ESG: How to judge a company’s climate change plan

Integrating environmental, social and governance considerations in investing is of critical importance for advisers because younger investors are increasingly demanding that their money is managed sustainably. More than 40 per cent of advisers in Australia now offer responsible investment options, according to surveys by Wealth Insights. The number is expected to pass 50 per cent this year and 65 per cent in the next few years.

Despite the interest in responsible investing, a recent Gallup study showed smaller investors don’t spend time focusing on environmental, social and governance factors when making investment decisions — and the majority don’t know much about it.

But that’s changing as well. The survey showed an uptick in smaller investors’ interest in responsible investing. And recent political outcomes, including the success of the Greens and so called ‘Teal’ independents in the Australian federal election, will force greater focus on ESG at a policy level.

So how can investors tell if a company has a robust plan for dealing with climate change?

To genuinely invest responsibly, investors need the comfort that companies have robust climate action plans that are appropriate and on track – as well as the confidence that climate risks are being managed well by the companies in their portfolios. It is increasingly being brought to the fore in AGM season with an increase in shareholder resolutions and now the introduction of formal ‘Say on Climate’ votes initiated by companies themselves, which calls to hold an annual vote on their emissions reduction progress.

While it’s important to be aware that climate expectations vary between companies — some sectors need to move faster, given that there are technological barriers that will make it more difficult for other sectors to decarbonise – there is a broad four-step approach that can help investors and companies alike understand if plans are on track:

1. Is the plan credible?

The first step is assessing whether a plan is credible.

This includes ensuring it comprehensively covers the most material issues for the company and is clearly disclosed with credible and current sources for the analysis undertaken.

But it also means the plan should show evidence of broader considerations of the impact of the transition to net zero, including on the capabilities of the workforce and impacts on the wider community.

2. Is it ambitious?

An ambitious plan shows clear, comprehensive targets in the short, medium and long term on all material aspects of climate change, including emissions in an organisation’s value chain and physical risks to the business of a changing climate.

Ambition should be judged within the context of the sector and with an understanding of the magnitude of the task ahead.

This recognises that some decarbonisation pathways are not yet fully known, so where they are, it is reasonable to expect that net zero be achieved ahead of 2050.

3. Is it real?

It is all very well to have a plan, but it must also be activated in the real world.

This means that it must be backed by sufficient resourcing and capability, appropriate organisational structure, CapEx plans and effective board oversight.

But it also means the company has provided evidence of progress to date and shown that its climate plan is embedded in governance and risk processes, and has informed strategy development and decision making.

This also covers companies that aim to achieve emissions reductions through divestment.

The key question becomes whether overall reductions can be achieved or reasonably expected from the divestment? Or are the emissions simply being moved elsewhere.

4. Is the company acting against change?

Finally, and most critically, look for evidence that a company is not merely paying lip service to climate action while lobbying against change.

Policy is crucial to drive meaningful climate action and there is a risk that companies may undertake activities aimed at swaying public sentiment and policy outcomes.

This is a pre-eminent question. For those companies where there may be a vested interest in the status quo, voting deliberations should be especially attentive to this area as a threshold requirement for endorsement of the plan.

A good responsible investor should expect to see evidence that the company is not involved in activities or lobbying that would delay decarbonisation efforts. They should also seek transparent reporting of positions and evidence of effective and ongoing board governance over this issue.

The upshot?

A company that passes all four of these tests is likely to have a solid climate action plan.

Alison George, head of research, Regnan, part of Pendal Group

Neil Griffiths

Neil is the Deputy Editor of the wealth titles, including ifa and InvestorDaily.

Neil is also the host of the ifa show podcast.