Institutional investors will play a pivotal role in tracking carbon reduction progress. At present, there is no formal enforcement mechanism to ensure that companies deliver on carbon reduction. Target setting and reporting of carbon data is largely voluntary. There is no sanction for a lack of success.
Given the short-termism inherent in financial markets, investors should proceed carefully when assessing companies’ long-term climate goals. CEO turnover reached a record high in 2018, with less than 1-in-5 CEOs remaining in their position for 10 or more years[1]. Put differently, four out of five CEOs are not likely to be at their company long-enough to see through their carbon targets to 2030, let alone 2050. This issue is compounded by the lack of verification and accuracy in reported carbon data. Investors need to assess carbon reduction targets with at least the same care and rigour that they do financial targets.
Therefore, investors should play an active role in ensuring that companies set and deliver carbon reduction targets. Investors are well-equipped to perform this task. For example, carbon reduction requires capex and questions about capex are typical of meetings with corporate management. Investors increasingly have expertise in integrating environmental data within their investment process. Additional guidance for companies on progress reporting is expected to be released in 2021 by the SBTi (Science-based Targets Initiative) and CDP (Carbon Disclosure Project). The SBTi is currently working on a process to track companies’ progress on their targets. These are positive developments that can help investors overcome some of the challenges of carbon reporting. However, as with financial targets, investors will still need to frequently monitor progress. Carbon footprinting is not sufficient as headline emissions numbers will only give a partial view on what is going on and does not capture the corporate planning for reaching the next milestone. The latter requires ongoing assessment of material developments as well as a clear understanding of the business model.
Many asset management firms maintain close interaction and engagement with company management. Engagement can also take the form of collaborations like Climate Action 100+. Engagement action could comprise the proposal or support of shareholder resolutions, for example, requesting major oil companies to take the first step and set more stringent targets considering all emission scopes in order to reach Net Zero by 2050. Investors that engage with company management act as enforcement agents in the delivery of carbon reduction.
1 PriceWaterhouseCoopers (2019). CEO Turnover at record high, click here.
Disclaimer
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française.
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