Why do we engage on climate change issues?
ACSI members manage over $2.2 trillion invested in highly diverse, multi-generational investments. Due to the long-term nature of these investments, returns are closely correlated with emerging economy-wide impact of climate change.
Climate change is, and always has been, distinctly financial in nature, presenting risks and opportunities for business. There are physical risks and opportunities, associated with rising mean global temperatures, rising sea levels and increased severity of extreme weather events, and transitional risks and opportunities as the economy adjusts to a lower carbon future. Because of this, ACSI has been engaging companies on climate change risks and opportunities for over a decade.
ACSI members are universal, long-term investors which means they are invested right across the economy. Being invested across the economy means members’ investments will increasingly be impacted by climate change in a way that cannot be diversified away. Long-term investors want to see an orderly transition to a low-carbon economy to reduce the impact – both the impact on the economy as well as affected communities.
As a representative of long-term owners, ACSI has actively engaged with Australian companies asking for the development of more sustainable long-term business models, reductions in emissions and improved governance.
How do we engage with companies on climate change?
Responsible investors can improve long-term returns through active engagement with company boards on how they are assessing and managing their physical and transition risks associated with climate change.
We recommend the risk assessment and reporting framework in the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure (TCFD) and expect disclosure to extend to strategies, metrics and targets to manage risk. We encourage companies to conduct and disclose scenario analysis that considers the transition risks of moving to a Paris-aligned economy as well as the physical risks associated with unmitigated climate change.
We also expect a company’s advocacy activity (including their industry associations’ activities) to be consistent with their policy positions.
Climate change and voting recommendations
Climate change issues are increasingly raised at company meetings.
We carefully review each item of business proposed at company meetings, including those proposed by shareholders. We take a case-by-case approach, taking into account our expectations (as expressed in our Governance Guidelines), information provided by those who have proposed the resolution and information and commitments received from the company through engagement and otherwise. After we have carefully assessed all this information, we make recommendations to our members on how to exercise their voting rights.
How are Australian companies responding?
Some companies are already moving to take action on climate risk, even in the absence of a national climate change policy.
By engaging with ASX-listed companies, ACSI has been a leader in driving changes to how companies manage and report to investors on climate-related metrics. Across the ASX200, there have been improvements in the reporting of climate-related information to investors in recent years, with the number of companies adopting (or committing to) the TCFD Framework doubling to 52 companies between 2017 and 2018.
In addition, while the TCFD provides a useful framework, challenges remain including comparability across the market, the quality of scenario analysis, and the fact that disclosures are not mandatory.
We have encouraged changes more broadly across the index. This has seen companies conduct climate scenario analysis, stress test their portfolios and set Paris-aligned carbon reduction targets. Over the last two years, our engagement has led a number of companies to set science-based targets to emission reduction and have tested their business models against the future effects of climate change, or have committed to doing so.
Nonetheless there is more to do. Policy uncertainty continues to make for an uncertain landscape in Australia. The Paris Agreement requires a shift to net zero emissions by 2050, and Australia urgently needs a credible, economy wide transition pathway that takes account of the needs of stakeholders.