Engaging on climate change

There is now almost unanimous scientific consensus that human activity has been the dominant cause of climate change since the 1950s. A growing body of evidence links activities such as deforestation and the burning of fossil fuels to the impacts of climate change including global warming, rising sea levels, increased incidence of extreme weather events, loss of biodiversity and reduced crop yields. In turn, these effects are expected to bring about societal pressures as populations migrate, wealth distribution is affected and the likelihood of conflict is increased.

Despite the very real dangers presented by climate change, the international response to date has been slow and largely ineffective. Debates over who should bear the cost of transition to a low carbon economy, and whether the more immediate concerns of poverty alleviation and economic development should take precedence over climate challenges, have been key stumbling blocks. However, political will towards a global deal on greenhouse gas emissions appears to be building, a trend marked most recently by the groundbreaking bilateral deal on emissions announced by the US and China on 11 November.

A move towards a world where carbon emissions are limited clearly poses risks for industry, and the extractives sector in particular. As a response to many of the concerns raised regarding the transition to a low carbon economy, Rathbone Greenbank Investments engaged directly with two companies exposed to climate-related risks in 2014.

The first was oil and gas producer Royal Dutch Shell. Major producers of fossil fuels face a potential overvaluation of their assets if it transpires that not all of their reserves can be extracted due to the constraints of international policies aiming to limit greenhouse gas emissions. Building on our engagement with the company over many years, we were present at the company’s 2014 AGM in The Hague to ask questions regarding the company’s efforts to progressively reduce its carbon footprint. We engaged with the company formally on its current lack of an emissions intensity target and on the efforts it must yet make to align its engagement with policy-makers with its stated position on climate change. We encouraged the company to work more closely with the corporate transparency organisation CDP (formerly the Carbon Disclosure Project) in order to communicate its progress on this issue to its wider stakeholder community.

The second company was energy supplier SSE.  Although not involved directly in fossil fuel extraction and production, it faces risks from the potential restriction of greenhouse gas emissions in terms of how this affects its capital investment programme. Notwithstanding the important consumer affordability and energy security challenges facing a company like SSE, there is a danger that capital investment decisions could represent a potential source of long-term financial risk to investment portfolios as we move into a carbon-constrained world. If the company prioritises adding new coal-fired generating capacity in the short term, it may find these assets operating under increasingly challenging markets in the long term.

On the issue of capital investments in clean technology, SSE has invested some £3.7bn in renewable energy projects in the last seven years. This investment is evidence of the group’s strategy for its wholesale business to move from a portfolio weighted towards gas and coal generation to one weighted towards gas and renewables. This shift in the balance of the generation portfolio is why the company remains confident that it will achieve its 2020 objective of reducing the carbon intensity of total generation by 50% compared to 2006.

Direct engagement with companies at their AGMs brings an enhanced level of detail to our dialogue with them, while also furthering our aim of influencing positive change within the companies in which we invest on behalf of our clients. Our involvement this year at both the SSE and Royal Dutch Shell meetings highlights our efforts to express the values of our clients throughout the investment process.

If you would like to review how your investments could better reflect your values, please call 0117 930 3000 or email greenbank@rathbones.com and we would be pleased to help.