According to the Intergovernmental Panel on Climate Change (IPCC), it will take significant effort to limit global warming to 1.5°C above pre-industrial levels, as targeted in the Paris Agreement. Unmitigated climate change would have catastrophic impacts across the globe, including impacts on human health, biodiversity, water availability, and disruption of ecosystems. Climate change therefore presents significant financial risk to the global economy. There are physical risks to assets associated with rising mean global temperatures, rising sea levels and increased severity of extreme weather events (even if Paris targets are met). Investors also face transition risks, and opportunities, that will arise as the economy adjusts to a lower carbon future. An inadequate response to these risk raises the potential for reputation and litigation risk.
The risks are deeply embedded across the financial system and therefore will influence the value of our members’ investments.
In order to mitigate the impacts of these risks on investment portfolios, and the financial system as a whole, ACSI supports the Paris Agreement aim of limiting global warming to 1.5 °C which will require a shift to net zero emissions by 2050. A planned transition to a low carbon economy is preferable to a disorderly transition on the basis that a planned transition will result in better economic outcomes, is better able to take account of the needs of various stakeholders and will enable better management of uncertainty and volatility.
ACSI is a member of the Investor Group on Climate Change (IGCC) and supports an efficient transition to a low-carbon economy. We recognise that climate change will impact our members’ investments, that there is an economic transition underway and that it is accelerating. We support a response that is found in a science-based assessment of the carbon constraints required to avoid dangerous climate change.
Governments and policymakers will have a vital role in setting a policy framework that will facilitate the achievement of the Paris goal of limiting global warming. To strengthen investor confidence, it is essential that policymakers deliver credible and continued support for action to achieve a net-zero emissions and climate-resilient economy. This involves acting to:
- Develop pathways to a net-zero emissions economy, including economy-wide strategies to achieve net zero by 2050 and 2030 targets that are aligned to Paris Agreement objectives.
- Ensure a managed energy-sector transition, including credible integration of climate change and energy policy and a strategy to ensure an orderly, just and equitable transition.
- Build resilient communities and economies including a national adaptation strategy and incorporate climate change as a systemic risk into corporate and financial regulation and disclosure frameworks.
Integrating climate-related risk into investment decisions requires companies to set their strategy to adapt to a low-carbon future. This includes a company demonstrating how climate risks and opportunities are integrated into its governance, strategy and risk management processes.
As a representative of long-term investors, ACSI engages with companies to understand their approach to managing the climate-related risks and opportunities material to their business, the challenges they face, and to clearly communicate our expectations.
Where companies face material climate-related risks, ACSI expects companies to:
- Disclose their approach to climate-related risks by adopting the TCFD: Adopt the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) risk assessment and reporting framework.
- Align corporate strategy: Align corporate strategy to the Paris Agreement and the objective of net zero emissions by 2050. Paris-aligned metrics should inform company strategy and be integrated into capital allocation decisions, financial reporting and audit, and where appropriate, remuneration practices.
- Undertake scenario analysis: Companies should stress-test the resilience of their portfolios and strategy against a range of plausible but divergent climate futures, including a Paris-aligned 1.5°C scenario and physical-risk scenarios based on current warming trajectories.
- Set Paris-aligned emissions targets: Setting short, medium and long term emissions-reduction targets that align to the Paris Agreement. In addition to quantitative metrics, targets may including undertake planned actions, partnerships, research and development, or investment to address risks material to the company.
- Analyse and manage physical risk: Companies should undertake analysis of the physical risks arising for assets within its portfolio. Assessment should be detailed and include asset-level and/or industry-level exposures and resilience plans.
- Align policy and advocacy activity: Companies should ensure their policy and advocacy activity is consistent with the goals of the Paris Agreement, including activity undertaken both directly and via industry associations.
- Plan for just and equitable transitions: Incorporate impacts on employees, communities and other stakeholders into transition strategy and planning.
To further support engagement between companies and investors on management of climate-related risk and opportunities for the long-term, ACSI supports the provision of a ‘Say on Climate’ whereby companies provide investors with an advisory vote on the company’s management of climate-related risks and opportunities (using the indicators outlined above). While much of this work is already conducted through engagement between investors and companies, a ‘Say on Climate’ advisory vote would provide further focus, transparency and accountability.
Where companies consistently fall short of our expectations, applying the indicators set out in this policy, ACSI may recommend our members vote against directors of ASX200 companies, on a case-by-case basis.
Our recommendations will focus on the individual directors most accountable for oversight of climate-change related risks, for example company Chairs, and the Chairs of the Risk and Sustainability committees or similar.
As always, our recommendations will be combined with direct company engagement, and take a balanced approach, with the long-term interests of members’ beneficiaries paramount.