Sharpened Expectations on Climate

Summary

In September 2023, Norges Bank Investment Management published a revised set of expectations on climate change to further support companies in managing the evolving climate related risks and opportunities. We present six core expectations, which apply to all companies, and provide further direction on good practices we encourage companies to adopt.[1] This blog post provides an overview of our updated expectations on climate change, and how the expectations inform our voting decisions as we enter the 2024 AGM season.

Introduction

Norges Bank Investment Management manages the assets of the Norwegian Government Pension Fund Global, according to a mandate from the Norwegian Ministry of Finance. We work to safeguard and build wealth for future generations. At the end of 2023, the fund had a market value of 1,5 trillion dollar and we were invested in 8,859 companies globally.[2]

The fund’s long-term return is dependent on sustainable development, well-functioning markets and good corporate governance. Our public expectation documents on key sustainability matters provide predictability for the companies we invest in, and communicate our priorities to the wider market. In 2023, we were recognized as the world’s most transparent fund in the Global Pension Transparency Benchmark.

Expectations on sustainability 

Our expectations of companies are based on internationally agreed standards, and informed by our dialogue with companies, academics and civil society.

The expectation documents serve as the starting point for our interaction with companies on these topics, and are primarily directed at company boards. The board should take overall responsibility for company strategy and address challenges presented by environmental and social issues.

As international standards, external and commercial contexts, companies and our experience evolve, our expectation documents have also evolved both in terms of structure and content. Climate change is a good case in point where there have been significant developments since we launched our first expectation document in 2009. 

Climate Action Plan and updated expectations on climate change

In 2022, the fund launched a Climate Action Plan, that outlined the ambition for our portfolio companies to achieve net zero emissions by 2050.[3] At the heart of the action plan are efforts to engage effectively with portfolio companies. This includes company dialogues, filing and voting on shareholder proposals, and voting for or against the re-election of board members.

In September 2023, we published a revised set of expectations on climate change to further support companies on how they manage the evolving climate related risks and opportunities.

Core Expectations inform our voting decisions

To enhance clarity and transparency, the revised document highlights six core expectations that apply to all companies. These core expectations are foundational, central to our board-level dialogues, and inform our voting decisions:

Board oversight: Company boards should ensure climate risks and opportunities are integrated into corporate strategy and risk management. They should be transparent on how they establish oversight by disclosing details of the associated governance structures, mechanisms and activities involving the board.

Climate risk disclosures: Companies should analyse and disclose the way in which climate risk may impact their operations, value chains and demand for their products.

Greenhouse gas reporting: Companies should report scope 1, scope 2 and scope 3 greenhouse gas emissions in accordance with the Greenhouse Gas Protocol. Companies should seek reasonable assurance of at least their scope 1 and scope 2 emissions.

Net zero 2050: Companies should commit to net zero by 2050 or sooner and align their activities with the objectives of the Paris Agreement.

Interim targets: Companies should set science-based interim emission reduction targets that cover scope 1, scope 2 and material scope 3 emissions, consistent with net zero by 2050. Interim targets should be based on region- and industry-appropriate pathways, using the associated absolute or intensity measure for emissions.

Transition plans: Companies should implement time-bound and quantified transition plans, designed to deliver on their interim emission reduction targets, and annually disclose progress against pre-established and consistent KPIs.

Further direction: Increased focus on transition plans

The next sections provide further direction on the good practices we encourage companies to adopt. The full document includes four chapters, broadly in the order in which a company might develop their work: foundations of corporate climate strategy; ambition and target setting; transition plans; and delivery and transparency. We have found this to be very useful in company dialogues and analyses.

The chapter on transition plans highlight that many companies need to move on from disclosure and target setting, to show investors credible transition plans with an emphasis on the prioritisation of near-term action and the specific measures required to meet interim decarbonisation targets.

The following are a selection of the elements we encourage companies to consider in their transition plans:

Decarbonisation strategy: Companies should implement and disclose time-bound and quantified decarbonisation strategies. Details should include specific abatement measures needed to reach their interim emission reduction targets, including internal abatement measures, divestments, output changes, carbon credits and contractual instruments such as RECs. Avoided emissions should not be included in a decarbonisation strategy.

Carbon credits: Companies can use carbon credits as a supplement to signal high climate ambitions but should follow the mitigation hierarchy and prioritise reducing GHG emissions from their own operations and value chains. The carbon credits should be additional and verified, with an increasing focus on durable removal credits over time. Companies should not count carbon credits towards science-based interim emission reduction targets and should disclose details of their use. We provide further details in our view on corporate use of voluntary carbon credits.  

Financial planning: Companies should allocate adequate financial resources to their transition plan and disclose the associated capital expenditure and R&D expenditure. Decarbonisation capital expenditure guidance should include the total and annual amounts to the interim target year and the amounts allocated to each specific abatement measure.

Climate lobbying: Companies should align their lobbying activities with the objectives of the Paris Agreement and address membership of trade bodies or associations that is or may appear incongruent with the company’s climate change policy. Companies should be transparent about where they advocate for specific policy and legislative support.

Voting at the 2024 AGM season

We aim to vote at all shareholder meetings at companies in our portfolio. Last year we voted on 115,266 resolutions at 11,468 shareholder meetings. There are several items where our climate expectations are considered in our voting decisions.

Handling material climate risk is ultimately a board responsibility. We will vote against board directors in cases of material failures in the oversight, management and disclosure of climate risk. This will generally follow attempts to engage with the companies, and we did so at 22 companies in 2023.

Many companies ask their shareholders to approve their climate plans.  When voting on climate plans, we consider elements such as the ambition level of targets set, the robustness of the plans and the detail of the related disclosures. When a plan is not sufficiently in line with our expectations, we will not support it. This was the case with four of the 31 proposals we voted on in 2023. Such votes do not supersede the board’s responsibility for ongoing oversight of climate change strategy.

Lastly, we both vote on and file shareholder proposals. To support our work and increase transparency, we make all voting decisions public in advance of the general meeting. In 2023 we voted on 175 shareholder proposals on environmental topics. We follow a three-stage framework in reaching our voting decision, considering the materiality, prescriptiveness and scope of the proposal. An assessment of the proposal against our expectations is an important part of the voting decision. We now provide a public rationale for all our votes on sustainability related shareholder proposals.

Our updated expectations on climate change contribute to increased clarity and transparency for companies and the market as we enter the 2024 AGM season. Being a predictable, long-term investor with clear expectations bounded by our long-term, economic interests, is important at a time when sustainability topics are increasingly politicised in some markets.

Endnotes