With the renewed global commitment to reduce CO2 emissions in the wake of the Paris Climate Agreement, investors are looking for ways to make a positive impact on climate change. Though some investors choose to divest out of carbon-intensive companies and sectors altogether, this has a limited impact on actual company emissions, as it simply means that one institution will buy what another is selling. At RobecoSAM, we believe that exercising our shareholder rights by entering into a constructive dialogue with high-carbon companies and encouraging them to adapt their business models to a low carbon economy is a more effective approach to reducing our investment portfolios’ carbon footprint. With this in mind, our Governance & Active Ownership (G&AO) team has been engaging with companies in carbon-intensive industries, focusing our efforts on the largest CO2 emitters. Therefore, a good starting point for our engagement on CO2 emissions reduction is the electric utilities sector, including electricity generators, which burn fossil fuels to generate energy and account for one-third of all global carbon emissions.
Our engagement with the utilities sector is already well underway: since June of 2015, we have been engaging with 12 European electric utilities. Driven by environmental factors, power generators’ business models are expected to shift away from centralized power generation based on fossil fuels to a decentralized structure based on renewables. For this reason, utilities should implement a range of environmental targets in order to survive. During the course of our dialogue with electric utilities, we have been focusing on four key engagement objectives.
First, we have been urging companies to implement proactive and ambitious environmental strategies to prepare themselves for future carbon prices that reflect the impact of emissions (around EUR 30–40 /ton of CO2). Therefore, we expect them to decrease their carbon intensity by shutting down aging and less efficient coal-fired power plants, for instance. Second, given that thermal generation from gas and coal will continue to play an important role in power generation for some time, we also expect utilities to achieve operational excellence in thermal generation by setting measurable thermal efficiency targets, for instance. Third, given the rise of decentralized power generation, we are encouraging utilities to introduce business model innovations, such as venturing into energy services, in order to diversify their revenue streams. Finally, we expect utilities to be transparent about their lobbying activities and positions in public policy discussions related to environmental legislation so that investors can gauge their commitment to addressing climate change. In short, over the course of the engagement, we expect to see electric utilities taking substantial steps towards their own decarbonization.
Buildings are responsible for about one third of global greenhouse gas emissions. Therefore, we have also been engaging with the real estate industry targeting their climate change management, disclosure practices, environmental management systems, owner engagements with occupiers, and energy consumption and CO2 reduction targets.
As companies, investors and governments figure out how to meet the COP21 targets, fossil fuel companies in particular, will come under increasing pressure to adapt their business models. With regulatory changes such as carbon prices or taxes to limit CO2 emissions combined with technological advances such as energy storage contributing to the rise of renewable energies, it is likely that demand for fossil fuels will decrease. In fact, according to a study published by Nature magazine1 in January 2015, one third of oil reserves and half of gas reserves would have to go unused to ensure the rise in atmospheric temperatures remains below 2°C.
This poses a range of challenges for oil & gas producers, which will need to find ways to reinvent themselves, possibly by shifting from oil to gas or even towards renewable energy business models, for instance. In order to understand what oil & gas companies are doing to lower or even eliminate their dependency on fossil fuels we plan to launch an engagement with companies in the sector in May 2016.
Investors increasingly want their portfolios to generate a positive environmental impact alongside financial returns – particularly when it comes to climate change issues. By maintaining a constructive dialogue with companies, we can encourage them to curb their CO2 emissions, thus reducing carbon footprint of our clients’ portfolios.
"Exercising our shareholder rights by entering into a constructive dialogue with high-carbon companies and encouraging them to adapt their business models to a low carbon economy is an effective approach to reducing our investment portfolios’ carbon footprint."
1 McGlade & Ekins: “The geographical distribution of fossil fuels unused when limiting global warming to 2 C°”, Nature vol 517, January 2015