Climate votes fall short, EU sustainability law advances, and more.

April 28, 2023

The top five climate risk and disclosure stories this week.

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Climate votes at BP, Wall Street banks fall short 

Climate votes filed at big corporations failed to attract majority support among investors in the latest round of shareholder meetings.

Investors in BP rejected a resolution for the oil supermajor to align its Scope 3 emission targets with the goal of the Paris Climate Agreement on Thursday. The resolution, filed by green shareholder group Follow This, received 16.75% support. This was up from 14.9% last year, but less than the 20.6% won in 2021.

The Follow This effort was dealt a blow prior to the vote when Norges Bank Investment Management (NBIM), which manages Norway’s USD$1.4trn sovereign wealth fund, announced it would not vote for the resolution. NBIM’s chief said last year that the fund planned to vote against firms that do not set net-zero emissions targets.

Separately, an effort by five institutional investors to unseat BP’s chair in response to the company’s failure to consult shareholders on major changes to its decarbonization strategy also failed. Helge Lund won reappointment with 90.4% of the shareholder vote. However, his share of support was below that received in 2022, when he was re-elected with 96.6% of the vote. The investors leading the campaign against Lund were Nest, USS, Brunel Pension Partnership, Border to Coast, and LGPS Central.

Investors in big US banks also beat back resolutions filed by climate activists. On Tuesday, proposals filed at Bank of America and Citi asking them to set “time-bound” fossil fuel phase-out plans lost out with just 7% and 10% support, respectively. 

Less prescriptive proposals won more investor support, but not the majorities needed for them to be adopted. On Thursday, 31.1% of investors in Wells Fargo called on the bank to produce “an actionable climate transition plan.” Earlier this week, similar proposals at Bank of America and Goldman Sachs won 28.5% and 30% support, respectively. The resolutions were filed by shareholder advocacy group As You Sow.

“The banking sector is key to achieving global net-zero goals,” said Danielle Fugere, president of As You Sow. “Banks with clear climate transition plans will be better prepared to act on opportunities created by the global net zero transition while reducing risk associated with high carbon companies.”

EU sustainability due diligence law advances

European lawmakers voted to push forward rules that would force companies to weigh environmental and social factors in their business models, operations, and value chains.

The Corporate Sustainability Due Diligence Directive (CSDDD) was approved by the European Parliament’s Committee on Legal Affairs on Tuesday. This clears the way for parliament to begin negotiations with European Union (EU) member states on developing a final version that can be enacted into law.  

The CSDDD would compel firms to identify, and either prevent, end, or mitigate the negative impacts of their activities on human rights and the environment — including pollution, environmental degradation, and biodiversity loss. It would also require companies to create climate transition plans that align their business models and strategies with a 1.5°C global warming pathway. 

If entered into law as currently drafted, the CSDDD would apply to EU companies employing more than 250 people and generating revenues of more than €40m (USD$44m) a year. Directors of companies with over 1,000 employees would be legally responsible for implementing the climate transition plans. CSDDD requirements are expected to take effect from 2030.

Climate groups broadly welcomed the law’s advance. But Finance Watch, a nonprofit focused on making the financial sector better serve society, said that “more ambition and clarity” is needed on the rules applying to banks, institutional investors, and similar firms. For example, the current drafting limits the definition of a financial institution’s value chain to those “activities of clients directly receiving financial services,” which may narrow the number of relationships that they need to monitor for environmental due diligence.

New sustainability assurance standard edges closer

A global standard-setter for auditing and quality control said on Monday it would roll out new rules on sustainability assurance for public consultation in July.

The International Auditing and Assurance Standards Board (IAASB) wants to normalize how assessments of the validity and reliability of sustainability information are made. The board’s proposed International Standard on Sustainability Assurance (ISSA) 5000 will cover multiple sustainability topics, including climate, and will be suitable for determining both limited and reasonable assurance of sustainability information.

The IAASB pledged to work with the International Ethics Standards Board for Accountants in developing ISSA 5000, so that together they can produce “an integrated package of ethics and assurance standards for sustainability” by end-2024.

Regulators say a sustainability assurance standard is an important part of the global effort to produce investment-grade sustainability data. In a statement, the International Organization of Securities Commissions (IOSCO) said the IAASB’s work “will serve to support the consistency, comparability and reliability of sustainability-related information provided to the market, enhancing trust in the quality of that information.” IOSCO urged companies, assurance providers, and capital markets participants — along with environmental, social, and governance (ESG) reporting groups — to take part in the consultation.

Oil majors not aligned with 1.5°C pathway — report

European fossil fuel giants are not shifting from oil and gas fast enough to align with a 1.5°C warming trajectory, a report commissioned by Dutch institutional investors shows.

The paper includes a projection that 82% of European oil majors’ energy production portfolios will be in oil and gas in 2030, and 18% in low-carbon alternatives. Even though most companies have set high growth targets for clean energy, their current investment plans are focused on upstream oil and gas production — USD$9bn on average compared to USD$3bn for low-carbon alternatives.

The report argues that energy firms’ ongoing exploitation of hydrocarbons “will not create long-term value for shareholders” or help limit global warming to 1.5°C. It recommended that energy firms better quantify their competitive advantages in clean energy and explain how their investments help with decarbonization if they want to improve their future valuations.

The research was conducted by Accela, a strategic advisory firm, and sponsored by investors PGGM, Achmea Investment Management, APG Asset Management, MN, and Pensioenfonds Rail & Openbaar Vervoer. Together they oversee more than €1trn in assets (USD$1.1trn).

“The report shows that even among progressive European majors, there is a divergence between target setting and performance,” said Andres van der Linden, a senior advisor on responsible investment at PGGM. “For example, even though Eni has the highest emissions reduction targets, it has plans to increase its oil and gas production the most — more than 17% — between now and 2030. Companies need to provide investors with more details on how they plan to increase their low-carbon segments in the near term and where they intend to find long-term value in a 1.5°C-aligned pathway.”

On Thursday, PGGM said it would support a climate resolution filed with European supermajor Shell to set Paris-aligned Scope 3 emission reduction targets for 2030. The company’s annual general meeting is scheduled for May 23.

Real estate may ‘over-rely’ on offsets, green energy — report

Publicly traded real estate companies are taking steps to decarbonize, but not always in ways that reduce their exposure to climate-related transition risks, research by a coalition of investors has found.

The Global Real Estate Engagement Network (GREEN) assessed a range of public real estate firms in 2022 to better understand their alignment with global climate goals and their approach to low-carbon strategy-making. This found that one-third of large companies, and fewer than one-fifth of small firms, have set net-zero targets.

GREEN further found that those companies making the least climate progress have concentrated their efforts on clean energy procurements and acquiring carbon offsets instead of adopting energy and heat efficiency measures. “As this does not improve the actual [climate] performance, the transition risk of investors is not reduced,” the report said of these companies. 

The research also revealed that while around half of large firms are conducting physical risk assessments portfolio-wide, only 17% report the results of these exercises.

“Real estate is responsible for more than 30% of carbon emissions. Investors need to start encouraging companies to take steps to lower the financial and non-financial climate risks from real estate. Asset owners and their managers should consider engaging companies about how they manage climate risk, either as a part of GREEN or individually,” said Vincent van Bijleveld, the network’s chair. 

GREEN represents real estate investors controlling over USD$2.2trn in assets, including Robeco, Wellington Management, and Neuberger Berman.