Active ownership tackles climate change
Active ownership tackles climate change
Why do we engage?
We urgently need to transform our economy to avoid the most catastrophic effects of climate change on people and the planet and adapt to future temperature rises. The global average temperature reached about 1.2 degrees Celsius above pre-industrial levels in 20201 and, according to our latest Climate Progress Dashboard, is on course for a temperature rise of over 3 degrees by the end of the century without concerted action.2
Can we overcome climate change?
We should be able to avoid the worst impacts of climate change if we manage to limit temperature rises to around 1.5 degrees Celsius above pre-industrial levels.3 We could achieve this by reducing emissions to “net” zero by 2050. This means reducing emissions to an absolute minimum and finding ways to counterbalance them (including the outright removal of greenhouse gases from the atmosphere).
What is the world doing to combat climate change?
Governments are taking action. By the end of COP26, the annual United Nations Climate Change Conference, 151 countries had submitted new or updated climate plans to reduce their emissions by 2030.4 The final agreement also committed countries to deforestation and methane targets, and to phase down coal power and phase out of “inefficient” fossil fuel subsidies.5 Companies’ long-term success depends on their ability to transition their business models to a net zero or 1.5 degree Celsius pathway, and adapt to a changing climate, is vital to ensuring those businesses thrive.
How does Schroders handle companies that are making moves?
For companies that have already committed to act, engagement and voting is our route to holding them to account for their progress. Schroders has joined the Net Zero Asset Manager initiative and committed to the Science-Based Targets initiative. Our Climate Transition Action Plan sets out how we will manage our business toward net zero emissions in our own operations and value chain, and primarily our clients’ investments.
What is the Schroders climate engagement gameplan?
We define four key areas of focus for our climate engagements, each representing one of the key responses to climate change:
- Climate risk and oversight: Strong climate governance is critical to ensure companies are equipped to deal with strategic and financial risks from climate change. Our priority asks will be for the disclosure of key information on material climate factors that could impact the company; we also hold the board to account for its oversight of climate strategies.
- Climate alignment – decarbonizing and minimizing emissions: The pathway to 1.5 degrees Celsius requires a dramatic reduction in emissions within the next 10 years and beyond. We engage to encourage companies to develop a robust and inclusive path to net zero.
- Climate adaptation: As a result of climate change, the number of weather, climate and water extremes will become more frequent and severe. With economic losses due to these extremes rising sevenfold since the 1970s,6 we engage to strengthen climate resilience and adaptation to minimize such losses.
- Carbon capture and removal: Climate scenarios limiting warming to 1.5 degrees Celsius require “negative emissions” through the removal of carbon dioxide from the atmosphere. We engage to encourage companies to develop scalable carbon capture solutions and to protect the world’s natural carbon sinks where their business models do not allow faster emissions reductions in their existing assets and operations.
Deep dive: how do we engage?
In blue we have identified five climate expectations that we believe large and medium companies7,8 need to adopt to align their business models with the transition to a net zero economy. Where appropriate, we have aligned our engagement expectations with those of collaborative initiatives in which we participate, including IIGCC and CA100+.
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6World Meteorological Organization (2021), Atlas of Mortality and Economic Losses from Weather, Climate and Water Extremes
7There is no standard definition for large and medium companies, and significant regional variation in what is considered large, medium or small. For this reason, we consider the largest 80% of companies we hold via public equity or corporate bonds as in scope (assessed by market cap or enterprise value). We recognize that smaller companies face greater resource and financial constraints than larger companies and therefore may need more time to meet our desired outcomes. When assessing company progress against our expectations, we generally compare the progress of similar-sized peers based in the same region.
8Our desired engagement outcomes are the same across developed and emerging markets. However, we recognize that companies based in emerging markets may need more time to meet our desired outcomes due to, for example, the trajectory of Nationally Determined Contributions (NDCs) in their operating countries, limited government policy response to climate change in some countries, or limited of financial support/incentives available to help companies transition compared to those based in developed countries. When assessing a company’s progress against our desired outcomes, we do take into account regional variations in standards of good practice.
9Scope 1 emissions are direct emissions that occur from sources owned or controlled by the company, Scope 2 emissions are indirect emissions from the purchase of energy, and Scope 3 emissions are all other indirect emissions that occur in a company’s value chain.
10We recognize that it may not be practical for companies to set targets across all scopes and timeframes e.g. a short-, medium- and long-term Scope 3 target. The key point is that we are looking for interim, and well as long-term, targets for all relevant emissions.
11As an interim step, our desired short-term engagement outcome for companies that have not yet set targets, particularly smaller companies and those in emerging markets, is that they start to measure and report their emissions, covering Scope 1, 2 and relevant Scope 3 greenhouse gas emissions.
12This could include, for example, information on “Scope 4” avoided emissions, which are emissions saved indirectly by products and services through the substitution of high carbon activities with low carbon alternatives. As the emissions are saved outside the value chain of a company’s activity, they are not captured under conventional Scope 1 (direct), Scope 2 (indirect) and Scope 3 (value chain) emission measures. For further information on this topic, see our 2021 report, A framework for Avoided Emissions analysis, developed in collaboration with Singapore's sovereign wealth fund GIC.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.