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Climate change poses long-term implications for investors and thus requires an effective corporate engagement strategy. To be effective, climate engagement must be focused, oriented around a material and relevant framework, and collaborative.


Overview

This case study from UBS Asset Management originally appeared in the CFA Institute report "Climate Change Analysis in the Investment Process."

Introduction

Climate change represents one of the most significant long-term risks that investors face in the coming decades, and consequently, any integration of climate change issues in financial analysis must be supported by a robust strategy for corporate engagement. Indeed, effective engagement is well suited to equity investments across both active and passive strategies. This approach not only provides a mechanism for deeper insights into climate change risks for company performance but also provides a mechanism for mitigating those risks through corporate action.

For active strategies, engagement can inform our forward-looking fundamental understanding of how a company’s management is addressing climate change in its strategy and risk management systems. For passive investments, corporate dialogue can address large negative externalities that impact the environment, the wider economy, and thereby index returns in the long term. At UBS Asset Management (UBS AM), we believe that to be successful, a climate engagement strategy must be focused, oriented around a material framework relevant for both companies and investors, and collaborative in nature in order to maximize effectiveness and realize positive change.

First, given that effective corporate engagement requires a great deal of dialogue with management to create change over time, it is important to prioritize any engagement strategy by focusing on the most relevant companies in terms of risks and opportunities. Our strategic engagement program on climate has focused on the oil & gas and utilities sectors, given their significant contribution to global CO2 emissions. Within these two sectors, we selected 50 companies by screening FTSE Developed World Index components using our proprietary “Climate Aware” methodology. This approach uses both quantitative and qualitative data in a forward-looking assessment of future climate change risks. The resulting set of 50 companies represents 27% of the direct and indirect CO2 emissions of the FTSE World Index as a whole, allowing our engagements to have the greatest impact in terms of mitigating environmental risks. In selecting our focus list, we also considered feedback from our fundamental sector analysts, who helped us identify the companies most receptive to dialogue.

Second, to create the most effective engagements, we oriented our engagement goals around a framework that is both financially material and well understood by corporate management teams. Consequently, we defined our objectives around the TCFD, an internationally recognized framework for both companies and investors to assess the impact of climate change on business strategy and to report on these impacts in traditional financial disclosures. We then conducted a detailed scorecard analysis for each company in order to identify the most relevant areas of potential improvement, focusing on the core elements of the TCFD:

  • Governance of climate change
  • Risk management
  • Strategy and policy
  • Metrics and performance
  • Targets
  • Lobbying activities
  • Overall level of disclosure

Conducting this scorecard analysis prior to our first dialogue with management was key for identifying any existing gaps in corporate performance and thereby formulating the most relevant climate engagement goals. Most importantly, it allowed us to formulate goals linked to each company’s business model and geographic footprint. By using a public framework that is familiar to companies in carbon-intensive sectors, we created engagement goals that are both relevant for senior management and thereby more likely to have an impact on company action as well as corporate disclosure of climate-related risks.

Third, to maximize both the coherence and effectiveness of our engagements, we aligned our climate engagement strategy through collaboration with other asset owners and asset managers. Specifically, UBS AM is currently participating in 29 coalitions of investors within the investor initiative Climate Action 100+ (CA100+),1 leading 8 of these groups across regions. Collaborating with other investors does not necessarily help to increase corporate access—in our experience, companies are generally happy to engage with us. Rather, collaborative engagement offers an opportunity to ensure that companies receive a single, consistent message from a number of the world’s largest investors. This consistency allows companies to focus on addressing the core issues linked to climate change rather than needing to reconcile divergent investor requests. Collaboration also allows investors to share various perspectives while combining expertise in order to better challenge and support corporate representatives in setting ambitious actions.

During the past two years, UBS AM has engaged with all of the companies in our climate focus list and held approximately 150 meetings, primarily with board members and heads of sustainability. The following example highlights our engagement results with Equinor, a Norwegian energy company that has been highly responsive to dialogue.

Case Study

Our Climate Aware methodology flagged Equinor because of carbon emissions trends and fossil fuel exposure. The company also came to our attention in February 2017 as one of the world’s top 100 GHG emitters included in the engagement focus of CA100+. Its stock has been attractive for active strategies because of the company’s exposure to large oil fields compared with other integrated majors, the transition from being a marginal to a low-cost producer and its increasing investments in renewables, other low-carbon technologies and emission management solutions. We began our dialogue with Equinor, in collaboration with two other CA100+ investment managers, by focusing on the strategic engagement objectives emerging from our TCFD-based analysis.

Following a series of productive meetings with senior management, in 2019 Equinor issued a joint statement2 with UBS AM and the other CA100+ co-leads, committing the company to pursuing a business strategy consistent with the goals of the Paris Agreement. Equinor agreed to assess its portfolio, including new material capital expenditure investments, in relation to a “well below 2D [2°C] scenario” from 2020 onwards. The company also committed to reviewing existing climate-related targets up to 2030 and set out new ambitions beyond 2030 for its business activities, informed by its assessment, stress testing, and business strategy.

These strategic commitments were followed by additional dialogue with the company during the past year. As part of these efforts, in February 2020, Equinor subsequently announced additional, more ambitious climate change goals, including the following:

  • Carbon neutrality of global operations (operated) by 2030—(including Scope 1 and 2 emissions);
  • <8 kg per barrel of oil equivalent (boe) CO2 intensity by 2025—(including Scope 1 and 2 emissions);
  • A 40% reduction in absolute GHG emissions in Norway by 2030, 70% by 2040, and near 0 absolute GHG emissions in Norway by 2050 (including Scope 1 and 2 emissions with no offsetting);
  • Growing renewable energy capacity tenfold by 2026, and 30 times by 2035, becoming a global offshore wind major; and
  • Reducing net carbon intensity/net energy production at least 50% by 2050. This indicator includes Scope 1 and 2 (100% operated) and Scope 3 emissions (equity production) estimated based on regional refinery yields.

We acknowledge and welcome the company’s willingness to issue concrete and public ambitions on renewable energy, net-zero emissions (Scope 1 and 2), and carbon intensity, including Scope 3 emissions (for the first time). Looking ahead, we will focus our dialogue on possible ambitions to achieve net-zero emissions by 2050 across the entire value chain. Ultimately, we believe that in just two years, our engagement, collaboratively with other asset managers under the CA100+ umbrella, has been successful in realizing change through targeted, materially relevant engagement goals linked to the TCFD.

Footnote(s)

  1. More information on this initiative is available at http://www.climateaction100.org/.

  2. The statement is available at https://www.equinor.com/en/news/2019-04-24-climate-action-100plus.html.

About the Authors

Christopher Greenwald
Valeria Piani