Investment priorities and Emission reduction – words or action?

The attached piece from the Financial Times is fascinating. Under the headline “Climate Change: asset managers join forces with eco warriors”, the piece argues that 2020 has been a turning point in investors attitude to climate change and more particularly emission reduction.

However, the detail in a survey by ShareAction provides questionable data to support this.

Respondents had to pick five key priorities. While Disclosure in line with the Task Force on Climate-related Financial Disclosures, Better Disclosure of Climate related risks, Emission Reduction and Setting Climate Related targets all scored over 50%, these priorities are about disclosure and targets, not about actions.

The following priorities scored less than 50% in descending order. Corporate strategy alignment with a scenario of a rise of less than 2C, Linking remuneration to climate related KPIs, Scenario stress testing, Supply Chain emission reduction, Measuring and reducing Scope 3 emissions and Withdrawal from Trade Associations (the last three scored less than 20%).

So less than half of investors prioritised aligning corporate strategy with a scenario of a rise of less than 2C. This is a key action for corporates if they are really supporting reducing climate change, if it is not then corporate strategy is about business as usual without regard to this key objective.

Just over 30% were in favour of linking remuneration to climate related Key Performance Indicators (in other words what bonus and pay rise you get). Well if most corporates have other objectives than climate change in KPIs then it is reasonable to think that staff will prioritise those objectives rather than climate change as that is the signal, that management is giving as to its priorities.

Just under 30% would include scenario stress testing. Again, this means the vast majority of investors do not prioritise climate mitigation or see it as a priority.

If climate targets are a real priority, then supply chain emission reduction would be a key priority and action requirement for a corporate, with a score in the high teens from investors, it clearly is not in those surveyed.

Measuring scope three emissions scores just over 10%. Scope three emissions are both upstream and downstream in the business (so procurement and customers) including Purchased goods and services, Business travel, Employee commuting, Waste disposal, Use of sold products, Transportation and distribution (up- and downstream), Investments and Leased assets and franchises. As a result 90 % of investors don’t think this is a priority, the interesting question is how do they think a business will achieve net zero if it doesn’t measure and reduce these emissions (who else is responsible for them?)

The graphic from Siemens does demonstrate a methodology to reduce emissions.

Siemens – progress to date

What is striking about this survey, is that investors prioritise complying with regulations and setting targets.

When it comes to actions, the incentives of remuneration, the emissions in their supply chains and managing scope three emissions (which are all key actions in achieving emission reduction) the priority they ascribe is very low. Actions speak larger than words, and in this case, investors seem more concerned about words.

This survey is depressing, for those countries with 2050 net zero targets, we have approaching 29 years. If the concern of investors is reporting and targets rather than actions and putting emission reduction at the heart of their business strategy, then a 2050 net zero target will not be achieved.

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