Climate partnerships needed between company boards and investors

That’s the message from engagement specialist Sylvia van Waveren and Head of Active Ownership Carola van Lamoen ahead of the annual World Economic Forum, at which the issue of tackling emissions has top billing.

The main topic to be discussed at Davos on 21 January is “How to address the urgent climate and environmental challenges that are harming our ecology and economy.”

Becoming carbon neutral

Making the world carbon neutral by 2050 is seen as essential to meet the goals of the Paris Agreement, which seeks to limit global warming to 2 degrees Celsius or less above pre-industrial levels by the second half of this century.

Much of the focus has been on reducing the carbon emissions by oil and gas companies in the transition from fossil fuels towards renewable, net zero carbon energy.

Three-year engagement

Robeco had a three-year engagement program with eleven listed oil and gas companies that ended in 2019. Engagement was conducted with six international and five national oil and gas companies which combined account for one quarter of global oil and one fifth of gas supply.

“Looking back on three years of engagement, our work with the oil and gas companies have in general led to successful outcomes,” says Van Waveren, who covers the global energy industry in Robeco’s Active Ownership team. 

“Of the 11 companies within the peer group, we have been able to close seven successfully, based on their progress on the underlying objectives set at the beginning of the engagement. That’s a success rate of 64%.”

Stunning success with Shell

The engagement formed part of collaborative work with the Climate Action 100+ initiative, a grouping of more than 370 investors with more than USD 41 trillion in assets collectively under management. Launched in December 2017, the initiative has identified more than the 100 companies that emit the most carbon, including the biggest names in the oil and gas sector.

It achieved a stunning success in December 2018 when Shell agreed to set short-term targets for the carbon emissions, including those of the used products, and said it will link executive pay to meeting these objectives for the first time. The Shell engagement was co-led by Robeco and the Church of England Pensions Board.

“The Shell example shows how important it is to form partnerships, both with the companies that need to lower their carbon footprints, and with other investors,” says Carola van Lamoen, Head of the Robeco Active Ownership team.

“Initiatives like the Climate Action 100+ have laid the foundations for the unprecedented partnerships that are needed going forward in high-emitting sectors such as aviation, automobiles, shipping, energy and steel.”

Public/private partnerships

The Davos summit is itself a public/private partnership at which the world's largest corporations meet in the Swiss ski resort every January to discuss global issues. This year the main topics under discussion by business leaders are sustainability, the ‘fourth industrial revolution’ and the demographic and social trends reshaping entrepreneurship.

Van Waveren says investors can build on the collaborative successes of 2019, at which three major moves forward were seen. “The first and most important was the firm establishment of the umbrella-style partnership model to drive ambitious change, as seen with what Climate Action 100+ achieved working collectively,” she says.

“The second was the concept of aligning companies’ business models with the Paris Agreement, helped by organizations such as the Transition Pathway Initiative, which looks at carbon emissions. Thirdly, attention has been – very logically – shifting away from energy supply and towards energy demand, since many decarbonization solutions lie with the use of the energy products by consumers. One example is the high carbon industries such as transport.”

More ambition needed

In 2020, investors and companies can build on this success, Van Waveren says. “While 2019 marked a watershed in terms of emerging practice and in terms of changing investors’ attitudes and views, we do not yet have the level of ambition needed if we are to succeed,” she says.

“This is why 2020 has to be the time a new partnership is formed between the company board room and institutional investors. This should be a partnership that is based upon systemic change and practical outcome that can work across the full value chain and across all asset classes, to develop net-zero carbon paths for aviation, autos, shipping, steel and cement, to name but a few.”

Van Waveren says that at a governmental level, Nationally Determined Contributions – the emissions that countries are committed to mitigate under the Paris Agreement – will rise up the agenda. Many governments including Robeco’s home nation of the Netherlands are already setting targets. Some companies are also formulating their own Determined Contributions to similarly try to become Net Zero Carbon– the new buzz phrase in sustainable investing – by 2050.