A climate-driven capital cycle is underway, and we believe companies must invest in low-carbon solutions to protect and grow the value of their assets and strengthen competitive positions. In our view, companies that prioritize environmental stewardship and establish clear climate strategies can be first movers and market leaders that profit from the low-carbon transition and deliver value for investors.
Identifying — and encouraging — climate leadership
We want all portfolio companies to achieve net-zero greenhouse gas (GHG) emissions by 2050 and set science-based targets to accomplish this. We look for companies that view climate planning as a strategic priority. We seek businesses adapting to changing regulations and positioning themselves to capitalize on evolving governmental incentives and consumer preferences. During our engagements, we ask boards and management teams to embrace low-carbon practices and align business plans with the Paris Agreement to cap global temperature rise to 1.5°C. We seek leadership on supplier practices and sustainable product innovation as a way to reduce indirect emissions. Our proxy voting policies are aimed at furthering climate stewardship as well.
Our early work on climate change focused almost exclusively on resource-heavy companies with sizable carbon footprints from emissions in their direct control. We have come to appreciate that the climate challenge is broader. Companies, supply chains, and communities are deeply interconnected, so meaningful carbon emissions reduction requires efforts all along the value chain. Companies with low direct emissions (Scope 1 and 2) will still be held accountable for indirect emissions from upstream and downstream activities (Scope 3), including the carbon costs of source goods and materials, transportation costs, and energy and waste costs from the use of products sold to consumers.
Many companies view the energy transition as a source of competitive advantage, using practices like the following to lower future carbon emissions:
- Minimizing fossil-fuel-intensive inputs
- Shifting to lower-carbon modes of logistics
- Designing or deploying energy-efficient heating and cooling systems
- Extending product life cycles to reduce waste
- Innovating to reduce energy intensity
- Incorporating carbon pricing into supplier RFPs
- Using internal carbon taxes to measure business-line profitability
Examples of recent climate engagements
Several portfolio companies have transparent plans for reducing incremental emissions and mitigating exposure to physical climate risk, and many have made measurable progress. Clearly, there is more to do, and we aim to get more companies on board with climate stewardship. The following is a sampling of recent engagements:
- We supported an agricultural machinery company’s plans to disclose Scope 3 emissions and engage with the Science-Based Targets initiative (SBTi).
- We engaged with a Singapore-based bank on carbon mapping in its loan book and incorporating climate considerations into risk assessments and loan pricing.
- We encouraged a health care company to increase measurement and disclosure of Scope 3 emissions and set tougher targets that prioritize carbon reductions over offsets.
- A discussion with a hygiene-solutions company centered on its efforts to inform customers of its environmental progress and encourage them to work alongside it to further reduce emissions. The company’s sustainability team works with its procurement team to reduce supplier emissions by increasing on-site assessments and helping suppliers improve disclosures and targets.
- We engaged with a global consumer goods company that has formalized science-based targets and committed to reducing Scope 1 and 2 emissions by 50% by 2030. The company is actively addressing Scope 3 emissions by building reduction requirements into supplier negotiations and evolving auditing and monitoring practices. It is also engaged in industry-wide efforts to map and source sustainable palm oil, sharing data with industry peers.
Our dialogue with portfolio companies helps us better assess whether climate change is a board-level strategic priority. While carbon transition strategies require multi-decade targets that extend beyond leadership tenures and investment horizons (and may rely on technologies not yet developed), we believe current climate planning can help us distinguish future market leaders from laggards. We look for forward-thinking, adaptable companies with the stewardship discipline necessary to invest in climate innovation. We will hold these same companies accountable as their efforts evolve.
While taking steps to decarbonize will raise the cost of doing business, we believe delaying action could prove even more costly in the long run. In our view, companies must adapt to the low-carbon transition and support a greener economy to protect long-term shareholder value.