ClearBridge Investments: Verifying net-zero alignment

ClearBridge Investments

Signatory type: Investment manager

HQ location: United States

 

Covered in this case study

Asset class: Listed equities

AUM: $157.4bn (as of 30 June 2022)

 

ClearBridge Investments is a leading global equity manager committed to delivering long-term results through active management. We have followed this approach for over 60 years and have integrated environmental, social and governance (ESG) factors into our fundamental research process for over 30 years.

Why engage portfolio companies on net-zero alignment

ClearBridge made a formal commitment to bring 100% of our assets under management to net-zero emissions by 2050. We did this for several reasons, among them the need for:

• the private sector, in particular asset managers, to help accelerate the world transition to global net-zero emissions;
• our portfolio managers and analysts to assess low-carbon investment opportunities in the form of climate change mitigators and adaptors, as well as improvers within high-emitting sectors;
• our portfolios to adequately manage risks related to climate change, including physical risks, regulatory requirements and changing consumer preferences.

As active equity investors, we believe we also offer value in supporting companies as they address climate change challenges. Engaging with our portfolio companies on material ESG issues such as climate change and providing feedback on their strategy and performance helps improve our understanding of their businesses and their potential for long-term success. We can also achieve positive impact when our engagements with companies contribute to their improved performance on ESG issues, leading to real-world outcomes.

Building a flexible approach to verifying net-zero alignment

ClearBridge has chosen a combination of the Science Based Targets initiative (SBTi) Portfolio Coverage Approach and Paris Aligned Investment Initiative’s Net Zero Investment Framework (NZIF) to measure the alignment of our assets to a net-zero pathway. Focusing on company alignment through science-based targets moves the conversation beyond traditional, backward-looking portfolio carbon footprinting to a more forward-looking approach that aligns with our investment goal of identifying companies that will maintain shareholder value and be successful well into the future. While carbon footprinting helps identify sources of emissions, it is not the best measure for assessing a portfolio’s progress toward net zero or its exposure to transition and physical risks.

After conducting a thorough review of the SBTi’s criteria for target verification and consulting with a range of portfolio companies, we have come to believe it is necessary to build some flexibility into our net-zero alignment approach. We did this primarily to allow for additional third-party verification of science-based targets set by portfolio companies. Beyond the SBTi, ClearBridge has approved verification by Climate Action 100+, which covers a range of high-emitting sectors, including oil and gas (which is currently excluded from SBTi). We also work with credible consultants and use our own assessment in special cases, while keeping in mind SBTi criteria. We independently assess any company that claims its target is science based but is not verified by a third party.

We also wanted to allow for the inclusion of climate solution providers, or companies whose products actively promote climate solutions. While there is still much discussion around the role of climate solution providers in measuring a portfolio’s alignment, we feel it is important to include them to give credit to companies whose entire business model/products contribute to climate mitigation.

ClearBridge groups issuers into four categories (see Figure 1) and assigns a weight to each. Figure 2 shows those weights as they apply to aggregate assets across the initial in-scope strategies.

Figure1: ClearBridge assessment for net-zero alignment of portfolio companies

Figure2: ClearBridge baseline alignment

Using this assessment framework and a baseline alignment of holdings (Figure 2), we may prioritise companies for our net-zero engagements through a decision tree that considers factors such as asset weight in the portfolio and the sector it belongs to (Figure 3):

Figure3: Decision tree for priority engagements

The engagements highlighted below demonstrate company-specific nuances in aligning with a net-zero pathway as well as the benefits of setting a science-based target using multiple verification methods. They also show the importance of open and consistent dialogue.

Net-zero aligned example: US integrated electric utility

ClearBridge has actively engaged with a US utility on its decarbonisation efforts. A recent meeting was specifically dedicated to the company’s “Real Zero” strategy to eliminate carbon emissions from its operations. The company has formally announced targets for Scope 1 and 2 emissions reductions in its operations and purchased power without using offsets. The plan has five-year milestone targets, e.g., a 70% reduction in emissions by 2025. We discussed specific assumptions underlying the plan, such as a coal plant retirement in 2024; a pilot combined-cycle-gas-turbine plant able to blend green hydrogen with natural gas as fuel; and so-far underutilised solar expansion as a main driver to reduce emissions at the company’s regulated utility. The company also engages with Climate Action 100+ and supports SBTi targets. While it is not eligible for SBTi verification due to its ownership of insignificant natural gas assets, its Real Zero target was verified by an industry climate consultant as a viable pathway to meet SBTi goals. Its 2025 target was verified by Climate Action 100+. We were therefore comfortable considering this company currently net-zero aligned.

Target, not aligned to net zero example: Engaging with a multinational shipping/receiving and supply chain management company

ClearBridge has actively engaged with a multinational shipping/receiving and supply chain management company that has set aggressive carbon reduction targets. The company recognizes it cannot credibly set a company-wide science-based target at this time due to heavy reliance on future technologies, such as sustainable aviation. We categorize the company as: Target, not aligned to net zero (the category labelled orange in the figures above). The company is, however, working to align all other parts of the business with a net-zero pathway. Efforts include investments in electric vertical take-off and landing aircraft and full electrification of its ground fleet, with a 2025 goal of 40% alternative fuel for ground vehicles, up from 24% today. We will continue to engage with the company on its current targets and its progress addressing said constraints through policy advocacy and communications with all of its constituents.