Active ownership can be a powerful tool to help mitigate financial risks and influence real world decarbonization.

Active ownership holds companies accountable for their transition strategies and provides additional insight into how effectively they are addressing their related risks and opportunities. abrdn’s proprietary credibility framework serves as a foundational tool to help identify transition leaders. However, to conduct a more comprehensive analysis, especially in regions with limited data and disclosure gaps, an engagement-led approach becomes imperative.

abrdn’s net-zero stewardship approach quantitatively assesses the integrity of companies’ climate transition plans. It is built on the following indicators:

  • A company has a clear and transparent decarbonization plan
  • Policy support is favorable and supportive
  • Investments are made in net-zero enabling technologies
  • The allocation for green capital expenditure is specifically dedicated to environmental initiatives

How can active ownership help the net-zero credibility gap?

abrdn uses active ownership to encourage companies to set credible and transparent targets to address transition risks. 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 any sectoral and geographical nuances of decarbonization.

A standardized engagement approach can be applied across sectors and geographies, and it allows us to measure and compare the effectiveness of a company’s decarbonization progress with other high-carbon emitters. Active ownership provides an in-depth analysis of a company’s climate strategy, rather than relying on third-party data or a principles-based approach to climate issues.

abrdn’s ownership approach considers factors, such as 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 the Science-Based Target Initiative, Climate Action 100+, and Transition Pathway Initiative).

How do we hold companies accountable and monitor progress?

Active ownership involves keeping track of progress, by setting milestones with companies identified as top-financed emitters. We assess progress against set milestones and determine whether the company has made sufficient progress to achieve its climate ambitions. Where required, 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 and engagements have identified the following five key points:

1. Intensity targets hide the absolute truth

We note that most of our top-financed emitters commonly use intensity targets rather than absolute emissions reduction targets. Emissions intensity is often used as a 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 the real world impact of reducing emissions, we therefore encourage companies to set absolute reduction targets.

2. 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 standardized reporting and methodology.

3. Capital expenditure (CapEx) is a sign of commitment

Companies allocating CapEx towards ‘green’ initiatives demonstrate a commitment to a net-zero transition. However, the impact of such investments on reducing emissions will take time and depend on a company’s competency, expertise, and technological readiness.

4. Policy support is needed

Policy support is essential for a credible transition to net zero. To reduce long-term emissions and minimize the reliance on fossil fuels, governments will need to enact policies that encourage the shift toward clean energy. At the same time, we work with our top-financed emitters 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.

5. 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 incentivizes them to take strategic action to address their climate-related risks. abrdn’s active ownership process encourages companies to set detailed and long-term key performance indicators, that focus on climate change. Allowing for a vote against remuneration recommendations for key executives if targets aren’t being met.

Final thoughts

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 in order to meet their targets.

As a large investor, we recognize that we have a responsibility to hold companies accountable and drive positive change. We closely monitor and track the companies in which we invest to ensure they’re progressing toward their climate targets and real world decarbonization.