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Owners can put pressure on high-emitting companies to adapt

Asset owners have an important role in achieving change in high-emitting companies. Today, 26th of September, Richard Gröttheim and Johan Florén, CEO and head of ESG and Communications at AP7, publish the following opinion piece in the Swedish daily DN Debatt.


Owners can put pressure on high-emitting companies to adapt

The Swedish election campaign is over. After a summer of extreme weather, drought, and fires around the world, climate awareness was high. But increasing energy prices, phase-out of Russian gas to Europe, and the colder part of the year just around the corner presented voters with a complex challenge with no simple political solutions.

Rarely has the everyday political conflict between the short and long term been so pronounced.

The scientific community is protesting that the climate problem has been pushed into the shadows by current events. What is needed now is a wholehearted political commitment to implement the necessary policy changes. This is one of the basic requirements specified in the International Energy Agency (IEA) Roadmap to reach net zero emissions by 2050.

Without political reforms, the climate problems cannot be solved. A price must be placed on emissions and fossil fuel subsidies phased out. At the same time, political decisionmakers must stimulate the introduction of clean and efficient energy technology.

Another basic condition for reaching the goal in the roadmap is to sharply reduce demand for fossil fuels. This would mean, for example, that oil and gas producers completely stop exploiting new resources and instead focus on existing assets and reducing emissions. Not until demand falls can existing reserves be left in the ground.

Consumers and companies must change their consumption from ‘brown’ to ‘green’. This requires investor support. Owners with large shareholdings must help companies with high emissions – particularly in the energy sector and industries such as steel, cement, and transport – to adapt their operations.

Devastating if sustainable investors stay away
With this in mind, it is a concern that so many opinion shapers still cling to the notion that sustainable investors can contribute best by selling assets in such companies. It would be devastating if that approach gained further traction. The companies with the greatest need to change would be drained of sustainable investors, and the internal pressure to bring about change would stop.

The international capital market is dominated by traditional asset management without significant climate ambitions. What is lacking are sustainable investors who are prepared to roll up their sleeves and get involved as owners.

Owners are needed in the transformation of the fossil economy
Companies deeply rooted in the fossil economy must find a way out of history if they are to adapt to a low-carbon future. The owners’ task is to make sure that happens as soon as possible. The solution is not to wash their hands of the problem by selling their holdings to someone else. Sustainable investments must not become a beauty contest where it is important to have the most attractive portfolio. The primary focus must be on generating benefit

Next year, AP7 will hopefully have a new, clearer sustainability goal in place. Assets will be managed in an exemplary manner, and special emphasis will be placed on promoting sustainable development.

Highest priority transition companies
Our conclusion regarding the climate is that we should not only continue to invest in transition companies – we also need to increase our efforts in terms of both holdings and corporate governance. This will be a top priority on our sustainability agenda for several years to come. Corporate governance and green investment volumes are already increasing. Shortly, we will also see the first earmarked investment with an explicit focus on transition.

Whether we like it or not, oil and gas will be around for decades. However, not all fossil fuels are equally bad. Coal produces the largest carbon dioxide emissions, and top priority is to keep it in the ground. The good news is that coal could be phased out significantly faster than oil and gas with the help of economic instruments that put a price on carbon emissions.

Market forces are important for the transition
A recent report from S&P Global Ratings concludes that a global policy shift towards pricing of carbon emissions is on the way. This is a decisive measure that will move society in the direction of net zero emissions, so it is a cause for optimism. However, until a price is placed on emissions, market forces will oppose the transition.

The process is likely to be gradual and local rather than through a global carbon price covering all sectors. Within the EU, intensive work is underway to agree on more ambitious targets for emission reductions, reduction of emission rights, and phasing in of climate tariffs. From an investment perspective, this means that companies that are prepared for higher carbon prices will be in a stronger competitive position.

While political reforms are necessary, they are not sufficient – all parts of society must play their part. Naturally, investors must contribute in several ways.

The financial market can generate benefit for the climate
Everyone who is active in the financial market is contributing to the basic societal function of offering financing and pricing sustainability risks and other risks. However, for those who want to generate benefit for the climate, they need to go beyond the normal function of the financial market.

One possibility is to offer selected companies cheap financing through greatly reduced yield requirements, but in practice this is difficult to reconcile with the main mission of most investors. A pension fund’s raison d’être is that the savers should receive a good pension with the help of the yield that is generated.

Another possibility is to look for private equity with a positive climate impact. For these companies, financing can be a crucial success factor, but this type of investment is only a narrow niche of the market, and this will remain so.

The investors’ best opportunity to actually make a difference is through their ownership role, providing these are investments in liquid assets with a requirement to generate return. Through a combination of dialogue and pressure, sustainable investors can persuade the companies they own to adapt their operations, which is particularly important in view of the climate issues.

The IEA Roadmap shows that companies need to adapt very quickly if the climate goals are to be reached. Investors can only influence this transition if their words and actions are clear.

Therefore, we urge large asset owners not to withdraw assets from high-emitting companies, but to work together and become a powerful force for change. Together, we can encourage companies to come up with credible transition plans and ensure they are better equipped for the future, which will make them more attractive as investments.

When the politicians agree to implement the necessary policy reforms, our companies must be well prepared.

Richard Gröttheim, CEO, AP7
Johan Florén, Head of ESG and Communication, AP7