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Not all ‘net zero’ is equal: how equity investors can avoid greenwashing

There are plenty of so-called ‘climate-aware’ companies to invest in — some 60 per cent of the ASX300 (by market cap) now have net zero commitments. But how do you judge the right ones? EDWINA MATTHEW explains

  • Not all net zero commitments are the same
  • Strategy and governance, disclosures and analysis of targets are critical, plus transition implications for workers
  • Red flags include board sceptics, indirect impact from value chains and lack of progress

Some 60 per cent of the ASX300 (by market cap) now have net-zero commitments.

That’s a reflection of accelerating global progress on climate change.

Almost 90 per cent of global emissions are now covered by net-zero commitments from nations — up from about 75 per cent before the recent COP26 climate change conference.

Financial institutions are also forming initiatives — such as the Glasgow Financial Alliance for Net Zero announced at COP26 — to accelerate the transition away from fossil fuels.

So Australian investors have plenty of opportunity to invest in “climate-aware” companies.

The question is: how do you judge which companies are best placed to deliver on their net-zero commitments?

“Investors and the public are sceptical about the credibility and veracity of many net-zero commitments,” says Edwina Matthew, Head of Responsible Investments at Pendal Group.

“Investors need to ensure the companies they invest in are walking the talk.

“That means having a clear and credible climate strategy in place that is based on delivering actual real-world decarbonisation, and not just ‘virtual’ reductions from carbon offsets and asset divestment.”

Below Edwina lists some key things to look for.

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Examine a company’s net zero targets

A company needs targets that span the life of its transition plan – including intermediate (typically 2030) and long-term (2050) targets. They need to be science-based and aligned to the Paris Agreement.

Companies should also be clear in their disclosures about whether their targets are across “scope 1, 2 and 3 emissions” — and what percentage of its assets and emissions are covered by those targets.

What are Scope 1, 2 and 3 emissions? They are the three factors an organisation should consider to understand its carbon footprint.

  • Scope 1 greenhouse gas emissions come directly from sources controlled by a company
  • Scope 2 are indirect emissions associated with the purchase of electricity, steam, heat or cooling
  • Scope 3 result from assets not controlled by a company, but indirectly impacted by its value chain

Investors also need to look out for how carbon offsets are used in their net zero plan and also whether there is reasonable consideration of transition implications for their workforce and communities.

To mitigate risks of ‘green-washing’, investors need to not just look at the company’s targets but also look at the governance and incentive structures and disclosure practices.

Is there clear evidence that a company’s climate transition plan is incorporated into its corporate strategy and risk management systems?

Red flags to watch out for

There are also red flags for investors, Matthew says.

“One is having net zero implementation responsibilities sitting solely in a sustainability or ESG role rather than being incorporated into relevant executive and business line responsibilities.

Also look out for climate sceptics on boards or lobbying against change via industry associations.

“Investors should also assess whether scope 3 emissions are sufficiently considered. While it’s an iterative process that should be refined over time, there should be demonstrable evidence of progress.”

Pendal Horizon Fund

A concentrated Aussie equities portfolio aligned with the transition to a sustainable, future economy

Climate transition plan  

Companies should have a climate transition plan with detailed analysis of material risks and opportunities.

There should be evidence the analysis is used to inform business decisions (including relevant capital allocation), resourcing and expertise and sometimes links to remuneration.

Investors should ask themselves if the board has sufficient skills. Is there stakeholder engagement? What is the track record of achieving previous transition strategies and targets?

Disclosures

Investors need to also pay close attention to disclosures.

Does a company produce reporting in line with the Task Force on Climate Related Financial Disclosures (TCFD)? How regular and comprehensive are they?

Does a corporate clearly outline the most material climate-related risks and opportunities for its business? How robust is the analysis that sits behind these views?

“We want to make sure their net zero plan is credible. It should be practical but adequately ambitious to align with key stakeholder expectations,” Matthew says.

“Without doubt the private sector on the whole is stepping up to the net zero call to action and this is a very important development.

“As investors, the onus is now on us to pay attention to the detail and progress of individual net zero plans.

“Through company engagements, we are working with companies to address any shortfalls and accelerate real economy decarbonisation.”


About Edwina Matthew

Edwina Matthew is Pendal’s Head of Responsible Investments. Edwina is responsible for maintaining our leadership position in the provision of sustainable and ethical investment products.

Edwina is actively involved in the implementation of the UN-supported Principles for Responsible Investment. She also represents the company in working groups with a number of industry associations and initiatives relating to responsible investment.

About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

We believe sustainability considerations ultimately drive higher and more stable investment returns over the long term.

Pendal Group has a proud heritage in responsible investing, extending back decades. Our specialist responsible investing business Regnan includes highly experienced ESG research and engagement experts and offers a growing range of investment strategies.

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at November 24, 2021.

PFSL is the responsible entity and issuer of units in the Pendal Horizon Fund (Fund) ARSN: 096 328 219. 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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