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Is responsible investment having an impact?

#EarthDay2021: Vicki Bakhshi, Director in Responsible Investment at BMO Global Asset Management explores whether investor engagement on climate change is having a real-world impact.

Parallel to the Biden Administration’s global climate summit, Earth Day 2021 focuses on climate action required to ‘Restore our Earth’. There is a collective responsibility at the country, corporation and individual level to address climate change urgently. As investors, we must use our position as stewards of capital to engage companies to adopt climate-friendly business practices and encourage positive change.

At BMO Global Asset Management, engaging companies to adopt climate-friendly business models has been on our engagement agenda for two decades. Last year, we saw significant progress in terms of companies adopting net zero-aligned targets.

However, progress varied by region and sector, and some these targets had more credibility than others in terms of our confidence that they will be translated into robust strategies. Our work with companies in the mining, transportation and financial services demonstrate the impact our climate engagement is having across industries and society as a whole.

Mining

The mining sector is diverse, and we have engaged with both the largest multinational diversified miners, as well as specialist miners focused on commodities such as coal and gold. Overall, the large diversified miners are the furthest ahead in terms of formal commitments to a net zero transition. BHP Billiton, Anglo American and Glencore all now have coal exit strategies, with BHP and Anglo aiming to sell their stakes, and Glencore running them to the end of life. One key focus area for these companies was on how they use their considerable political influence; as co-lead of the Climate Action 100+ engagement with BHP Billiton, we led intensive engagement on its lobbying and trade association memberships, and 2020 saw the company announce a market-leading lobbying framework.

The picture among more specialist and regional miners is more mixed. Gold miner Newmont was one example of leadership, with its net zero target. Miners in Asia and South America have so far been less responsive to engagement. Companies in this sector tend to be strongly influenced by national government policies; with more net zero government commitments likely to emerge in the run-up to COP26, we anticipate scope for engagement to progress.

Transportation

We have engaged with both automotive manufacturers and shipping companies. With further policy measures from governments to phase out internal combustion engine vehicles, most automotive firms now see an electric vehicle (EV) strategy as essential to maintaining their competitive edge. Two leaders in terms of ambition include Volkswagen, which has committed to 70 all-EV models by 2030, and Daimler, aiming for a net zero emissions fleet by 2039.

Our engagement focused on companies whose ambition lags the leading group, particularly Fiat Chrysler (now part of Stellantis), where we lead the Climate Action 100+ engagement and had two meetings with their sustainability director. In order to directly address the Board, we made a statement at the AGM, asking for medium-term climate-related targets and transparency around climate lobbying.

In shipping, the International Maritime Organization set out a pathway to a low-emissions transition in 2018 – but driving this through to implementation has seen mixed success. Maersk was the first major firm to set a net zero target, in 2018.

Financial institutions

Financial institutions such as banks, insurers and asset managers present a more complex picture than other sectors in terms of assessing ‘Paris alignment’ – their impact comes primarily through activities they finance, rather than through their direct operations. Amongst the South East Asian banks we have engaged with, we have been pleased to see some positive progress on integrating deforestation criteria, such as Maybank requiring sustainable certification schemes in lending, or CIMB, which has introduced enhanced due diligence for palm oil and forestry clients.

We have also looked at European and North American banks, particularly their implementation of the recommendations of the Task Force on Climate-related Financial Disclosures. Analysis and disclosure accelerated in recent months, particularly in Europe where financial regulators made clear their expectation that this should be part of risk management practices.

The shareholder resolution at Barclays – which we supported – calling for a phase- out of fossil fuel financing prompted the bank to adopt a net zero target, making it one of the first international banks to do so. Others have followed, although the industry remains at a relatively early stage in terms of implementation plans. Some of the issues to address include integrating climate change across their business lines, not just lending.”

The crises of 2020 – the pandemic, economic turmoil and social upheaval and, running through them all, climate change and biodiversity loss – have forced a reckoning among governments, businesses and civil society. The climate crisis in particular has elevated the need for action on sustainability risk and opportunity in boardrooms globally. As we navigate the next phase of the pandemic, we will strive to help companies meet the challenge of making the recovery from COVID-19 an environmentally, economically and socially sustainable one.

 

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