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ESG: How investors can judge a company’s climate change plan

How can responsible investors tell if a company has a robust plan for dealing with climate change? Regnan’s head of research ALISON GEORGE offers a four-point checklist

HOW can you tell if a company has a robust plan for dealing with climate change?

It’s a complicated question, says Alison George, head of research at sustainable investing leader Regnan.

But it’s important that investors have confidence that company climate action plans are appropriate and on track.

“Investors need to have confidence that climate risks are being managed well by the companies in their portfolios,” says George.

“And it is increasingly being brought to the fore in AGM season with an increase in shareholder resolutions and now the introduction of formal ‘Say on Climate’ votes initiated by companies themselves.”

The ‘Say on Climate’ initiative calls on companies to hold an annual vote on their emissions reduction progress. Regnan provides its clients with specific voting recommendations for ASX-listed companies on their climate-related activities.

George says it’s important to be aware that climate expectations vary between companies — some sectors need to move faster, given that there are technological barriers that will make it  more difficult for other sectors to decarbonise.

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But she says a broad four step approach can help investors and companies alike understand if plans are on track

1. Is the plan credible?

The first step is assessing whether a plan is credible.

This includes ensuring it comprehensively covers the most material issues for the company and is clearly disclosed with credible and current sources for the analysis undertaken.

But it also means the plan should show evidence of broader considerations of the impact of the transition to net zero, including on the capabilities of the workforce and impacts on the wider community.

2. Is it ambitious?

An ambitious plan shows clear, comprehensive targets in the short, medium and long term on all material aspects of climate change, including emissions in an organisation’s value chain and physical risks to the business of a changing climate.

Ambition should be judged within the context of the sector and with an understanding of the magnitude of the task ahead.

This recognises that some decarbonisation pathways are not yet fully known, so where they are it is reasonable to expect that net zero be achieved ahead of 2050.

3. Is it real?

It is all very well to have a plan, but it must also be activated in the real world.

This means that it must be backed by sufficient resourcing and capability, appropriate organisational structure, capex plans and effective board oversight.

But it also means the company has provided evidence of progress to date and shown that its climate plan is embedded in governance and risk processes and has informed strategy development and decision making.

This also covers companies that aim to achieve emissions reductions through divestment.

The key question becomes whether overall reductions can be achieved or reasonably expected from the divestment? Or are the emissions simply being moved elsewhere.

4. Is the company acting against change?

Finally, and most critically, look for evidence that a company is not merely paying lip-service to climate action while actually lobbying against change.

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Policy is crucial to drive meaningful climate action and there is a risk that companies may undertake activities aimed at swaying public sentiment and policy outcomes.

“This is a pre-eminent question,” she says.

“For those companies where there may be a vested interest in the status quo, voting deliberations should be especially attentive to this area as a threshold requirement for endorsement of the plan.”

Regnan says it expects to see evidence that the company is not involved in activities or lobbying that would delay decarbonisation efforts. It also seeks transparent reporting of positions and evidence of effective and ongoing board governance over this issue.

The upshot?

George says a company that passes all four of these tests is likely to have a solid climate action plan.

About Alison George

Alison George is Regnan’s head of research. She has deep experience in ESG, responsible investment and active ownership. Alison oversees Regnan’s research frameworks, processes and outputs, ensuring it remains at the forefront of industry practice and meets evolving clients needs.

About Regnan

Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.

Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.

The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.

The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change. Both funds are distributed by Pendal in Australia.

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For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at May 12, 2022.

PFSL is the responsible entity and issuer of units in the Regnan Global Equity Impact Solutions Fund (Fund) ARSN: 645 981 853. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.

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