Investing for the transition to net zero

Eva Cairns is joined by Adam Matthews, Chief Responsible Investment Officer for the Church of England Pensions Board, to discuss the transition pathway initiative, a global initiative which assesses company's preparedness for the transition to the low carbon economy.

Transcript

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Hello everyone. I'm Eva Cairns your host for today and you're listening to the abrdn Sustainable Investing podcast, discussing all things relating to sustainable and responsible investing.

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I'm delighted to introduce our guest for today Adam Matthews, a well known name and passionate leader in the world of sustainable investing. Adam is the chief responsible investment officer for the Church of England pensions board. He's also the founder and chair of the 30 trillion dollar backed transition pathway initiative and asset owner lead and asset managers supported global initiative which assesses company's preparedness for the transition to the low carbon economy. He's a board member of the institutional investors group on climate change, and co leads engagement with Royal Dutch Shell on behalf of the global investor engagement initiative, climate action hunger plus.

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Adam set up and call it the mining and tailing safety initiative. And he also represents the United Nations back principles for responsible investment as a co convener of the global tailings review that produced the first ever global tailings standard. Recently set up and co-chairs for the Dutchman DPG, the Paris aligned investing initiative of the institutional investors crippled climate change that produced the first global net zero investment framework for pension funds and investment managers. Adam, what an impressive bio. And this is by no means a comprehensive list is such a pleasure to have you with us welcome. No, thank you ever so much for inviting me, it's really good to be joining you. Excellent. So as I said earlier, you have had a significant impact of moving the world of sustainable investing forward. And remember were named as sustainability Personality of the Year in 2020, as well, I believe. So can you tell us a bit more about how your journey started? And how you got to where you're at today? Was there anything that inspired you to take this route? Yeah, I must admit, anyone said to me, when I was a bit younger, I'd end up working for a pension fund, I think I would have just sort of smiled and thought they, they didn't really know who I was. And actually, I've landed in an industry and at a point where it's just fascinating the opportunity to work to shape things. And previously, I'd studied politics at university, I was very politically active, I got involved I ran member of Parliament's office had a very political kind of background and early career, and then stepping completely into a different area of finance was something you've been in touch with, through working in politics. But this was really a very different industry. And a bit that really has sort of struck me is, is really the way in which you can influence genuine change on important issues, in the interests of those that you serve in a pension fund the beneficiaries, but you can read into it in a way that actually is very difficult to do in the political sphere, and you can cut across jurisdictions, you can work in a way in a much quicker way. And really seeing that potential. And that power in this industry that it has has been fascinating. And for me, that has been a really, I mean, just a surprise, but also, perhaps not a surprise, but at the same time, just really sort of energising aspects of being able to work in finance. And when you make that connection with working through what is important to the beneficiary is ultimately those that you serve in working for a pension fund, and then looking at what the appropriate ways in which you can then intervene in the market work with other investors to drive change. It's a powerful combination. And that hugely excites me. So I sort of connected element to my background in politics and sort of understanding of working in power, and then looking at this industry and seeing how you can actually use that in a much more effective way. Yeah, I think that's a really good point in terms of thinking about also for the younger generation today, you know, career choices, a lot of them don't really connect, working in finance with having that impact on climate change. And I had a kind of similar moment of focusing on on this and realising how impactful really, that can be. So I think that's a really, really important message to get out there as well. And how is that an aspect of, you know, sustainability, and what you do in your professional life reflected in your own personal life is one of those nightmare questions where you had evidence that you don't have a car,

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use petrol, and that you don't ever have been tires, whatever. So, I mean, I'm not going to pretend I'm perfection. And I think that's the challenge that you've got to combine the kind of the way that you you are trying to make interventions to shape regulatory frameworks or the way companies are responding to these massive issues. But also it's going to be matched by individual action and community action, societal action. And I think that challenges all of us I mean, we do home genuinely try and live parts of our life in ways that are consistent with that. But equally we know that we fail in other aspects when it's not easy. We don't have an electric car at them.

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We would like to get one that that's an aspiration. But we do use the train, we don't fly down to London, now that we live in Edinburgh to visit family, we only use the train. So we sort of make changes like that we do try and buy sustainably to the extent that's possible, but we also eat meat. So that there are aspects of our life we're trying to adjust, there are ways in which we sort of support things locally that are in the right direction. But we also know that we need to do a lot more, but equally, so does everybody and I think it's about how you can make individual action much more easier for people. And one of those is obviously the kind of power you choose at your home. And with there, we've got a very good energy company. So we're able to have a sort of green energy provision. But at the same time, I think probably the other area that you can make the biggest impact is working through your pension fund. So I happen to work for my own pension fund. So

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one of those areas. Absolutely. And I think the first step is just being mindful of all the different things that you can do, and then have maybe a roadmap you don't need to start with everything today or tomorrow, but having that roadmap, okay, that awareness through your food, the energy, your transport your pension funds, and being mindful of that and take it one step at a time. So, and moving back to your professional life. I mentioned earlier that you find that the transition pathway initiative, which is a really great tool for investors, and we use it ourselves for research funding partners, and use it to identify transition leaders vote against laggards. So it really is quite a powerful tool for for that, and how did you come up with that idea? So that'd be quite interesting to hear it kind of had that thought process when and how is it different from other tools? And and what are the next steps for TPA going forward? Yeah, sure. I mean, one of the challenges I had was the US sitting in meetings with companies meeting after meeting and they were producing ever more detailed plans on climate or sustainability. And I mean, the pages and then it was quite a lot of them were the pages were growing, you had an inch or two inches of this strategy. And quite frankly, I couldn't really work out who was telling me, they had a really good plan and who was sort of given the greenwash. So I just sort of really needed to sort of have something that could cut through this and, and at the time, we would just complete in the development of the first just rangeland ethical investment policy on climate. And that really required us to engage with with a purpose that if change didn't happen over a certain period of time, we would also use disinvestment. But fundamentally, we believe that you could change behaviour, but that you had to have an independent way of understanding the change you're trying to drive, and a tool that could do that, that held you accountable and enabled your beneficiaries, your trustees, or other stakeholders to take a view as to whether you're making sufficient progress, but also really served your needs as an asset owner, in effect at the top of the investment tree in understanding and determining what was important for you in that engagement with the company. So talking to other asset owners. In the first instance, we sort of looked at the landscape of data and information out there, we felt that there was increasing information flows. And as I say, companies were producing evermore detailed plans, but there wasn't anything that sort of set above it and could very clearly distil what was important to us as acetone. And so we just sat down. And I've still got the diagram, we drew in terms of the staircase that you have in TPI on the management quality, and then really sort of worked through what what we wanted to see what good looks like recognising it's a journey. And that's why I think the name transition so important in that initiative, because it's about getting from where you are today to where you need to be. So that means that you can be a high carbon emitting company, and that you can transition over time, and then having a way to be able to track that. So that was the impetus for TPI, we were the Environment Agency we worked with, with your own fund, and others to sort of really work out a practical way that we can have a tool that serves that need. And it's grown very significantly over that time to the point today. I mean, we cover about 420 companies, but the ambition for TPI is to very significantly scale the coverage. And there'll be an announcement on this shortly. But that I think will really position this kind of insights as a key part of enabling finance and investors in particular to sort of play the role they need to in the low carbon transition. Yeah, and I think you rightly mentioned the importance of active ownership and engagement and what an important tool that is for investors to influence the transition. You've been involved as colleague Michelle as part of Climate Action 100 Plus, can you tell us a bit more about that specific engagement as an example you know, how that started and actually resulted in the success of shells trade, anyone net zero commitment? What was the key to success for that effective engagement in your view? Well, I think it's been fascinating to be in a process where

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You're representative or $54 trillion of assets under management. So whilst you're there as an individual and on behalf of your, your fund, you're also there very much with the sort of the AU m of an enormous group. I mean, that's over half of the investable capital. I mean, that signal in and of itself is powerful. We've got three clear asks, and we've got, and we've got a significant portion of the market that's aligned behind those asks, and so you're in a very automatically universe, serious conversation with the company. And the thing that we've tried to do is, is really sort of understand the transition that the company is seeking to make. And to be clear, I still feel that there is further for the company to go. But through the engagement over the years that we've been engaging with them, now, we have got a number of commitments from the company in response to that engagement. And that has come because there's sort of a shared understanding that the company is wanting to transition is wanting to carry the confidence of its shareholders, its owners, it recognises It's a challenging transition, and is trying to find the right ways to sort of demonstrate that through its public disclosure. So we've sat down, we've sort of gone into a lot of detail about what we need. And we've got, we had sort of the first sort of ca 100 agreement with a company that sort of set out commitments and targets related to scope three emissions, which is the vast majority of shells missions about 85%, which is obviously other people burn in their products, but they acknowledged scope three, they set a target covering scope three, and subsequently we've enhanced that, that target to be a net 01. There's still questions around boundaries and and converting that target into an absolute equivalent in the short term. But we've also had commitments on corporate lobbying, that they're reviewing their industry associations that they fund and their members have to check that their lobbying in line with shows own commitment to the Paris Agreement, they've left some which again, was a first in the industry, and they're the first in the industry to put a vote to their shareholders on a transition plan. And I'm quite clear that there is a journey still, for Shell to go, we've got till 2023 in the climate action 101st phase, the company needs to close the gap with the areas that we've identified that they still need to go further. But my sense is that we're on a trajectory that I think shark can get there. It's a complicated strategy, though. And there's there's questions still underlying that around whether their expectation that hydrogen is going to have to roll it in so that you can use nature based solutions in the way they are, or that ccus is going to be able to be as rolled out as it needs to be to deliver what they expect in their plan. So there's some still big questions to address. But the point is, we've gone from a discussion around whether you have scope three emissions targets, to now having them to now having a plan about how you deliver them, to now have discussions around capital expenditure alignments, and the aspects of that plan. So you can sort of see the evolution of that dialogue and engagement with that company playing out through those sort of disclosures. And with further still to go. Yeah, and that's really interesting, because obviously, these are the companies we need in 2015, to transition, you know, and, and some others take the approach of, you know, upfront fossil fuel divestment, where you don't get that chance of engaging in helping the transition. So I think that's quite an important point how, what a difference you can make through particularly that collaborative engagement was climate action 100 plus. And you also talked about scope three, so I wanted to just talk about that a bit more. It's obviously critical for the oil and gas sector, but also the mining sector. And we have seen, you know, these are, again, challenging conversations with companies in that sector seeing it's hard to incorporate scope three in our targets. And you've been involved, you know, in some of these conversations, can you tell us a bit more about that, and what you think the sector's going and where we need to push further.

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I mean, it's an absolutely relevant question as to whether it's acceptable to vote on a transition plan that doesn't have credible scope three target. And I think if you reflect on where we were three, four years ago, just before climate action came into being and TPI was being established, lots of companies in lots of sectors, refuse to acknowledge scope, three emissions, but I think tools like TPI, the methodologies that have been involved in sectors like oil and gas are very clearly underlined, investors expect you to acknowledge your responsibility and your relationship with scope three emissions, if their material. Now it's not the same in all industries. And I think we had a very clear point where there's no debate, quite frankly, if you have scope three emissions and material, then you have to have targets related to a reduction path consistent with the Paris Agreement. If you don't, then I think you're putting yourself at odds with initiatives like climate action 100. And I get that it's challenging. And I think the opportunity really is to acknowledge scope three, set the ambitious target and ask for support of universities to work with the company in helping to deliver the strategy that can really draw

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delivering on that and and my fear is that some companies sort of view this as well, it's difficult. Therefore we'd rather try and avoid setting the target. And I think that's the wrong approach, they need to acknowledge it upfront, and then develop a plan that I think you can bring to your shareholders which can be have areas that still need to be evolved, recognising there's going to be technological innovation and legislative dependencies, but that you can also the confidence in that kind of strategy, rather than coming up with a plan that's only half baked. And my fear is that the first mover companies that have come forward with plans, there's a range between sort of comprehensiveness evidence in an understanding and then sort of targets and alignment that some are more aligned than others. And I think, really, investors now need to clearly define what is an acceptable transition plan if we're going to vote for them. And if you're asking us to vote for one for three years, and it doesn't have scope, three emissions targets, I mean, that, to me just feels a sort of a mismatch between what we can give as investors and what a company can expect. Yeah. And this, you know, the topic of Paris alignment, you talked about targets, but also obviously, this is quite an important topic for the industry just now when we look at portfolios and funds. And we recently spoke on a panel together about the challenges of measuring real world impact and the risk of unintended consequences when you focus too much on temperature ratings, for example. And you might end up just divesting to have a good carbon footprint, a good temperature rating. But now, investors are increasingly looking for solutions that are parents aligned, you know, in whatever way we define that. But how do we implement an evidence base in practice with a incentivizing this simple divestment from carbon intensive companies, in your view? Yeah, well, I think that's the that's the challenge. And I've sort of appreciated very much appreciated your views and evidence views on this issue, because it is about acknowledging where companies are today, acknowledging that you have ownership of companies and sectors have got to significantly change, but that they can do so in a path that's legitimate and aligned to the science and the economics of the Paris Agreement. And so therefore, we need tools, like TPI that can help that understanding. But we've also then got to have confidence on the investor side, that you're willing to own a company through a difficult transition. And I do bear in mind that this is a multi decade or transition that hasn't been done before. That's going to radically reshape the whole global economy, the way we live, and the way that many of these companies are operating, and some will succeed and some won't. And that's the sort of the risk the opportunity of that we've also got to managers as investor in new sectors, but you can, I believe, work with the company in that difficult transition, have confidence in a plan, recognising that there's going to be evolutions in that plant, but at the same time, ultimately, you're sending a signal to management had confidence we're going to own and stay with you through this transition, because we've got confidence in your plan. And then how do you translate that at a sort of portfolio level for a fund like us is a challenge because we're setting sort of portfolio wide commitments to be net zero. And at one level, you could easily just wash out your carbon and be be aligned. But that at one level is quite dishonest, because at the same time, society is demanding resources, from steel, from cement, etc, is still using energy from oil and gas. And therefore you've got to acknowledge that. And I think setting the path that can go over time, that is incredible transition path is the key, and therefore temperature, alignment metrics, risk incentivizing the wrong action. And that's one of the concerns you raised, I get the importance of them. And I'm very open to working through with partners to find a way to make this work. But if you just simply distil it down to that single metric, you can run the risk that incentivizes the wrong behavioural reaction. And that's where I think the conversations that we've had with you around, okay, how do we fix this to make sure that we've factored in transition and time on credible pathways that can sort of match with understanding where we are today and where we need to get to, and that you can then in turn, bring your beneficiaries and your stakeholders along with you? Yeah, and I think, you know, right at the start, I talked about your involvement in a netzero investment framework. And this is very much also something that we would use in support because it is about real world, decarbonisation and is about, you know, accepting the companies are transitioning and still aligning, and that you can are with them on that journey for that real world impact. Absolutely. So we've talked quite a bit about the transition and a bit, we're also obviously seeing the physical impacts of climate change already unfolding around us and across really every region and the latest IPCC report that highlights they will only get more severe, more frequent, you know, cold read for humanity, it was called. So what does this ultimately mean for investors in your in your view? How does this need to be considered in the investment process? And do you think it's really these messages from the IPCC report? Are they being taken seriously enough by corporates, investors, public

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See makers? How do we tackle the physical aspects? Well, I do think the Yeah, I mean, I do think that there is a huge amount of effort trying to address this from from finance, I do think you're seeing commitments coming through and attempts to understand. And I think the physical risk has probably been less well documented and understanding of what does that actually practically mean, I think tools are emerging. And I feel that we do need to sort of work harder at that aspect. But at the same time, I'm acutely conscious of what this also means in terms of our dependency on public policy, enabling us to deliver on the kind of commitments we're making, or that we're seeking from the companies we're invested in, or equally the government debt that we're holding. And so I sort of feel that we need to be much more robust as investors in terms of recognising that dependency with regulation, and how you could potentially hit a brick wall where we don't have sufficient enabling regulation, be it at a sectoral level that enables particular sectors to transition or at the macro level, or failing to have a price on carbon that can really drive this. And I think there's a risk though, we've got to really manage to our relationship and our approaches. And our strategies have really got to be cognizant of that.

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But I do think the sort of the practical tools that we're we're developing that zero investment framework aligned to the right kind of path, but we've got to continue to question ourselves and and recognise that this is going to be continually moving as the science continues to become clearer. I mean, it is abundantly clear, but in terms of the urgency and our understanding of that relationship with the action that's required. And the IAEA net zero scenario is really important in helping sort of bring to life what that means in a credible way. So I think we just got to be in this zone, where we are understanding where we are today, recognising that we've got quite a lot of information, but it's going to continue to evolve and quite rapidly, but you can make decisions, you can take action. And you do need to do that collaboratively working across the industry. And I think that there is the mobilisation and the structures within finance to do this. But we've also got to recognise our interdependency on regulation and be much clearer in in sort of dialogue with policymakers. Yeah, and that's obviously very topical with cop 26 in a few weeks time, and the pressure to raise ambition, given that policies and pledges are currently nowhere near Paris aligned, what do you think are really what are your hopes and expectations for Corp? What are the key actions we need really to help deploy the capital for net zero? And ultimately, implications for investors with net zero goals if we don't see those policies aligning? Well, I mean, I think I've spoken to the implication that I think we could hit a brick wall. So the, the, and that brick wall is that we've all made netzero commitments, we all have expectations from our beneficiaries, to sort of be doing what we can and deliver on those commitments, and we're not able to and so we resort to washing out carbon from our portfolios, because that's the that's the easiest way to still meet a commitment, but you've not then actually made that real world change. And I think that's a tangible risk. And and I do have concerns around that. So what do we need to see, I mean, I think we need to see a clearer, stronger message from investors to governments that this is what we can do. But this is what we need you to do to enable us to do it. And if we don't have that, this is the risk we run. And equally, I do think at a national level commitments like that made by South Africa recently, which is an emerging economy that has set what I believe is a credible, ambitious path for the country requires investors to now work with that government to help them deliver it, they've got a difficult energy system, they've got massive demand for more energy. And at the same time, they've got a power system that's fossil fuel based dependent on coal mines within South Africa mines that I've visited. And I think that we need to work more practically to unlock finance to deliver that plan at the national level. And I think that working across key countries will actually enable governments to go further internationally, because they'll have confidence they've got the resources at the national level to deliver on their national plans. So I think continue to send our message being absolutely open to working proactively practically, with with governments potentially quite a different way. And at the same time profiling national transition plans in our portfolio on sovereigns and actually try and have a different dialogue with governments. Yeah, so And on that note, I think, you know, there's quite a lot to do and hopefully we'll see what would cop will bring, but be great to, as a final point, leave listeners with something that inspires you and keeps you motivated and hopeful in this journey. Is there a person that inspires you or any books or podcast you'd recommend other than Of course, you own that you're doing with David taky talking responsibly, which I listen to, of course, that's very kind of you. I mean, it's just walking my son in school yesterday. It's just quite interesting how he is

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Kids are now pointing out Tesla's and electric cars as the cool thing as the differentiator in in cars. And it's just quite interesting that that sort of younger level, you've got that understanding that that's good. And that's cool versus what we've got and what other people got. And I just don't think that that pressure in the system should be powerful. But the other person that probably, I mean, it's, it's a difficult question, because I'm probably one of the other people that I have taken a lot from and is someone called Wagner, Dennis, who is a Brazilian gentleman who we work with, and he lost his daughter, his son, and the the unborn baby and his daughter in law in the realm of Dino mining disaster, and they were killed when the tailings dam collapsed, and that's holding the waste from mining. And he is working with us to create a global system, that means the waste of mining is handled, and that kind of disaster that go to hundreds of people never happens again. And to come from something like that, which must have untold pain for him. But to have the kind of dignity, focus and willingness to see that there's, there's something good to be made out of this horrific event is quite a powerful presence to work alongside. And so, for me, we know our responsibility relation to that particular disaster and what he's asking us to do. But I think that's quite powerful when you understand that relationship with how you're invested in those kinds of events. And equally, the change that you can also achieve and being able to walk alongside people like that. I think that's quite sort of something that keeps me real in some of what I do with others. Absolutely. Just realising that the impact on your real life people, thanks so much for sharing that with us, Adam. We have no come to the end of our podcasts. Unfortunately, it's been such a pleasure to have you with us. So thanks a lot for your time and all your inspirational contribution. Particularly I'm sure you do as well because you do a hell of a lot. Excellent. Thank you. So you've been listening to the Aberdeen sustainable investing podcast and podcast relating to all things responsible and sustainable investing, and today a special episode with Adam Matthews and investing for the transition to net zero. Thank you all for tuning in. You can find all our episodes on various podcast channels such as Spotify and Apple, as well as on the Aberdeen website. Until our next podcast Good bye for now.

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