Few globally listed companies can “effectively demonstrate to investors how they climate risk into long-term strategy”, according to State Street Global Advisors (SSGA).
SSGA has put out a guidance note on effective climate change disclosures for listed companies – SSGA’s Perspectives on Effective Climate Change Disclosure. The note is based on observations from 240 climate-related engagements with 168 companies over the past four years. SSGA believes it is particularly important for companies in the oil and gas, utilities and mining sectors to demonstrate this capability, given that in those sectors, long investment horizons could render assets stranded.
SSGA has focused on 50 global companies in the oil and gas, utilities and mining sectors as part of its engagement, said Rakhi Kumar, managing director and head of ESG investments and asset stewardship at State Street Global Advisors (SSGA). The oil and gas, utilities and mining sectors (“high-impact sectors”) account for over one quarter of annual GHG emissions, which accounts for their particular focus. SSGA manages US$2.56 trillion of asset on behalf of its clients as of March 31, 2017.
“We studied 50 companies in three primary sectors – utilities, oil and gas and mining – to see what type of disclosure they give related to climate issues,” Kumar said. “We did obviously look at many of the mining companies in Australian, and I think overall, I would put Australian disclosure around climate about where Europe is, with some smaller companies a little bit behind, but definitely ahead of the US in terms of acknowledging the risk. What we’re focusing on is the 2 degree scenario planning exercise. In that sense, a lot of companies have a lot of work to do.”
SSGA believes that to provide a holistic picture of how climate risks are managed and mitigated, companies should be disclosing information in four areas – governance and board oversight of climate risk, establishing and disclosing long-term GHG goals, disclosing the average and range of carbon price assumptions, and discussing impacts of scenario planning on long-term capital allocation decisions.
“Why did we focus on those particular areas and what are we trying to do,” Kumar said. “As an investor … we don’t have the expertise to say this is the right answer and this is the wrong answer. It’s management’s job to hire the talent and do the robust scenario planning. It’s the board’s job to do the robust oversight, and then use the results of that oversight to make decisions. As an investor, I want information to give me a sense of the robustness, and what the outcome has been in terms of how it’s been incorporated.”
Establishing and disclosing long-term GHG goals is important because it is essential to the robustness of long-term planning and strategy, she added.
“If you actually are doing a robust exercise and thinking about your emissions in a strategic manner, you have to put a number in that model,” Kumar said. “Companies are fighting back on actually setting goals because they believe that goals may restrict their ability to do M&A activity, etc. But we say, you can explain if you had a good opportunity to buy a good asset and how that fits in with the long-term.”
SSGA’s guidance does not identify key sustainability performance indicators, nor does it “contradict or limit disclosure recommendations from other groups such as the Task Force on Climate-related Financial Disclosure (TCFD) or the CDP (formerly known as the Carbon Disclosure Project). It is designed to identify current disclosure practices that are useful to investors in evaluating the robustness of climate-related scenario planning exercises and climate-related strategic reports by companies in the high-impact sectors.”
Kumar noted that SSGA is a signatory to the TCFD.
“What you really need is to have material, consistent reporting and comparative reporting,” she said. “Currently, we are using the data that is available, but you need to work on that and then make sure that companies do provide disclosure.”