcheting of investor-led shareholder resolutions as well as increased scrutiny on transition plans brought to the vote, starting with the imminent AGM season.”
Investors are expected to escalate pressure on companies and boards during the upcoming proxy season in the US and Europe, following last year’s record high majority votes on climate proposals. Climate Action 100+ said the next several months will be a critical time for investors to support key climate shareholder resolutions, as flagged by the initiative, that are aligned with the goals of the initiative and the Paris Agreement.
Upcoming resolutions include a proposal by US investor network Ceres that Imperial Oil (one of the companies assessed by the Benchmark) “adopt a policy to cease capital expenditures in exploration and developments of new oil and gas fields in order to align its business strategy to a net zero emissions by 2050 pathway as described in the International Energy Agency’s Net Zero by 2050 scenario”. A number of US banks and insurers also face resolutions calling for the IEA.
Mindy Lubber, Ceres CEO and President and a member of the global Steering Committee, said companies must ratchet up their climate ambition and action. “As we head into this year’s US proxy season, investors will continue to use the results of the Climate Action 100+ Net Zero Company Benchmark to strengthen their own engagement and voting strategies. There is too much at stake. All eyes will be on companies and their investors as they work to respond to the results at the necessary speed and scale required.”
Climate Action 100+ has updated its benchmark methodology since 2021, now assessing companies against the IEA scenario. New indicators and assessments focused on the just transition and climate accounting and audit also have been added to drive greater company ambition and reflect evolving investor priorities.
The assessments indicate overall year-on-year improvements by assessed firms on cutting GHGs, improving climate governance, and strengthening climate-related financial disclosures. The results show that 69% of companies assessed have committed to net zero emissions by 2050 or sooner across all or some of their emissions footprint, a 17% year-on-year increase. Nearly all companies (90%) have some level of board oversight of climate change and 89% have aligned with recommendations of the Taskforce on Climate related Financial Disclosure (TCFD) either by supporting the principles or by employing climate-scenario planning.
Despite this progress, only 17% of companies had set medium-term targets aligned with the IEA’s 1.5°C scenario. There was also an absence of commitments covering Scope 3 emissions, with less than half (42%) of companies with a comprehensive net zero by 2050 or sooner commitments covering all material GHG emissions, including material Scope 3 emissions.
Alignment of capital expenditure strategies with net zero transition goals remained almost “non-existent”, said Climate Action 100+, with only 5% of focus companies explicitly committing to align capex plans with their long-term GHG reduction targets.
Another concern raised by the assessments was that companies are setting emissions reduction targets but don’t have the strategies to deliver them. Only 17% of focus companies have robust quantified decarbonisation strategies in place to reduce their GHG emissions. A new benchmark, measuring integration of climate risk into accounting and audit practices, revealed that no company has demonstrated that its financial statements are drawn up using assumptions consistent with net zero by 2050.