Case study by GES International

Company: GES International
HQ: Stockholm, Sweden
Operations: Global engagement service provider
Investor clients: >100 representing €1.5 trillion AUM

The engagement

A three-year collaborative investor engagement on carbon risk management will come to an end in 2018. A group of five European investors - AP7, NN Investment Partners, Folksam, The Church Pension Fund (Finland) and OP Wealth Management - has engaged with 20 of the world’s largest power utilities in Europe, the US, Japan, China and India. GES International has coordinated and facilitated the engagement.

The aim of the engagement is to align the power utilities’ long-term climate strategies with investor expectations and the Paris Agreement. This is achieved through focusing on improving the power utilities’ climate positioning, transparency, targets and action plans, and, finally, risk and mitigation strategies.

Climate regulation has a strong impact on power utilities’ financial conditions. It is natural to include the topic of lobbying in discussions on climate strategies with this sector, which is heavily regulated and has intense interactions with the political sphere on environmental issues.

Over the last 30 months, discussions have been held with the companies through in-person meetings, conference calls and emails, totalling over 140 significant interactions each year. Insights have been shared to inspire laggard companies to catch up with best practices observed in other markets. The topic of lobbying has been addressed primarily through discussing the companies’ public positions on regulatory responses and participation in industry associations.

Response

Overall, responses from the power utilities have been constructive, and the sector is beginning to make a huge transition towards lower carbon intensity. The companies have generally been willing to discuss the topic of climate change and over the course of the dialogue have become fully aware of the financial materiality of the issue and changing investor expectations. Despite challenges ahead, the companies recognise the need to listen to investors’ concerns on climate risks.

However, there is, naturally, tension between long-term ambitions and the short-term protection of current business models. During the course of the engagement, it was observed that the target companies became more transparent on their position on climate change and associated views on where the sector is heading. Such positions were found to not align with investor expectations as stipulated by broadly supported investor statements, such as the PRI’s statement on corporate climate lobbying and the Institutional Investors Group on Climate Change’s (IIGCC) Investor Expectations of Electric Utilities Companies.

Corporate climate lobbying is largely executed via industry associations. There are valid reasons for power utilities to join industry associations, aside from their lobbying activities on climate regulation. The engagement has therefore focused on ensuring that the targeted power utility companies promote the same agenda on climate within the industry associations as they do towards their investors and other stakeholders.

As the engagement dialogue has progressed, expectations for real transparency and evidence of action has grown, including from the inner workings of industry associations. Investors now need concrete evidence from the power utilities that they are actively pressing industry associations for the same type of climate regulation for which investors have stated their support.

Therefore, all targeted companies have been asked to consider publishing an industry association review where potential policy differences are highlighted and addressed. This has already been tested in the mining industry. A typical outcome is that the industry association refrains from taking positions on climate-related issues or that the company withdraws its membership from the industry association.

Result

The engagement has resulted in companies setting more ambitious climate targets, developing better action plans and improving risk and mitigation strategies. The engagement has also led to greater transparency, including positions on climate change and associated policy responses. Some of the companies have more clearly described their reasons for not participating in lawsuits against climate regulation and for withdrawing from organisations promoting climate policies that divert from company climate policies. So far, no power utility has published a full industry association review. However, it is not unlikely that, in some form, this could become part of standard disclosure, in part to protect against future liability claims.

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