Institutional investors have been using their financial heft to urge corporations to go green. But now they are asking Congress to do more — to get regulators to ensure transparency and consistency when it comes to reporting risks.
The Principles for Responsible Investment, which says that it has 2,400 signatories who manage $86 trillion assets, wants businesses to divulge their environmental, social and governance data to investors so that they can make informed decisions. It says that climate issues are the “number one” risk in their portfolios and that industry needs to act now to avoid disruption.
“We are not near where we should be and we won’t meet the Paris targets unless there is an incredible amount of action,” says Fiona Reynolds, chief executive of the group, in an interview with this writer. “Within the next five years, governments will have to make their next round of climate commitments and that action has to be ramped up.”
Specifically, those institutional investors are asking the U.S. Securities and Exchange Commission, or SEC, to mandate companies to reveal their environmental, social and governance data.
Generally speaking, CEO Reynolds wants industry to set emissions reductions targets in line with the Paris climate agreement, or to limit temperature increases to no more than 2 degrees Celsius by mid century. It also wants them to disclose and report climate-related activities while demonstrating good governance — or showing investors how they are going about it and that they have employed the right set of skills to get the job done.
Other pension fund managers have also written the SEC and asked it to institute stronger reporting requirements for sustainability risks. The companies that are doing the most will be rewarded by the capital markets.
“We think the SEC is failing in its duty,” Reynolds says. “If you are invested through pension funds that are exposed to climate risks, the SEC can be doing more like requiring companies to disclose their actions and how they are making the transition to a low-carbon economy.”
Government’s Role?
According to data compiled by Climate Action 100+, only about 22% of the heaviest greenhouse gas emitters have committed to a science-based target. A science-based target is when a company sets its personal goals in line with the best-available science, all to limit global temperature increases to less than 2 degrees Celsius from the pre-industrial era.
The Principles for Responsible Investment is applauding Royal Dutch Shell and BP, which it says are venturing into renewable energy. Both companies also said they would tie executive compensation to emissions reductions.
Separately, the Legal and General Investment Management labeled Equinor, Rio Tinto and BHP Billiton as leaders in this area. It also likes Xcel Energy, Daimler, General Mills, Citigroup, BNP Paribas and Westpac. The investment manager said that Exxon Mobil Corp., Hormel Foods, the Korean Electric Power Corp., Kroger and Metlife are falling behind. Earlier, it had said that China Construction Bank, Japan Post Holdings, the Canadian retailer Loblaw, Rosneft Oil, Subaru and Sysco Corp. were “loafers.”
But if market pressures are forcing companies to divulge environmental, social and governance data, why would it be necessary for a federal regulator to get involved? Under the Trump administration, the SEC has been more sympathetic to corporate management. In prior years, the agency was more in tune with investors.
Consider EOG Resources: Trillium Asset Management wanted it to conform to stricter greenhouse gas rules that would have required the oil and gas explorer to gather more data and to make its findings known to shareholders. But the driller responded by saying that it already informed its stockholders and that going any further would force it to deviate too far afield from its primary business. The SEC recently agreed with EOG.
The SEC, however, told Exxon that it must increase its transparency in an effort to reduce CO2 releases while also giving its shareholders full insight into the financial and technological risks it faces. “For investors, they should be concerned about the amount of money that Exxon will now have to spend to respond to something in which it already allocates resources,” says Tim Doyle, general counsel for American Council for Capital Formation, in an earlier talk with this writer.
“The concern is that it will never be enough," he adds, "and dealing with climate change is already a fundamental part of its business model."
Material Risks
Exxon is not sitting idly by and it has come out in favor of regulatory actions to force oil and gas developers to capture more of the methane that escapes during the discovery and transportation phases. Methane is the most potent greenhouse gas emission there is. (Exxon has been joined by BP, Eni, Repsol, Shell, Statoil, Total and Wintershall.)
Indeed, the Principles for Responsible Investment says that the added scrutiny by investors is working. It points to a study by the Deutsche Asset & Wealth Management and the University of Hamburg that looked into the correlation between socially responsible investing and financial performance: they found that 62.6% of all such studies positively tied one with the other.
It also references an analysis by Ceres, the Environmental Defense Fund and itself that discovered by incorporating environmental, social and governance data, investors could mitigate potential risks. The institutional investor specifically made note of methane-related hazards.
“As a pension fund with fiduciary duty, we must consider all material financial risks: climate change is a material risk,” says Reynolds, with Principles for Responsible Investment. “If you do not consider this risk, then you are putting your portfolio at risk. What if we do all this work and we end up making the world a better place?”
Institutional investors are bringing the issue of climate change to the fore. They are working with companies and policymakers alike to require more transparency. That pushes industry to be its very best — a move that allows investors to avoid unforeseen pitfalls and thus, give them more insight into where to place their capital.
