Putting Together a Climate Action Portfolio

Creating a climate action portfolio can be both challenging and rewarding. Often, climate conscious investors have ethical concerns about being invested in so-called “dirty stocks", but your investments, no matter the size, can have real and positive impact. It's incredibly important to put our money where it may do the most good and to exercise your shareholder rights at every opportunity to drive the changes we need to see.

Climate change is a complex, global problem. While the energy transition is undoubtedly underway, there is a need for greater urgency if we are to mitigate the worst impacts of a changing climate - and this is where shareholders can play an important role. By staying invested in high-emitting companies, shareholders can use their rights as owners to seek information and to have a voice on company strategy, with a focus on decreasing absolute, real world emissions.

ACCR has a portfolio containing some core ASX stocks that we hold for long-term stewardship and corporate engagement. For our strategic climate-focused action, we select stocks based upon there being a need for improvement on climate strategy, and where we think shareholder strategy can be deployed to decrease emissions and protect long-term value for all shareholders.

Here are some of our primary concerns:

Decarbonisation targets not aligned with science

In order to limit global warming, rapidly decarbonising the global economy is crucial. Shareholders must monitor and challenge listed companies to make progress against credible short, medium and long term emissions reduction targets in line with science and the Paris Agreement.

ACCR eagerly awaits the opportunity to review the new climate strategy from the refreshed board of AGL, Australia’s largest emitter of scope 1 greenhouse gases. We will forensically examine the climate transition plan that Woodside Energy will put to a shareholder vote in 2024. We are also monitoring how Rio Tinto and BHP are collaborating with their customers on reducing the emissions intensity of steel manufacturing.

Director competence

For high-emitting companies, climate change is a material strategic governance risk and therefore the responsibility of a board and its directors. Directors who fail to demonstrate a credible approach to climate-risk management should be held to account by shareholders.

Shareholders were instrumental in the renewal at AGL in 2022 by electing four new climate-focused directors to join the board. A record-breaking vote was recorded against long-standing Woodside Energy director Ian MacFarlane at the company’s 2023 AGM. Sizeable votes were recorded against all three Santos directors facing re-election in 2023. Director  elections will become increasingly significant at all heavy-emitting companies that lack science-aligned strategy in the coming years.

Remuneration, incentives and bonuses

Good corporate governance should see executive pay-packets linked to achieving credible climate targets. However, there are still cases where remuneration structures incentivise fossil fuel expansion. Shareholders should be aware of these remuneration structures, particularly where they may apply to new fossil fuel projects and the expansion of existing fields.

Australia has a ‘two strikes’ remuneration rule. This means that boards face being spilled if they suffer shareholder votes of more than 25 per cent against their executive pay proposals at two consecutive AGM’s. AGL received a ‘first strike’ on remuneration at its 2022 AGM. Santos avoided a humiliating second strike at its AGM in 2023. Woodside and Santos still incentivise its CEOs to bring new fossil fuel extraction projects online.

Lobbying

Lobbying to subvert and delay policy settings that enable rapid and orderly decarbonisation increases the risks of future stranded assets and misaligned capital expenditure. Negative climate lobbying also suppresses opportunities for investment in the energy transition. Investors can play a critical role in curtailing the impact of negative lobbying by industry associations and heavy-emitting companies by pushing for them to withdraw their memberships, and by insisting on the adoption of positive climate lobbying practices.

In 2023, Rio Tinto made a commitment to positive climate advocacy and to disclose the policy settings required to meet its decarbonisation targets. BHP and Rio Tinto, as paying members of their industry associations, still remain complicit in the negative campaigns and conduct of organisations like the Minerals Council of Australia. Rio Tinto’s welcome exit from the Queensland Resources Council (QRC) was triggered by ACCR’s shareholder resolution.

Regulatory and litigation risks

Shareholders should expect high social and environmental performance standards and reporting transparency. Climate litigation is increasingly pursued and regulatory bodies are issuing substantial fines for non-compliance.

In 2021, ACCR filed landmark  proceedings against Santos in the Federal Court, claiming that the company had engaged in greenwashing. ASIC has stepped up investigations into company greenwashing statements and Woodside is under investigation by NOPSEMA for decommissioning breaches.

We believe shareholders should actively pursue a range of issues across all of the companies they own to preserve the long-term value of their investments and to contribute towards a safer planet. We hope that being a part of our shareholder community fulfils a significant part of your  ethical investing and active engagement journey.

ACCR cannot advise you on the investment choices you wish to make with your money. If you already have a financial adviser, we can speak with them about the easiest way for you to support our work.

If you don’t have a financial adviser, we can provide you with information on some advisers that we already work closely with. Email us: shareholders@accr.org.au

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