To Meet Net Zero, Prioritize ESG Laggards

On the heels of COP26, investors are not only thinking about the climate-related risks of companies within their portfolios, but they are also considering whether to make new investments or maintain existing investments in high-emitting companies or countries going forward. With the long-term goal of net zero in mind, it may be tempting for investors to focus on capitalizing ESG trailblazers over ESG laggards. But this approach misses out on untapped value and potential in the companies that have room to improve. To capture unrealized value and move toward net zero, investors should continue to invest and prioritize active engagement with ESG laggards on their response to climate change and management of greenhouse gas (GHG) emissions.

Engaging for Net Zero

While engagement has been perceived as primarily the domain of equity investors, fixed income investors can also drive meaningful engagements on ESG risks with bond issuers. Active engagement benefits both the issuer and the bondholder; investors can recognize the companies dedicated to improving ESG metrics and identify those with shortcomings, which may improve issuers’ GHG emissions – and, potentially, their financial performance – over time. (For fixed income investors new to engagement, the UN’s Principles of Responsible Investment offers guidance on ways to structure engagement strategies.)

With this perspective in mind, we engaged a U.S.-based oil and gas producer whose production process included injecting carbon dioxide into the earth. The company has used this expertise to develop direct air carbon-capture technology, which removes carbon dioxide from the atmosphere and produces oil that is either net zero or net negative carbon. By 2040, the company aims to be net zero and expects their carbon management business will overtake their traditional business.

Through this engagement, we learned best practices from an industry leader and will use this information with other producers to contextualize the risks facing the industry. As investors, it will be critical to monitor the progress of these plans, hold the company to account and continue to engage to ensure these plans are executed in the most open and transparent process possible.