In line with the Paris Agreement’s target of net-zero emissions by 2050, investors have raised their expectations on corporate net zero commitments. According to the International Energy Agency (IEA), the path to net zero emissions is possible, but narrow — and it requires a concerted effort from regulators, investors, and companies.
In this Q&A, we spoke with investment, strategy, and energy experts to discuss how investors and companies can focus on climate accountability while supporting long-term value creation.
Q: How do you balance your fundamental fiduciary duty to protect the economic interest of clients with helping portfolio companies prepare for the next year of transition?
BlackRock Managing Director Michelle Edkins explains that BlackRock recently released a five-pronged approach to build a net zero-aligned portfolio, which includes reducing portfolio exposure to highest carbon emitters, prioritizing capital allocation, and changing how they engage with companies.
On a more specific level, she says there are three main ways that BlackRock integrates climate risk and sustainability risk into what they do for clients. “On the active investment side, we look at data produced by companies and data aggregators and integrate that into our analysis of companies. As a long-term investor on behalf of our clients, we strive to understand their risk and opportunity set, and we take that into consideration in buy and sell decisions.”
“Second, in index strategies, we offer clients the choice to invest in index products that are linked to indices that take sustainability and climate risk into consideration,” she explains. Finally, the company prioritizes investment stewardship. “Through our dialogue with companies and our voting at shareholder meetings, we set our expectations of companies in terms of aligning their business model and setting out a business plan that ensures that they have a viable business as the global economy transitions to being low carbon.”
Q: Climate risk is a business risk. What considerations come into play when you think about climate-related shareholder proposals?
Edkins explains that at BlackRock, “The most important analysis we do is in relation to the company’s disclosures and whether the company’s underlying actions seem to be consistent with the risk and opportunity to the company in this energy transition. Where we think a company falls short, that’s when we might vote in support of a shareholder proposal if it is on point with the issue that we’re concerned about, or we may a vote against a director to signal that concern.”
Q: A company’s emissions can be classified into three scopes: Direct emissions (scope 1), indirect emissions from the generation of purchased energy (scope 2), and all other indirect emissions, which generally includes consumer behavior (scope 3). How should companies think about these scopes?
“My view is every EMP should be net zero on scope one and scope two immediately,” says Ben Dell, Managing Partner at Kimmeridge Energy. “That’s something that we as a firm do, and that’s a combination of reducing your footprint and buying or investing in offsets.
“Over the next 10 years, I believe every industry is going to be required to be net zero on scope one and scope two in the industrial base,” he continues. “And I actually don’t think that’s a particularly challenging ask.”
However, scope three presents a challenge. “Scope three to me is very difficult,” he says, explaining that an EMP has no mechanism to stop people from consuming their product aside from not being in business. “I’m not sure I can stop someone driving a car,” he shares as an example. “So, I’m fundamentally against scope three as a metric. I think if everyone reduced this scope one and two to zero, then we get to zero.”
Q: What are some of the practical solutions you’ve created for your clients to help them transition to a low carbon economy?
One solution Goldman Sachs introduced, explains Global Head of Climate Strategy, Kara Mangone, is sustainable solutions councils. “It could not have been a better opportunity for individuals who were spending time with metals and mining clients … who were banging their heads because they didn’t have the right climate data to footprint their portfolio, to actually have those use cases and have those individuals who are on the ground put their heads together and figure out the right solutions and then determine how we can connect the dots.”
Q: How important is collaboration between sectors and investors? What initiatives are underway to aid that collaboration? How do you marshal resources and work together?
“One of the organizations that is doing great work in this area is called Open Source Climate,” explains Mangone. “This organization aims to acknowledge that there a fragmentation of data points out there. We don’t all need to agree on the complete distinct universe of data that is needed, but there is some value in having information portals out there where we actually can have the data points that are needed to measure progress.”
Q: What can companies expect in a regulatory sense?
According to Sebastian Niles, Partner at Wachtell, Lipton, Rosen & Katz, “We are going to be seeing SEC-mandated rulemaking around climate-related disclosure. You just have to be ready for that type of world where more transparency will be required of you,” he says. “There’s one simple question that every company now has to be able to have an affirmative answer to: ‘Is your leadership managing climate related risks and opportunities?'”
The path to net zero emissions is narrow and difficult, but necessary. To succeed on the public markets, companies must prioritize climate accountability. For more in-depth insight, listen to the replay of the panel discussion, “Net Zero Transition: Investor Expectations and Realities for Companies.”
