Companies across sectors and geographies are responding to rising pressure from investors to demonstrate how they’ll remain profitable and sustainable in the face of climate change. The factors driving investors’ sense of urgency include their lived experience with extreme climate events and scientifically backed conclusions about the difficult road ahead for virtually everyone on earth, but particularly for more vulnerable populations.
The International Energy Agency, for example, now acknowledges that a massive shift in investment will be required over the next 10 years to reach net-zero greenhouse gas emissions globally by mid-century. And this mid-century deadline is expected to be deadly if we miss it, as documented extensively by the Intergovernmental Panel on Climate Change (IPCC).
Key goals to achieve by 2030
Source: International Energy Agency, May 2021. EVs are electric vehicles.
In its most recent report, the IPCC painted a grim picture of a world that remains business as usual, pushing global average temperatures far beyond planetary boundaries, leading to a high likelihood of cascading catastrophes, from the collapse of global agriculture and oceanic health to an inexorable rise in sea levels and frequency of extreme weather events. Institutional and individual investors, beyond just taking notice, are demanding to know the degree to which their investments are subject to these risks—and how quickly investee companies are assessing and helping mitigate climate risk.
With a growing consensus that future economic growth, social stability, and, indeed, life itself depend on averting catastrophic climate change, we believe it’s critical that investors continue to use their voice and capital to pursue a sustainability-focused agenda. At Boston Common, we’re focused on the mitigation of systemic climate risk through:
1 Redirecting corporate conduct and operational alignment with net-zero commitments
2 Putting pressure on key industries, particularly on banking and insurance, as well as other enabling industry groups
3 Holding ourselves accountable to high sustainability standards
While corporate and governmental commitments to achieve net-zero emissions by 2050 are encouraging—and have continued to gain steam after Glasgow, the site of the COP26 climate conference—rising atmospheric concentrations of CO2 are cumulative, rendering straight-line abatement plans and back-end-loaded solutions less likely to work and ultimately much more expensive. In the race to 2030, we’re striving to take early action and make dramatic changes within this decade. That means taking the initiative now to update and replace aging infrastructure; build efficient, cleaner systems; and change supply chains to be in line with the low-carbon transition.
Redirecting corporate conduct in line with net-zero commitments
In 2021, we found ourselves working on new fronts in the fight against climate change; in some cases, working around thematic areas such as global warming accelerants such as hydrofluorocarbons (HFCs). HFCs have as much as 9,000 times the global warming impact of CO2. In our work this year engaging with companies in the refrigeration industry, we sought to convince Kroger, the biggest U.S. supermarket company, to improve its oversight and disclosure on preventing leaking refrigerants such as HFCs. We also engaged with companies involved in the manufacture of refrigeration and air-conditioning appliances and systems—Carrier, Daikin, and Voltas—to advocate for adoption of alternatives to HFC refrigerants, increased refrigerant efficiency, and proper end-of-life disposal of refrigerants.
Putting pressure on key industries
In 2014, we embarked on a five-year initiative to align the banking sector with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and increase banks’ awareness of climate risk in lending portfolios, with the goal of encouraging banks to demand higher standards from high-carbon-sector clients. Banks are primarily exposed to climate-related risks through their lending and financial service activities. A recent study from Ceres analyzed the $2.2 trillion syndicated loan market and found that as much as $250 billion could be subject to physical climate risks each year. Given that banks have historically represented large sector exposures in ESG portfolios, forceful engagement strategies are especially important in this market segment.
Since the inception of our initiative, we’ve engaged nearly 60 global banks to gain a clearer understanding of the trajectory and scale of environmentally beneficial and environmentally harmful financing relative to overall financing activities. Many banks have demonstrated progress over the last five years of our global engagement, including improved governance and oversight of climate risk, climate disclosure aligned with the TCFD, sector-level restrictions related to fossil fuels, and ongoing assessment and target setting to decarbonize bank portfolios. We continue to push for more rapid action by governments, advocating for mandatory climate disclosure. And beyond that, we’re advocating for stricter financing requirements for bank clients, changes in bank pricing models, and increased financing of climate mitigation and adaptation to accelerate the changes necessary to shift the balance away from carbon-intensive sectors and toward sectors supporting the urgent action needed by 2030.
As much as $250 billion of the $2.2 trillion syndicated loan market could be subject to physical climate risks each year.
Holding ourselves accountable to high sustainability standards
In a time of great change and increasing awareness, we must continue holding ourselves accountable as investors. In early 2020, Boston Common became the first U.S. asset manager to join the Partnership for Carbon Accounting Financials, through which we’re committing to strategically reduce our portfolios’ carbon footprints over time. We also joined the Net Zero Asset Managers Initiative, an international group of over 125 asset managers with more than $43 trillion in assets under management committed to aligning with a 1.5° scenario and neutralizing portfolio emissions by 2050 or sooner. In 2021, we took steps to accelerate our action, committing to deforestation-free portfolios by 2025 and endorsing the Finance for Biodiversity Pledge.
Averting catastrophic climate change is a tremendous challenge that can only be faced by acting decisively now. We commit to staying active on behalf of our clients, for whom we’re stewards of capital.
Views are those of Lauren Compere, managing director of ESG engagement, Boston Common Asset Management, are subject to change, and do not constitute investment advice or a recommendation regarding any specific product or security. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. John Hancock takes no responsibility for the accuracy of the content, and the views may not necessarily reflect those of John Hancock Investment Management.
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