Navigating the Green Transition: An Investor’s Guide

Understanding the Risks, Rewards, and Strategies for Investing in Hard-to-Abate Sectors on their Journey to Net-Zero Emissions

The climate transition presents both risks and opportunities for investors. This post, based on Helix.Earth’s recent market research report, aims to guide investors through the complexities of investing in companies with credible climate transition plans. If you are asking if I am walking the talk, please feel free to look at my portfolio.

Litigation Risks in Transition Finance Investments

While the report does not specifically mention any large litigations related to climate transition plans, it does flag litigation risk as a key concern. Here are some potential litigation risks for investors:

1. Greenwashing lawsuits: Companies could face lawsuits if their climate transition plans and disclosures are found to be misleading or fraudulent.

2. Failure to mitigate climate risks: Investors could potentially sue companies for failing to accurately assess, disclose, and mitigate climate-related financial risks.

3. Human rights violations: Companies may face litigation if their transition plans do not adequately consider impacts on workers, communities, and human rights.

4. Inadequate emission reductions: Lawsuits may arise if companies’ emission reduction efforts are insufficient or delayed compared to their stated transition plan goals.

5. Anti-trust issues: Coordinated investor efforts demanding transition plans from companies could potentially raise anti-trust concerns from regulators.

Investors should monitor legal developments closely, as “strategic litigation aimed at policymakers, corporates, financial institutions, and asset owners” could potentially drive transition finance growth.

Photo by Mika Baumeister on Unsplash

Macroeconomic Implications of Climate Finance

The transition to a lower-carbon economy enabled by climate finance has significant macroeconomic implications:

• Economic restructuring: The reallocation of capital toward transition solutions could shift economic outputs across sectors, impacting employment, costs, and consumer prices.

• Energy prices: Transition costs for fossil fuel companies could translate into higher energy prices for consumers during an interim period until clean alternatives are fully scaled.

• Fiscal/monetary policies: Aggressive emission policies, carbon taxes, green incentives, and other regulatory interventions may influence investment returns and broader economic activity.

• Financial stability: Disruptive impacts on companies unprepared for the transition could create instability risks for financial institutions with exposure to those assets.

• Growth dynamics: While clean technology disrupts incumbents, new industries may drive economic growth and productivity in the transition.

Overall, the macroeconomic effects depend on policy coordination between public and private sectors to ensure an orderly, just, and affordable transition that balances environmental and economic priorities globally.

Photo by Nik on Unsplash

Proxy Voting Considerations for Climate Transition Strategies

The report emphasizes the importance of shareholder engagement and proxy voting as mechanisms to influence companies’ climate transition strategies. Here are some general proxy voting considerations:

1. Board Accountability: Vote against directors lacking oversight and governance around climate transition planning. Support climate-competent board members focused on transition execution.

2. Climate Lobbying Disclosures: Vote for proposals seeking transparency on companies’ climate lobbying activities and alignment with their stated transition goals.

3. Emission Reduction Targets: Support proposals asking companies to adopt greenhouse gas emission reduction targets in line with Paris Agreement goals.

4. Climate Risk Reporting: Vote for proposals requesting companies to provide enhanced disclosure on climate risks and opportunities.

5. Climate Transition Planning: Vote for shareholder proposals asking for robust climate transition plans.

6. Executive Compensation Alignment: Support linking a portion of executive compensation to the achievement of climate/transition goals.

7. Climate-Related Expenditures: Vote against companies with misaligned transition spending.

Investors should review proxy research and advice specific to each company’s transition exposures and plans.

Key Risks and Mitigation Strategies

Investing in polluting companies based on their transition plans presents several key risks:

1. Greenwashing/Lack of Credible Transition Plans: Companies may overstate or misrepresent their transition plans and emissions reduction goals. Mitigation: Rely on third-party assessments and scrutinize transition plan details thoroughly.

2. Failure to Execute Transition Plans: Companies may fail to successfully transition due to technological, financial, or other roadblocks. Mitigation: Favor companies with transition-aligned leadership and monitor interim targets closely.

3. Stranded Asset Risks: If companies fail to transition adequately, their legacy fossil fuel/high-emission assets could face severe devaluations or stranding. Mitigation: Ensure companies have clear asset retirement/redeployment schedules.

4. Regulatory Uncertainty: Shifting regulations, policies, and carbon pricing can impact the economics and payoffs of transition investments. Mitigation: Understand policy landscapes across operational geographies.

5. Litigation Risks: Companies could face lawsuits related to transition plan misrepresentations, inadequate climate risk management, etc. Mitigation: Prioritize companies with robust governance, disclosures, and legal risk management around climate issues.

6. Opportunity Costs: Transition investing in emitters may forego more direct opportunities in green/clean tech companies. Mitigation: Take a balanced portfolio approach and periodically review allocation.

Rigorous due diligence on transition plan components, continuous monitoring of progress, and diversification across companies and sectors can help individual investors navigate these risks.

Why Invest in Polluting Companies with Credible Transition Plans?

Investing in stocks of polluting companies with credible transition plans offers several potential benefits:

1. Potential for financial returns: Helping polluters transition through strategic engagement and providing capital can offer competitive financial returns.

2. Alignment with values/impact investing: This strategy allows investors concerned about sustainability and climate change to put capital towards companies taking concrete actions to decarbonize.

3. Managing transition risks: Companies with robust, science-based transition plans are better positioned to manage the financial risks associated with the shift to a low-carbon economy.

4. Early mover advantage: As climate transition finance is still nascent, early investors pushing for credible plans can influence company strategies and positioning for the transition.

5. Diversification benefits: A transition investing strategy provides exposure to sectors traditionally underrepresented in standard environmental/SRI funds.

However, the risks include transition plan credibility issues, potential value erosion if transition fails, and the complexity of assessing robust plans.

Engaging with Companies on Their Transition Plans

Investors and stakeholders can engage with companies in hard-to-abate sectors on their transition plans in several ways:

1. Review public disclosures: Thoroughly review the company’s public reports, disclosures, and statements related to their climate transition plan.

2. Shareholder engagement: As shareholders, investors can actively engage with company management and boards through meetings, written communications, and shareholder proposals/resolutions.

3. Collaborative engagement: Investors can join collaborative engagement initiatives like Climate Action 100+ that aggregate voting power to drive engagement with systemically important emitters on climate transition planning.

4. Proxy voting: Shareholders can vote on climate-related resolutions and board directors based on the credibility of the company’s transition plan at annual general meetings.

5. Strategic litigation: The report mentions strategic litigation aimed at policymakers, corporates, financial institutions as a potential driver for climate transition finance uptake.

The overall goal is to drive companies to develop credible, ambitious, and verifiable transition plans that align with a 1.5°C pathway through constructive and escalating investor engagement actions.

Evaluating Transition Plans of Specific Companies

Thoroughly evaluating the credibility and robustness of corporate transition plans requires an in-depth review of their publicly disclosed strategies, targets, governance frameworks, and third-party assessments. However, a high-level overview of some of the transition efforts and commitments made by a few companies based on publicly available information can be provided.

For example, ExxonMobil (XOM) has stated goals to achieve net-zero Scope 1 & 2 greenhouse gas emissions from operations by 2050 and plans to invest $17-$25 billion through 2027 in emissions reduction projects. Chevron (CVX) aims to achieve net-zero Scope 1 & 2 emissions by 2050 from assets operated and is increasing investments in renewable fuels, carbon capture, hydrogen, and offsets. United States Steel (X) aims for net-zero emissions by 2050, with a 23% reduction in emissions intensity by 2030.

Investors should review the latest assessments as more corporates release detailed transition strategies.

U.S. Stocks in Hard-to-abate Sectors

The report does not specifically name any U.S. stocks, but based on the sectors mentioned as “hard-to-abate”, here are some major U.S. publicly traded companies that could potentially be evaluated for their transition plans and strategies:

• Steel: Nucor Corporation (NUE), United States Steel Corporation (X), Cleveland-Cliffs Inc. (CLF)

• Chemicals: DowDuPont Inc. (DWDP), LyondellBasell Industries N.V. (LYB), Eastman Chemical Company (EMN)

• Cement: Eagle Materials Inc. (EXP), Summit Materials Inc. (SUM), Vulcan Materials Company (VMC)

• Oil & Gas: ExxonMobil Corporation (XOM), Chevron Corporation (CVX), ConocoPhillips (COP)

Investors should review each company’s public disclosures and sustainability reports for details on their transition strategies. If you would like to follow how I am tracking these, and just copy past my investing strategy, you can do so, by paying a $25 per month subscription.

Investing in Stocks of Polluting Companies with Credible Transition Plans

Photo by Patrick Hendry on Unsplash

Investing in stocks of polluting companies that have credible transition plans could work as follows:

1. Identify “hard-to-abate” sectors like steel, cement, chemicals, fossil fuels etc. which face significant challenges in reducing emissions but are essential industries.

2. Look for companies that have developed robust and transparent transition plans outlining how they intend to achieve net-zero emissions by 2050 or earlier, with particular emphasis on the interim targetsof 2024-2030.

3. Invest in the stocks of such companies that have credible, science-based transition plans approved by expert bodies like the Transition Plan Taskforce.

4. The investment thesis is that instead of divesting from polluters, financial institutions should help them transition by providing capital for their decarbonization projects.

5. As these companies execute their transition plans successfully, it reduces transition risks for investors while offering competitive financial returns as well as “impact returns” through reduced emissions.

The key aspects are identifying companies with science-based transition plans, and making sure that the credibility doesn’t get diluted along the way.

Please note that this investment strategy is only appropriate for qualified investors, who either have spare capital, or have multiple income sources. If you would like to use it, please click here to subscribe.