Investor Insight Newsletter: science-based stewardship - October 2024

This is an excerpt from our October newsletter. Subscribe to receive our latest research, insights and updates directly to your inbox.

Rio Tinto has stepped forward with public support for proposed reforms to Australian environmental law - including support for the “transparent disclosure of project climate emissions”. This has happened following months of pressure from institutional investors after ACCR publicly disengaged from Rio Tinto due to negative climate lobbying. There had been widespread concern from investors after it was revealed the company had directly lobbied the Prime Minister against the reforms. Rio’s pivot to positive advocacy demonstrates that activated and informed investors can make an impact on improving a company’s climate-related lobbying.

Rio Tinto says it’s supporting reform to the Environment Protection and Biodiversity Conservation Act 1999 (EPBC Act) “given the urgency of finding solutions to nature loss and the impact of climate change”. Indeed, there has never been a more important time for robust and forceful stewardship, especially as the likelihood of the world overshooting the goals of the Paris Agreement increases. This month saw the release of the updated Planetary Health Check, with six out of nine planetary boundaries already surpassed, and climate change being one of them. Global mean temperatures are now higher than at any point since human civilisations emerged on Earth.

While we explore overshoot in more detail below, it’s worth pointing out just why the latest science needs to be front of mind when engaging with companies on their transition plans.

BHP’s 2024 Climate Transition Action Plan (CTAP) will go to a vote at the 30 October AGM. In its CTAP, BHP states “The modelled outputs of our planning range result in global CO2 emission pathways implying a projected global temperature increase of around 2°C by CY2100 (p. 32).” This reflects a broader malaise across the corporate sector that implies there are no additional costs associated with higher temperature transition pathways. Accepting 2°C as a so-called “safe” or acceptable target ignores the reality that every 0.1°C of warming comes with a cost. This has become all the more apparent with human-caused climate change leading to half of the direct economic damages linked to the recent back-to-back hurricanes in the USA, Helene and Milton. And so BHP’s latest CTAP - which offers improved disclosures, but reveals low ambition - does little to answer the principle that every 0.1°C matters.

More broadly, if indeed it is the case that businesses and financial institutions are planning for a 2°C world, then there needs to be a more honest conversation about risks and costs associated with this temperature outcome. The physical and financial costs of warming are already being felt, and the science tells us that between 1.5 to 2 degrees, six climate tipping points are likely to be triggered and another four become possible. Investors should be pushing back and voting accordingly when company transition plans are presented with incomplete and inadequate risk assessments. “Business as usual” is just not an option in a world that is misaligned with the goals of the Paris Agreement.

Science-based stewardship

Setu Pelz, ACCR Climate and Energy Analyst.

As global mean temperature moves towards and beyond 1.5°C, physical impacts will become more extreme and frequent with every increment of warming. Investors must consider whether their risk assessment models appropriately capture cascading physical impacts and near-term nonlinear risk channels, as well as the uncertainties in adaptive capacity to deal with these.

A common misperception of the Paris Agreement is that the 1.5°C goal represents a “safe” threshold. In fact, the impacts of global mean temperature rise, currently at around 1.2°C, are already felt worldwide. Examples of extreme weather events which are empirically linked to anthropogenic temperature rise are abundant; from floods in Pakistan^[1] and Central Europe^[2], to heatwaves in India^[3] and the Philippines^[4], and Hurricane Helene^[5] that recently tore across the continental United States. The 1.5°C goal therefore does not represent the point at which we begin to feel the impacts of climate change. Rather, it represents a collective political agreement to limit the increasingly severe impacts felt around the world - intended to mitigate the worst of climate change. We expect to breach this at some point in the next decade.^[6]

With every 10th of a degree of warming, the frequency and magnitude of extremes increases. This is governed by a series of cascading processes that have corresponding nonlinear consequences for physical infrastructure investment risk.^[7] An example of what this would look like - which has already occurred - is that damage to property and infrastructure from a series of tropical cyclones would be exacerbated by the consecutive nature of the storms, along with the depleted response ability of emergency management, owing to a preceding hurricane.

These impacts have already been observed and robustly linked to global mean temperatures^[8], and may be reversible to some degree, with net-negative emissions following net-zero^[9]. However, these physical risks are distinct from the risks of tipping points, which have the potential to irreversibly shift the climate into another state.

As we navigate the implications of 1.5°C overshoot, the investment community must be alive to the reality that global temperature rise induced physical risks to infrastructure investments will not regress to the mean, but steadily worsen over time.

The World Meteorological Organization estimates climate change-related events over the past five decades have resulted in US$4.3 trillion in reported economic losses. While adaptation measures, such as investing in floodproofing infrastructure, may attenuate these effects to some degree^[10], the most effective lever remains a concerted effort to limit overshoot and return to below 1.5°C as quickly as possible. Diversification and patience are not sufficient to deal with this type of risk.

Question of the Quarter: Does investor stewardship of company climate lobbying still matter in the era of macro stewardship?

Eight years on from the Paris Agreement, public policies remain insufficient to avoid systemic climate risks and fully unlock private capital flows in a net-zero economy. Many leading investors are stepping up their engagements and advocacy for more supportive public policy in recognition of the limitations of corporate engagement.^[11] Over 500 institutional investors managing more than US $29 trillion in assets recently signed on to the 2024 Global Investor Statement to Governments on the Climate Crisis, urging all levels of government to do more on climate policy.

Macro stewardship by investors is essential. However, because these efforts to secure better public policy can be either helped or hindered by the advocacy of investee companies, keeping a focus on company climate lobbying is also required.

• Ensuring macro stewardship efforts are not undermined by the continued lobbying of investee companies and their industry associations. Incumbent fossil fuel industries “are often more concentrated than those benefiting from climate policy and lobby more effectively to prevent losses”.^[12] This cannot be overlooked as investors grow their macro stewardship focus. In fact, the need to effectively identify and constrain such advocacy by investee companies only grows as investors themselves throw further resources towards enhancing climate policy outcomes.
• Requiring companies to identify and lobby proactively for effective decarbonisation policy. To complement investor macro stewardship efforts, companies should be required to disclose the specific policies and regulations they require to successfully transition in line with the Paris Agreement.^[13] Then, not only the companies but investors can enthusiastically advocate for those policy outcomes.