The investment industry’s understanding of ESG and sustainability has evolved in recent years, making it increasingly clear the often-claimed choice between exclusion and engagement is a fallacy.
While asset managers should not be afraid to exclude companies when necessary, it should be obvious that initiating and maintaining constructive dialogues with the corporates chosen for portfolios is crucial to achieving real-world impact.
For this reason, the use of engagement and voting to influence companies is now overwhelmingly accepted as a driver of more sustainable business practices. As such, it is recognised as a vital element of long-term value creation within both equity and bond markets.
However, as the recent clampdown on greenwashing shines a spotlight on ESG promotion and integration claims, it is understandable if engagement increasingly comes under the microscope. Engagement will continue to be a powerful tool for investors, and it is vital the asset management community creates broader awareness of the work undertaken behind the scenes to foster positive change. Engagement also needs to be the real deal – merely sending annual letters is not enough.
Currently, most of the higher profile engagement cases are embarked upon by investor coalitions, such as ClimateAction 100+, or the collaborative engagement we at Nordea initiated regarding construction of the planned coal fired Vung Ang 2 power plant in Vietnam. While communication of the results of such activities will remain important, it is also crucial for investors to demonstrate smaller – but still significant – engagement efforts at individual company level. In most cases, such dialogues occur over a number of years.
Importance of individual efforts
As an example, our Responsible Investments team has been in multi-year discussions with French group Air Liquide, a global leader in industrial gases. The industrial sector is responsible for 23% of global energy-related CO2 emissions, which demonstrates the urgent need for improved efficiency in the sector. While it is not ‘obviously green’, Air Liquide is one of the companies able to help achieve this.
As a heavy emitter, Air Liquide tends to be penalised by ESG data providers, with the company scoring poorly in conventional carbon footprint tools. However, the end-use of the company’s products and services often helps contribute to emissions reductions at the point of use. Incentivising Air Liquide to focus on its contribution to combating climate change can therefore drive both increased positive impact and better recognition of the company’s efforts.
Accordingly, during the early part of our engagement interactions with the company, we focused on persuading Air Liquide management to report in line with Task Force on Climate-related Financial Disclosures (TCFD) recommendations. In addition, we urged the introduction of a long-term commitment to reach net zero by 2050, as well as the setting of science-based greenhouse gas (GHG) reduction targets. As a result of this phase of our engagement, Air Liquide publicly committed to reaching net zero, while it is also now adhering to TCFD reporting.
In our most recent meetings with Air Liquide’s CEO and head of sustainability, we continued to stress the importance of the company demonstrating the robustness and achievements of its climate strategy, along with the opportunities it sees in the hydrogen market. In response, Air Liquide published its first sustainable development report earlier this year, presenting the group’s sustainability ambitions and extra-financial results. In the report, Air Liquide highlighted a carbon intensity reduction of 24% versus 2015 levels, while it is on track to achieve its objective of a 30% reduction by 2025.
In a first within its industry, Air Liquide has also obtained validation for its short-term Scope 1 & 2 targets from the Science Based Targets initiative, or SBTi. As for its plans for hydrogen, the company has committed €200m to expand hydrogen production and related infrastructure.
Continuing the credible commitments
As Air Liquide is among the largest GHG contributors within Nordea’s portfolios, it will remain one of our focus engagements for the foreseeable future. Encouragingly, Air Liquide remains genuinely receptive to our feedback, and management remains committed to improving the company’s ESG profile. Apart from helping us reach our own climate targets, this provides additional comfort on the overall investment case.
As we move into 2023, our next steps with the company include the continued push for increased green capex, the third-party validation of Scope 3 targets, the provision of a robust and credible decarbonisation roadmap, and execution on its carbon emissions reduction targets.
For now, Air Liquide is rated B+ within our proprietary ESG scoring model, meaning it is investible for our ESG STARS fund range – where we, on a quarterly basis, provide reporting on our most important company engagements. This is the sort of information we hope and expect to see more of in the market – helping to prove real ESG investment can indeed have real-world impact on the issues that matter to us all.
