Net Zero: Great Unifier and Energy Transition Facilitator

For years, asset owners have been divided on the most effective decarbonization strategy: some have favored shareholder engagement, while others have opted for fossil fuel divestment. Indeed, we at FFI Solutions have felt this division since 2014, when activists adopted our Carbon Underground 200 (CU200) exclusionary screen as a standard for being fossil free. For years, as investors chose between divesting or engaging, they either embraced us or shunned us.

The divestment movement shined a light on stranded asset risk and limited the social license of carbon polluters to operate. Shareholder engagement led the charge for carbon disclosure, board composition changes, and acknowledgement from these boards that climate change is occurring, with its inherent risks to the future of their businesses.

While FFI’s focus remained predominantly in the divestment camp as we worked with advisors and asset managers, we remained agnostic about the approaches. There are no right or wrong answers with respect to exclusionary screening, shareholder engagement, or something in between. The approaches are not mutually exclusive. The truth is that both can be effective. Yet, the division remained.

A dramatic shift in this dynamic occurred at the end of 2019. Many strictly pro-engagement organizations approached us directly and started tracking the CU200 companies. Why were investors renowned for their pro-engagement stance using a tool intended for divestment? The answer: net zero.

The global movement to reach net zero greenhouse gas emissions by 2050 or sooner has come center stage. Investors taking a deep dive into their carbon footprints renewed their focus on the source of three‐quarters of greenhouse gas emissions today – fossil fuel reserve owners.

Now, all decarbonization options are on the table. Divestment and engagement, along with ESG tilts and shorting, are part of the net zero spectrum of tactics to force change in the energy complex. Investors do acknowledge that some of today’s fossil fuel companies will be tomorrow’s clean energy companies. Many are willing to remain invested and even consider new investment in companies that demonstrate real change through specific net zero commitments and proven progress in achieving their transition targets.

The challenge for investors is to determine which companies are actively transitioning to a low-carbon economy, and which are not. Fossil fuel company websites are rife with bold net zero proclamations. Some of these companies readily acknowledge the goal to reach net zero by 2050 and yet continue in their search for new carbon reserves.

Numerous frameworks for assessing transition readiness have been established. Some of these frameworks apply a single list of questions to assess companies across all industries and then measure a company based on management quality and carbon performance. But questions specific to each industry sector are missing in some of those frameworks.

Focusing on the unique factors within the fossil fuel sector is essential in assessing these companies and holding them to the energy transition task. Their net zero commitments and actions must be tracked and dissected. Have they set short- and medium-term commitments? Are their commitments inclusive of Scope 3 emissions? Are their commitments absolute reductions or intensity-based? Are their carbon asset divestments genuine?

Taking a real-world example from the oil industry: BHP recently announced the sale of its oil and gas reserves to Woodside Petroleum – but BHP will still own 48% of the combined entity. As a minority owner, how will BHP report these reserves, and more importantly how will they apply this divestiture to their own net zero targets?

As for the coal industry, the assessment of the transition readiness is heavily driven by commitments and actions to reduce their thermal coal power generation assets. German energy giant RWE has been lauded for its transition efforts. RWE has made significant acquisitions and investments in clean energy, but much of their carbon-neutral vision was forced upon them by German government legislation and coal closure payments of more than US$3 billion. And while they have announced two large mine closures by 2029, the embedded emissions from RWE coal reserves as reported on the CU200 are three times higher in 2021 than they were in 2014 when the list was first published. RWE has pledged carbon-neutrality by 2040, but some assessment frameworks overlook that they will not be aligned with the 1.5°C Paris Agreement goal prior to 2040.

With the slew of recent announcements by investors to exclude fossil fuels from their holdings, it may seem that the gulf between divestors or engagers remains wide. However, these actions are counter-balanced by large asset managers and public pension funds announcing engagement strategies paired with the threat of divestment.

FFI Solutions engages with asset owners to help them evaluate and track the progress of the CU200 companies and beyond. We are committed to providing investors with the transparent, objective, and timely assessment tools required to determine which fossil fuel companies are best positioned to transition their businesses. We see great promise in the diverse coalition of investors, asset managers, and activists working to ensure a sustainable net zero future.