21 June 2023 (Lloyd's List) - ONE of the world’s largest asset managers, Legal & General Investment Management, has pulled its investments in Cosco, citing a lack of decarbonisation ambition from the Chinese shipping giant.
The divestment decision, which saw a total of 12 companies sanctioned by LGIM for failing to meet minimum standards to address climate risk, comes amid growing scrutiny from asset managers and financiers signed up to net zero targets and tightening EU regulation requiring climate commitments to be verified.
As part of its annual climate assessments LGIM identified 229 companies as not having met its minimum standards, but only 14, including Air China and Cosco Shipping, were included on a list of divestments that were deemed to have failed to meet a basic level of ambition when it comes to climate standards.
LGIM’s analysis noted that while Cosco has an operational target to reduce emissions in place “the level of ambition for this target is low compared to leading peers. There is no commitment or investment in low-carbon fuels, which is key to sector decarbonisation”.
Cosco’s stated ambition to achieve “carbon neutrality before 2060” is line with Beijing’s national decarbonisation targets which are standardised across state-controlled entities.
According to Cosco’s latest sustainability report the company will have reduced the greenhouse gas intensity of its container shipping business 12% by 2030 compared with 2019. Its port terminals are aiming for a 20% reduction by 2030, compared to 2020.
Cosco did not respond directly to the LGIM sanction, however a company spokesperson pointed out that last year “Cosco Shipping Holdings responded to the industry development trend and the long-term potential demands of its customers by accelerating its pace towards green and low-carbon transformation”.
Cosco also cited several specific initiatives including methanol dual-fueled orders photovoltaic power generation projects as evidence of this acceleration and explained that the company was “exploring” the use of biofuels for ships.
LGIM told Lloyd’s List that its assessments were not shipping specific, but focused “on climate-critical sectors, which are responsible for the most global greenhouse gas emissions from listed companies and/or vital to climate transition at scale, as well as the most carbon-intensive sectors in LGIM portfolios”.
While the LGIM decision to exit Cosco will have a limited direct impact on the shipping sector, its significance amid growing regulatory scrutiny and similar decisions from asset managers to eschew climate risk points to a growing trend concerning the industry’s financial experts.
BlackRock, the world’s largest asset manager, said earlier this year that it would continue to push companies for details on how they treat “material” climate-related risks, however it has stopped short of explicitly naming companies that don’t meet its standards.
While some asset managers have divested from specific sectors on the basis of climate risk, most notably the Norwegian sovereign wealth fund which announced in 2019 that it would divest from oil and gas exploration, such pronouncements have been heavily caveated with disclaimers and narrowly defined parameters that have seen most continue to engage with heavily emitting sectors.
Additional regulatory requirements, however, are prompting asset managers to review their stance and the LGIM decision to divest on the basis of climate risk is likely to be the first of several similar decisions elsewhere.
The US Securities and Exchange Commission, the EU and other regulators in Asia and international standard-setting bodies are all working towards standardising disclosure of the climate-related risks a company faces. This is aimed at giving investors a better sense of which firms are meaningfully adjusting their activities to the reality of climate change and, in the EU’s case, what impact firms are having on the environment.
Meanwhile, the EU’s Green Claims Directive, introduced by the European Commission in March, would require firms to substantiate their climate-friendly claims with evidence.
The most substantial regulatory shift prompting both asset manager and shipping companies to review current climate programmes is the EU’s Corporate Sustainability Reporting Directive, which will eventually oblige almost 50,000 companies (including foreign ones operating in the bloc) to disclose sustainability-related information related to their business models, strategy and supply chains.
While such requirements have previous targeted larger corporates, the wording of the latest iteration of the EU’s CSRD applies to many smaller and medium sized enterprises, meaning that much of the shipping sector will now fall into its scope.
The CSRD is underpinned by the EU’s taxonomy, which sets six criteria — from climate-change mitigation to protection of biodiversity — by which to determine how sustainable a firm’s activities are.
That effectively amounts to a concrete set of criteria spelling out what businesses can access green financing, and which sectors will be excluded.
While several hundred companies in the maritime sectors have signed up to zero-carbon coalitions and programmes, a small fraction of them have set solid 1.5°C Paris Agreement-aligned targets to support those ambitions.
Under the proposed EU Green Claims Directive companies will be obliged to prove their environmental claims are credible and trustworthy, or face “effective, proportionate and dissuasive” penalties.
