The idea that you can achieve net zero by avoiding highly exposed companies to climate risk will not help the transition into a clean economy and engagement is needed with those companies, according to a panel.
Joey Alcock, Frontier principal consultant, said the idea of decarbonising portfolios by decarbonising the underlying holdings in those portfolios was a nuanced idea which was sometimes difficult to translate.
“Particularly in some parts of the media, which has had some challenges around appreciating why asset owners might continue to hold on to their higher emitting assets and companies,” Alcock said.
“It’s because of that ability to utilise the rights as an owner to affect positive change, so it’s one part of the overall picture and not the only way to affect change.
“Clearly an important part, particularly with the ability to utilise proxy voting to influence to selection of directors and so forth.”
Alcock said engagement was “crystalising” as a fundamental component of a net zero strategy.
“Notwithstanding that investors have been engaging on an increasingly frequent basis around [environmental, social and governance] ESG issues more generally,” Alcock said.
“It’s to be expected engagement will focus on net zero and climate in more intense ways going forward.
“Particularly we’ll start to see greater collaboration and collective action, and the key thing there is the dynamic is about decarbonisation of portfolios but using engagement to encourage the setting of a corporate strategy that is in line with decarbonisation of those business activities.”
Claire Jones, Lane Clark and Peacock (LCP) head of responsible investment, echoed the sentiment that net zero was a nuanced concept.
“As the conversations become more sophisticated asset owners and investment managers come increasingly aware that climate change is very much systemic risk,” Jones said.
“If there are companies in your portfolio that are highly exposed to climate risk you can divest from them but it doesn’t help in terms of the overall management of the systemic risks of the economy that comes from climate change.
“Particularly the long-term, physical risks that we will see if the net zero targets are not met and we don’t manage to keep below 1.5 to 2.0 degrees Celsius.
“If you need change across the whole economy then that can only happen if you’ve got engagement taking place with companies.
“You don’t want to just blacklist those that are not engaging with the transition, you want to work with them to encourage them to put appropriate business strategies and risk management in place, that’s why engagement is so important.”
