The purpose of the Government Pension Fund Global is to safeguard and build financial wealth for future generations. We believe that long-term value creation for the fund depends on sustainable development in economic, environmental, and social terms. Analysis of our equity portfolio’s transition risk shows that a scenario with a delayed policy response would lead to greater financial losses than staying on a 2C pathway. We therefore stand to benefit from an orderly transition.  

NBIM has worked with climate change in mind for more than 15 years, and in September 2022 we launched a dedicated Climate Action Plan. Our headline ambition is for our portfolio companies to achieve net zero emissions by 2050. The plan describes how we are working on the market, portfolio, and company levels to achieve this. At the market level, we support standard setters in their efforts to improve the management of climate-related risks and advocate for mandatory climate-related reporting. At the portfolio level, we systematically monitor climate risk in the portfolio, and integrate it into our investment and divestment decisions. At the company level, we want to support our portfolio companies through the climate transition and engage with them to set targets and develop transition plans of their own. 

Many of our functions are involved in the implementation of the plan. The market level work is conducted collaboratively across teams, drawing on our experts, but led and coordinated by our Corporate Governance department. It includes engagement with regulators and participation in initiatives that can support capacity building. Our portfolio-level work is mainly led by our investment and risk areas, and company engagements are led by the Corporate Governance department, while our ESG Analytics team supports our data tools and analysis throughout.  

How we approached the project  

A key tenet of our Climate Action Plan is the “engage to change” approach. We decided to start with the companies with the highest emissions, aiming to conduct in-depth dialogue with the ca 200 companies who are responsible for 70 percent of the financed emissions in our portfolio. In the past year, we have built out this focused engagement through dedicated ‘dialogues’ with companies in high-emitting sectors and will continue this work in 2024. We refer to these as our net-zero dialogues. In practice, we integrate them with our existing company facing investment and ownership activities. 

As a basis for this strengthened dialogue, in August 2023, we published updated climate change expectations of companies, emphasising the need to shift from setting emissions reduction targets to transition planning. We have introduced a small number of ‘core’ expectations to signal our highest priorities, which directly inform our voting and ownership activities. These core expectations include board oversight, climate risk disclosures, greenhouse gas reporting, net zero 2050 and interim targets, and transition plans. Our updated expectations were shared with the boards of selected companies, and we follow up with letters to “laggards” in cases where companies’ practices fall significantly short of our expectations.  

The presence of targets is a starting point, but they need to be evaluated. In 2023, we conducted a pilot analysis of the cement industry, assessing how companies’ relative emissions performance aligns with the industry pathway. Pathways help us evaluate whether companies plan to reduce their emissions in line with the reduction that the entire industry needs to achieve year-by-year.  

Impact of the change  

One of the key performance indicators we use to evaluate the effectiveness of our climate work is an internal net zero tracker. We have observed a positive development, as close to 65 percent of the fund’s financed scope 1 and scope 2 emissions are now covered by net zero targets. We also observe that target setting is linked to emissions reductions: there is a 2 percent reduction for companies with strong targets, compared to an 8 percent increase for those without.  

At the company level, we have set specific objectives for each net-zero dialogue. Objectives can include building a relationship with the company, understanding their strategy, conveying our expectations, and seeking impact over deliverable changes in strategy or disclosure. While it is too early to assess progress, we have built a strong understanding of companies’ decarbonisation efforts and going forward will engage in a deeper and even more targeted way to effect change. We also observed positive results of our first shareholder resolutions: of the four that we filed, we decided to withdraw two following commitments made by the targeted companies. 

This is very encouraging, although we are careful in attributing these outcomes to our engagement. We are a minority investor in all the companies we own, which are subject to pressures from other shareholders, stakeholders, regulators, and market forces.  

What we learned 

To analyse the progress of our work, we depend on good data. While climate and sustainability disclosures from companies have increased, we still face challenges in the coverage, quality, and availability of this information. This is why we strongly support initiatives such as the International Sustainability Standard Board’s climate standard. Value chain risk and Scope 3 information is particularly key, and good forward-looking information about transition planning and changing business models is still a work in progress for many companies. We need companies to expedite their decarbonisation efforts. We are no longer talking about “hard to abate” but “expensive to abate” – the technology is there, and we want our portfolio companies to invest in a way that creates sustainable value. 

The biggest challenge relates to systemic issues, the underlying coordination failures, which are hard for companies and investors alike to address on their own. The high cost and low impact of individual efforts is one example of this; for instance, auto manufacturers rely on critical minerals supply for transitioning and on consumer demand for EVs. Another example is policy uncertainty and occasional backtracking, which makes companies’ investment and capital allocation decisions difficult in some sectors. More broadly, we increasingly recognise the importance of a multi-stakeholder perspective, and of analysing the entire value chain to assess the interdependencies of companies’ action with suppliers and clients, among others. Finally, we acknowledge the need to devote increased attention to climate physical risk, in light of its ever more apparent manifestation.