With Australia’s greenhouse gas emissions at their lowest levels since 1998, as a result of COVID-19 restrictions, there is a clear opportunity for active managers to engage with companies and drive ongoing, lasting change.
A “green lining” of the global COVID-19 crisis has been the significant reduction in carbon emissions. In Australia, preliminary June quarter estimates from the Department of Energy and Resources predicted emissions to be as low as 518 tonnes, the lowest level in 22 years. Globally, factory closures, lockdowns, bans on large gatherings, and transport curtailment have seen emissions drop by around 4 per cent the largest reduction ever recorded.
However, while 2020 has seen significant positive change for our climate, we are still a long way from meeting global climate change targets set out in the Paris Agreement.
Recent research by AXA IM shows it would take a COVID-19 like event every year until 2050 to reach our commitment to keep global warming within 1.5 degrees above pre-industrial levels. Starting next year, yearly emissions cuts should be more than 7 per cent. If negative emissions technologies are excluded, or fail to become available at scale, then the required emissions reductions for a 1.5-degree world would be an eye-watering 15 per cent every year until 2050.
We have been given a glimpse of the adjustments our world needs to make if we are to definitively tackle the looming threat of the climate crisis. Far from distracting us from this, COVID-19 should harden our resolve while teaching us valuable lessons. We all have a role to play in ensuring the long-term upward trend of emissions does not simply resume in a post-pandemic world.
How active management can play a part
As an active manager with a strong focus on environmental, social, and governance (ESG) issues, AXA IM believes ESG themes have become even more important during the pandemic.
On behalf of our clients and wider stakeholders, and despite all the challenges of this period, in the first half of 2020 we engaged more companies in a six-month period than ever before.
Climate change is a key area of focus for our engagement activities, accounting for 40 per cent of our total engagement with companies in 2019. This has continued into 2020, when we supported 72 per cent of climate-related shareholder resolutions proposed at 32 company general meetings.
Looking forward, we believe investors can help build a greener economy through investing in positively evolving businesses and scaling up their company engagement agenda and stewardship commitments.
A carbon footpath approach
When engaging with corporates, AXA IM believes in taking a “carbon footpath” approach, rather than eliminating polluters altogether through a decarbonisation, “footprint” strategy.
Our view is that the “footprint” strategy may not be a sophisticated enough tool for a complex issue. It can result in unintended consequences for investors, reducing portfolio diversification by eliminating companies that may have high emissions at a certain point in time.
Instead of seeking out those that are evolving, this approach treats all polluters the same. Divesting means the manager has less leverage to use to encourage greener and more sustainable activities and it can also limit the capital companies need to make positive changes.
Instead, we believe investors should take a more “holistic” approach using multiple data inputs to identify leaders and laggards within each sector, to create what is known as an E score for companies they assess.
Rather than simply focusing on carbon intensity, this approach can identify companies that have done more to improve emissions by beginning to transition before others in their respective industries. An example might be electric utility firms that have a higher propensity to invest in renewable energy and storage and divest from thermal coal.
This “footpath” approach means investors can manage risk by maintaining adequate representation in all sectors and also potentially benefit from the upside of investing in businesses that may be better able to navigate a tightening regulatory landscape in the future.
Industry bodies and working groups are also playing an important part in driving conversation and change on the climate agenda.
One of the best known is the Climate Action 100+ initiative, which AXA IM is part of, and engages with the most carbon-intensive companies in the world on climate-related issues. While the coalition has been mostly focused on energy supply sectors, engagement opportunities still exist in the end-use consumption sectors.
AXA IM is also helping lead the work on how the climate transitions – which will likely be expensive and disruptive – could be financed efforts by capital markets. We are one of the co-chairs of the Climate Transition Finance Working Group of the ICMA Green and Social Bond Principles. This group features more than 80 members from around the world, including a handful of Australian ones.
Recently, AXA IM supported the European Alliance for a Green Recovery, launched in April, which brings together a coalition of policymakers, companies, trade unions and financial institutions. This is the first pan-European call for mobilisation on post-crisis investment packages which will not only build the recovery but enshrine the fight against climate change and biodiversity as a key pillar of economic strategy.
AXA IM is also proposing concrete solutions like the “European Climate Emergency Fund”, which would issue debt instruments whose proceeds would be used to fund green transition projects undertaken by governments or corporations.
As the global recovery from COVID-19 continues and we find our “new normal”, there is much that can be done by active managers to ensure we do not simply resume “business as usual” post-pandemic but instead help realise positive changes that can be felt for decades to come.
Yo Takatsuki, head of ESG research and active ownership, AXA IM
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