Buffeted by critics on both sides, finance sector alliances may need to refresh their tactics to progress toward net zero goals in 2023.
This time last year BP was in receipt of numerous plaudits for accelerating its net zero transition plans.
Among those singing the oil and gas giant’s praises was Climate Action 100+ (CA100+), which acknowledged the work of its members in engaging with BP to secure promises to its operational emissions by 50% by 2030, compared with an aim of 30-35% previously.
It will be something of a disappointment for CA100+ then that despite announcing it had doubled last year’s profits by delivering £23 billion in the past financial year, BP has ditched its earlier “ambitious” hydrocarbon reduction plans in favour of a more conservative 25% target.
CA100+ is the largest investor-based initiative focused on engaging systemically important emitters to reduce greenhouse gas (GHG) emissions.
It has more than 700 investor signatories responsible for more than US$68 trillion in assets under management (AUM), all of which have agreed to engage with 166 “systemically important” focus companies, that represent approximately 80% of global corporate industrial GHG emissions.
The alliance has three goals: improve board-level oversight of material climate-related issues; make absolute emission reductions in the real economy; and increase corporate climate-related disclosures.
CA100+ has created the Net Zero Company Benchmark which scores companies on their progress across the three target areas.
CA100+’s most recent report demonstrates notable progress against the first goal. More than nine out of ten (92%) focus companies have some level of executive oversight of material climate-related issues, and 75% of companies have committed to net zero by 2050.
Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change which co-founded CA100+, says “When CA100+ launched [in 2017], five focus companies had set net zero emission targets by 2050, now we are at three-quarters. We’ve made a lot of progress in terms of changing conversations with companies; talking about net zero is normalised.”
CA100+ also reports “substantial improvement” in corporate climate-related disclosures, with 91% of focus companies aligning with the Taskforce for Climate-related Financial Disclosure (TCFD) recommendations, either by supporting the principles or by employing climate scenario planning.
Yet efforts to make absolute emission reductions, by CA100+’s own admission, “need to improve rapidly”.
The alliance says: “Companies need to work now to develop and implement credible transition plans aligned with the Paris Agreement.”
As part of its role in supporting investors better engage with focus companies, last October CA100+ launched a public consultation on enhancing the Net Zero Company Benchmark.
The consultation closed in November, and Pfeifer says decisions are “still being made” about how the benchmark will evolve.
However, she notes: “What’s clear is that we need to think about how we change a sector, and that takes policy and it takes technology.”
Growing frustration
Consultations aside, there is a sense of growing frustration among some large institutional investors – including CA100+ signatories – that large multinationals continue to make slow progress on climate change.
This February the UK’s Local Authority Pension Fund Forum (LAPFF), Sarasin & Partners, CCLA and Ethos Foundation wrote to the chairs of all FTSE listed companies requesting they allow for a shareholder vote on their GHG emission reduction strategy.
Cllr Doug McMurdo, Chair of LAPFF, which is a CA100+ member, says: “The lack of disclosure and the timidity of climate plans at many companies are very serious concerns for investors. Such concerns should be addressed by all companies publishing credible climate action plans and allowing investors to have a say on whether the strategies are fit for purpose.”
Yet not all alliance members appear to be pulling in the same direction.
New research from Majority Action found high levels of divergence between CA100+ members during the 2022 US AGM season regarding board director elections. Analysing the proxy voting performance and disclosures of more than 100 “key CA100+ investor signatories” at US focus companies, the research found that the majority supported 90% or more of directors in AGM votes, with the largest investors by AUM increasing their levels of support versus 2021.
Eli Kasargod-Staub, Co-founder and Executive Director at Majority Action, says: “We believe that [some asset managers] are serving their own institutional short-term self-interest over the interests of their clients. Some of that institutional self-interest is a desire to be able to continue maintaining profitable lines of business by financing fossil fuel expansion. Some of it is driven by an institutional proclivity against holding publicly traded companies to account because many of them do not like to be seen as going against their own.”
He says further research will reveal a propensity by the 20 largest asset managers to “set a low bar” on climate change policy among investee companies, thereby absolving them of the need to vote on more ambitious climate resolutions.
“[Some asset managers] are systematically setting policy targets to that most companies can already meet, which is just another example of institutional self-interest,” Kasargod-Staub says.
“The most important thing to understand is that none of this approach is in the clients’ interests. Investors are not concerned about their asset manager’s reputation or quarterly profitability. They are simply concerned about their own portfolio, which is irrefutably at risk from climate change.”
Among its recommendations, Majority Action calls on CA100+ to develop “timebound accountability pathways” to hold accountable the boards of focus groups to climate milestones consistent with its Net Zero Company Benchmark. It also proposes “the adoption of proxy voting policies that empower investor signatories to vote against directors” at companies failing to align GHG reduction targets and business strategies with the Paris Agreement.
Anti-ESG movement
Kasargod-Staub also says asset managers have been influenced by the ‘anti-ESG movement’, which is largely driven by Republican politicians in the US who have introduced laws prohibiting public pension funds from investing in strategies that explicitly exclude firearms or fossil fuel companies.
Anti-ESG activities include claims of anti-trust behaviour, with members of the US Congress alleging that involvement in CA100+ by US-based organisations was in breach of US competition law.
Pfeifer describes the anti-ESG movement as “completely misguided” and argues that preventing investors from managing climate change risk in their portfolios “undermines their fiduciary duty to clients or beneficiaries”.
However she notes opposition to the anti-ESG movement in the US, notably from the Securities and Exchange Commission which has established a Climate and ESG Task Force to identify ESG-related misconduct, and formulate rules on company climate disclosures.
Kasargod-Staub argues that the anti-ESG movement has proved counter-productive for its protagonists, claiming it has proven to be “a deep validation of how important the shift towards net zero is, and how much it is impacting fossil fuel companies’ decision-making”.
He adds: “The action of investors starting to vote against directors is really getting their attention.”
However, the anti-ESG movement is widely seen as a motivator for the withdrawal of Vanguard – the world’s second largest asset manager – from the Net Zero Asset Managers (NZAM) initiative, which raises questions about its influence on the wider investment agenda.
Glasgow Financial Alliance for Net Zero (GFANZ), the umbrella alliance under which NZAM falls, has come under fire for bowing to anti-ESG pressure.
Investor activist group Reclaim Finance points out that GFANZ members are no longer required to join the UN’s Race to Zero campaign, which is designed to ensure alignment with the Paris Agreement, after it tightened its rules and included an obligation that investors phase out their support for new “unabated fossil fuel assets”.
In a report Reclaim Finance notes that a tightening of the Race to Zero criteria “led to a pushback from some GFANZ members, and especially the big US banks”.
Reclaim Finance also criticises GFANZ members for continuing to invest in fossil fuel companies.
“They have continued pouring hundreds of billions of dollars into the companies most involved in developing new coal mining, power and transport projects, as well as those most involved in exploring and extracting oil and fossil gas and building pipelines and liquid natural gas terminals,” the report claims.
Further, Reclaim Finance has expressed disappointment at the UN-convened Net Zero Asset Owner Alliance (NZAOA) – another GFANZ sub-alliance – for reducing the acceptable range of ambition for emission reduction targets in 2030. Last year’s target-setting protocol required NZAOA members to reduce their sub-portfolio emissions by at least 49% but this has fallen to 40%.
When approached by ESG Investor, the alliance said it would continue to align its emissions reduction ranges, for both sub-portfolio and sector targets, to the Intergovernmental Panel on Climate Change (IPCC)’s net-zero pathways with no or limited overshoot.
An NZAOA spokesperson noted that the IPCC’s emissions reduction estimations reflect policy and climate action in the real economy, with the transition of the latter largely determining asset owners’ room for manoeuvre.
“The alliance acknowledges that there is a widening gap between members’ target setting and the real economy and works to address this gap through its policy engagement,” the spokesperson added.
“Encouraging signs”
According to the GFANZ 2022 progress report, the umbrella alliance has made strong progress in mobilising private finance in support of the transition to net zero.
In the past two years, GFANZ amassed 550 financial institutions, including 100 in the last year, and has launched regional networks in Africa and Asia Pacific to “ensure its work brings together the global financial sector and the local perspectives and expertise”.
The alliance says: “The ambition and commitment of the financial sector is also translating into detailed targets – today over 310 targets had been set across the sector-alliances that make up GFANZ. Before GFANZ, not one bank had set or published an interim net-zero target. Today more than half the banks in Net Zero Banking Alliance have set science-based targets for 2030.”
Tony Rooke, Technical Lead on transition planning at GFANZ, says the initiative is driving greater investment in clean energy, but acknowledges there is much more work to be done.
According to a recent BloombergNEF analysis, the 2011-2015 low-carbon to fossil energy supply investment ratio was US$0.5 low-carbon versus US$1 for fossil fuels. For 2016-2020, the ratio improved to was 0.7:1 and by 2022 it was more or less at parity.
This needs to reach 4:1 by the end of the decade, meaning for each dollar invested in fossil fuel energy supply, four would be invested in low-carbon energy supply.
Rooke says these are “encouraging signs” and asserts that GFANZ’s focus is on engaging with carbon-intensive firms rather than divestment.
“We are focusing on helping companies to manage their phase out through achievable and transparent transition plans. If investors simply pull out from particular sectors, they will falter which will have a very real impact on people’s lives,” he says.
State Street declined to comment for this article. BlackRock did not respond to requests for interview.
