Our net-zero stewardship quantitatively assesses the integrity of companies’ climate transition plans. It’s built on the following indicators:
- a company has a clear and transparent decarbonisation plan;
- policy support is favourable and supportive;
- investments are made in net-zero enabling technologies; and
- the allocation for ‘green’ capital expenditure is specifically dedicated to environmental initiatives.
Active ownership encourages companies to set credible targets and to enact changes in support of climate action
How can active ownership help the net-zero credibility gap?
abrdn's active ownership encourages companies to set credible targets and to enact changes in support of climate action. Active ownership also involves engaging with businesses to encourage the appropriate level of oversight by the board. This helps to manage climate-related risks and allows us to gain an understanding of sectoral and geographical nuances to decarbonisation.
A standardised approach can be applied across sectors and geographies, and it allows us to measure and compare the effectiveness of a company’s decarbonisation progress with other heavy polluters. Active ownership provides an in-depth analysis of a company’s climate strategy, rather than relying on merely third-party data or a principles-based approach on climate issues. Our ownership approach assesses policy support for clean energy, a company’s policy advocacy, low-carbon substitutes, market appetite for low-carbon products, and technology readiness in terms of barriers to entry and stage of development.
Both data-driven and engagement-led approaches are essential for a well-rounded assessment of a company’s progress against its climate targets. In addition to engagements, we assess quantitative information, such as the proportion of ‘green’ revenue, the scope of a company’s targets, and the disclosure against benchmarks (including Science-Based Target Initiative, Climate Action 100+ and Transition Pathway Initiative).
But how do we hold companies accountable and monitor progress? Active ownership involves keeping track of progress, by setting milestones with each of abrdn’s top-financed emitters. We assess progress against set milestones and determine whether the company has made sufficient progress to achieve their climate ambitions. We can escalate our concerns in a variety of ways, including revising our quantitative assessment of a company, taking voting action, and by collaborative engagement.
What does active ownership tell us?
Our active ownership research has identified the following five key points.
Intensity targets hide the absolute truth
We identified that the majority of top-financed emitters are using intensity targets rather than absolute emissions reduction targets. Emissions intensity is often used as metric as it’s comparable with other companies and controlled by a company’s size. However, it doesn’t always mean that actual emissions are decreasing, as changes in capacity or energy output can affect the overall intensity target outcome. As we aim to assess real-world impact on reducing emissions, we encourage companies to set absolute reduction targets. Two of the emitters that we invest in, CRH and Engie, have already adopted absolute targets. We are now working with them on other climate-related measures, such as improving their energy mix.
Targets need to cover direct and indirect emissions
Companies must set comprehensive targets that cover all emissions, with an additional focus on those that are significant and most material. While many oil and gas firms set short-term goals for direct emissions, they often ignore the larger impact of indirect emissions. We expect companies to identify material emissions to address this gap and to support initiatives for standardised reporting and methodology. An excellent example is Siam Cement Group, a chemical and cement company in Thailand, which audited its full scope emissions with the Science Based Target Initiative. It included Scope 3 emissions (indirect emissions) in its audit, despite them representing less than 30% of its total emissions. We are now working with the company to encourage it to reduce the clinker content (which releases CO2 in production) of its cement.
Capital expenditure is a sign of commitment
Companies allocating capital expenditure towards ‘green’ initiatives demonstrate a commitment to a net-zero transition. However, the impact of such investments on reducing emissions will take time. It depends on the company’s competency, expertise, and technological readiness. For example, Ultratech Cement, one of the largest cement companies in India, has set ambitious clean energy targets. We are encouraging the company to invest in new technology to electrify its kilns. We will monitor its progress over the next three-to-four years.
Policy support is needed
Policy support is essential for a credible transition to net zero. Governments must enact policies that encourage the shift towards clean energy. This helps reduce long-term emissions and to minimise the reliance on fossil fuels. At the same time, we work with our top-financed emitters – such as TotaleEnergies, Shell and BP – to help them set climate targets to reduce their methane emissions. We monitor their progress, while also encouraging them to invest in low-carbon solutions and alternative fuels where feasible.
Aligning pay with delivering climate targets
Lastly, we believe companies that are high-financed emitters should hold executives accountable, by tying climate performance metrics to executive remuneration. This holds executives accountable, and it incentivises them to take strategic action on climate change. Our active ownership process encourages detailed and long-term key performance indicators, which focus on climate change. If these targets aren’t met, we can vote against renumeration recommendations for key executives.
Most companies in heavy-emitting industries have set climate targets, but there are still gaps that may affect their credibility. We work closely with the companies in which we invest to encourage them to plug those gaps and to make the changes needed to meet their targets. Our influence as a large investor is significant. We recognise our responsibility in holding companies accountable and driving positive change. We closely monitor and track the companies in which we invest to ensure they’re progressing towards their climate targets and real-world decarbonisation.