Bringing Investors and Companies Together to Address the Climate Change Crisis

As Earth Day is again around the corner on the 22^nd of April, the Biden Administration is to convene a global climate summit. Following a historical precedent for several such events, since its inception in 1970, including signing the landmark Paris Agreement[i]. We have seen positive developments since the Paris Agreement; societal actions to address some of the root causes of climate change have yet to suppress the negative trends[ii]. Historically, active ownership on climate change has focused on direct emissions from highly exposed sectors, such as fossil fuel and utility companies. However, the more complicated, less direct aspects of climate change have seen limited progress. Tackling such issues will see a strong need for collaboration from both countries and other key sectors, in particular, banking and finance. Banks are key to support this transformation; facilitating economic activity for positive change throughout the entire value chain is key.

One such aspect is the degradation of forest biomes through deforestation, wildfires, and other factors. Deforestation has been increasingly in focus in recent years. Economic activity relating to forest systems has a significant impact on climate change. IPCC claims that AFOLU (Agriculture, Forestry & Other Land Use) is responsible for 23 percent of total net anthropogenic emissions. These emissions mean substantial transitional and physical climate risks for companies operating in this area. They are likely to result in financially material impacts, such as supply chain disruption, cost volatility, increasing legislation and litigation, pressures on natural resources, and additional costs and reputational damage to the, directly and indirectly, involved sectors. Also, as climatic changes materialize, the physical risks and vulnerability of forest biomes will be compounded. This compounding of impacts will, in turn, lead to an increase in financial risks for investors, not to mention reputational risks and the impact of changing consumer demands on addressing climate and other issues.

Beyond these risks, the scientific community is warning that we may be approaching some climate tipping points1 in the Earth system, such as the loss of tropical rainforests. A tipping point is a threshold of change in a system that, when exceeded, can lead to extensive and irreversible changes to that system, with the potential for domino effects on other systems. The risk of reaching a tipping point in forest biomes is growing through rising temperatures, forest fires, sprawling deforestation and forest mismanagement. It is estimated that a tipping point caused by deforestation of the Amazon could be reached at a forest-cover loss of between 20 and 40 percent. The current loss stands at 17 percent, and the year-on-year rate of loss increased by 134 percent in 20192. Irreversible changes to natural systems are expected if a tipping point is reached and will lead to severe consequences for society. 

As part of Sustainalytics’ active ownership program, we recently launched our new Climate Change - Sustainable Forest and Finance thematic engagement. This new engagement focuses on key material risks, working beyond a single company or industry, understanding how the entire investment value chain in question affects climate change. Climate Change - Sustainable Forest and Finance builds on Sustainalytics’ previous experience in climate engagement, pivoting to a more holistic approach. There will be a focus on companies putting specific science-based targets in place relating to emissions and forest mismanagement and driving uptake on key disclosure standards, including TCFD and the upcoming recommendation from the Taskforce on Nature-Related Financial Disclosure (TNFD) where relevant. Engagement Managers will look to target driving forces, such as credit and loan portfolios, and how they influence ongoing negative impacts, as well as consumer demands and their influence on the value chain and how to utilize these to create positive change.

The thematic engagement will explore with financiers their role, the challenges, and practicalities of addressing climate change and forests in banking activities, identifying best practice and barriers. From this, we expect to gather insights that can inform other investor-company conversations on climate and forest risks, bringing together investors and companies from various industries to discuss significant challenges concerning climate and forest value chains through, for example, our virtual roundtables. Our dialogue will strive to address UN Sustainable Development Goals (SDGs), in particular Climate Action (13), Responsible Consumption and Production (12), Life on Land (15) and Partnerships (17).

Through active ownership, investors can play an active role in supporting global climate crisis solutions, encouraging companies to collaborate in addressing the climate crisis. Expressing concern for climate as a material issue and raising this with companies can accelerate change, providing a progressive step on the long road to meeting the Paris agreement.

Hear from Sustainalytics' Emma Henningsson, Associate Director, Engagement Services and Henry Pallister-Dixon, Manager, Engagement Services, as they chat with industry experts about climate change from three different perspectives. Watch the video series on demand.

Get in touch to learn more about Sustainalytics’ Engagement Services, including its climate change thematic engagement.