There are many different methods for achieving net-zero. The heart of our climate actions is focused on developing firmwide and portfolio-level metrics and targets while engaging with company management on key issues. Instead of resorting to widespread exclusions or divestment as the first option, we view divestment as one tool in our escalation strategy after engaging for action has failed. In many cases, companies that are part of the global climate problem are instrumental in the solution, and staying invested offers opportunities to influence corporate behavior for the better. Most importantly, we acknowledge that climate issues present many unknowns—and we simply aren’t equipped to deal with all of them in house. So we need to assess which issues can be addressed internally and which require external help.
Educating Investment Teams
All of our net-zero activities are rooted in education. In the past, at most investment firms, climate change research was the remit of energy analysts, as the sector was directly in the line of climate-related pressure. Now, every company in every sector and industry should be preparing for climate change. From healthcare to consumer staples to industrials, analysts who may not have focused on climate change issues in the past needed to be trained in the importance of climate to an investing thesis about portfolio candidates and holdings. This was a huge cultural challenge for our organization.
Companies that think about climate now—and put money toward solutions—will be better prepared to face the future in a market where competitors may develop lower carbon alternatives. Regulations are changing rapidly, so companies that don’t prepare might suddenly get hit with a carbon tax or new building requirements or equipment upgrades. And customers are changing their purchasing behaviors as climate awareness grows. These issues will all have a profound impact on future market share, cash flows and profitability. To incorporate these considerations in financial analysis, we first needed to train our investment teams in the underlying climate-related issues.
Educating our investment teams required expertise that we simply didn’t have in-house. In 2019, we formed an exclusive partnership with Columbia University’s Earth Institute, which is home to hundreds of climate change scientists and experts, to collaborate on developing a climate change course for investors. Since then, all our portfolio managers and analysts, as well as several members of our board, have participated in this climate change training.
The course covers the basic science and direction of climate change; the legal, public health, policy and regulatory implications; potential solutions; and how to translate climate change into financial analysis. We’ve also expanded the reach of the course to train clients and asset owners. By November 2021, more than 1,100 people from outside the firm had participated in the climate course. We’re now working with Columbia to develop collaborative projects that will leverage Columbia’s multidisciplinary approach to climate change in our investment processes. These include working groups on renewable energy, carbon accounting, salmon fisheries and synthetic biology. We believe this unique partnership between a distinguished scientific institution and our firm will provide distinct advantages in our ability to deepen a climate-aware investing approach and to engage more effectively with companies.
Engaging on Climate Targets
Divesting from companies is taking the easy way out, in our view. By withdrawing from a controversial industry or company, investors forfeit the opportunity to influence corporate behavior for the better. Bad actors with improvement potential are less likely to change their ways without activist investors pressing for change. Take deforestation as an example. One of our portfolios has holdings in Brazilian beef producers, which are big contributors to deforestation of the Amazon—a major environmental crisis.
Given the scale of the deforestation crisis, it might seem counterintuitive to invest in Brazilian. But the logic is actually clear. While avoiding or divesting from Brazilian beef producers would decrease our portfolios’ exposure to deforestation risk, it wouldn’t help reduce deforestation. AB’s holdings in Brazilian beef producers allow us to engage effectively with management teams on deforestation risks. Since 2012, we have studied each company’s practices and, in frequent engagement meetings, have pushed them to improve. By staying invested, we can encourage companies to adopt more sustainable practices, which is good for the environment as well as for business performance and shareholder returns.
Similarly, some investment firms might steer clear entirely of oil and gas companies. We think that is a naïve approach that doesn’t acknowledge the world’s need for hydrocarbons over at least the next decade as we transition to renewable energy. In this transition, some major oil companies are much cleaner operators than others, and some are playing important roles in building renewable energy infrastructure. If an asset manager decarbonizes a portfolio by selling all its oil and gas holdings, it has not made any contribution toward decarbonizing the world.
As active investors, engagement with company management is central to our philosophy on environmental, social and governance (ESG) issues. By engaging with executive teams, we aim to influence company behavior, which in turn can make a positive impact on investment returns. In 2020, we launched our first targeted ESG engagement campaign—focused on our largest equity holdings that didn’t have either carbon emissions reduction targets or ESG metrics in executive compensation, as defined by Institutional Shareholder Services and Bloomberg. We asked these companies to introduce such measures over the next two years and have been following up with those issuers in our 2021 ESG engagement campaign.
More broadly, we held more than 12,500 issuer meetings during 2020, including 835 engagements on ESG topics across 534 companies. Climate-related issues were the most prominent in these meetings, including 249 focused on carbon emissions, 74 on climate change vulnerability and 45 on opportunities in clean technology (Display).