Climate Action 100+ assessments show that companies have upped their net zero commitments, but more action is needed as investors focus on corporate accountability for ESG goals.
Assessment data from Climate Action 100+, an investor engagement initiative on climate change, has found that while companies have made some progress in key climate-related areas, they need to do more to support global efforts on the 1.5C limit.
The second round of net zero company benchmark assessments by the initiative – which has 700 signatories responsible for $68tn in assets under management – examined 166 companies on its focus list. They measured companies’ progress against the Climate Action 100+ engagement goals of improving climate change governance, cutting greenhouse gas emissions and strengthening climate-related financial disclosures, as well as key indicators related to business alignment with the goals of the Paris Agreement.
The assessments reveal there have been year-on-year improvements on these targets. Specifically, 69 per cent of companies have now committed to achieve net zero emissions by 2050 or sooner across all or some of their emissions footprint – a 17 per cent year-on-year increase.
Additionally, 90 per cent of companies have some level of board oversight of climate change, and 89 per cent have aligned with the Task Force on Climate-Related Financial Disclosures recommendations – either by supporting the TCFD principles or by employing climate-scenario planning.
While this is positive and demonstrates companies’ willingness, could they be doing more?
Improvement needed
Despite the increase in net zero commitments, the data reveals that only 17 per cent of companies have set medium-term targets that are aligned with the International Energy Agency’s 1.5C scenario and cover all material emissions.
Moreover, just 42 per cent of companies have comprehensive net zero by 2050 or sooner commitments that cover all material greenhouse gas emissions, including material scope 3 emissions.
Only 5 per cent of companies explicitly commit to align their capital expenditure plans with their long-term greenhouse gas reduction targets, while just 17 per cent have established robust and quantified decarbonisation strategies to reduce their greenhouse gas emissions.
Stephanie Maier, global head of sustainable and impact investment at GAM Investments and current chair of the global Climate Action 100+ steering committee, says: “Overall, the net zero company benchmark clearly shows that focus companies are not making the progress required to align with achieving the 1.5C climate goal agreed in Paris and reaffirmed in Glasgow last year.
“Given that these companies represent the world’s largest corporate greenhouse gas emitters, their ambition and pace of change is critical to a successful transition, and needs to accelerate.”
Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change and current vice chair of the global Climate Action 100+ steering committee, says though the majority of companies have set long-term targets, many remain far from where they need to be. “Investors are calling on focus companies to credibly set out details of their net zero transition plans and will step up their engagements to ensure companies move from target setting to delivery,” she adds.
Using shareholder votes
As the proxy season in the US and Europe approaches, investors are likely to escalate pressure on companies and boards on climate-related issues. Patrick Sarch, partner and co-head of UK M&A at law firm Hogan Lovells, says “expectations on ESG commitments are high” for this proxy season, with shareholders anticipated to focus on climate change, human capital, diversity and the value chain.
Sarch says the firm is increasingly seeing companies “running ahead” of legislation in their decision-making on ESG. “The goalposts are not only set by law and regulation, but also by the social and moral values of companies’ stakeholders, and the fast-changing geopolitical landscape,” he says.
He adds that companies are also increasingly obliged to perform due diligence up and down their supply chains and this, together with recent pandemic and other supply chain disruption, is driving vertical consolidation to ensure more resilience within the chain and in ESG assurance.
“The challenge for boards this [annual general meeting] season is to continue on a path of progress, while balancing the reputational risks, benefits and potential liability of focusing on specific ESG-related [key performance indicators] and commitments that they might fail to reach,” he says.
Accountability in focus
Asset manager Nuveen predicts that shareholders will shift their focus away from transparency and toward accountability, through investor engagements, shareholder proposals and proxy votes.
“In the maturing ESG landscape, investors increasingly recognise that reporting does not automatically generate impact, which in turn, is resulting in a greater focus on accountability as the bridge,” says Amy O’Brien, global head of responsible investing at Nuveen. “We expect this proxy season to place greater emphasis on corporate strategies and ultimate environmental and social objectives.”
Nuveen global head of stewardship Peter Reali says stewardship has become an essential tool in the responsible investing toolkit. “This proxy season will demonstrate a continued evolution in the depth and scope of those efforts as investors grapple with evaluating companies’ near-term practices against environmental and social impacts that may take years to materialise,” he says.