Companies transparent about their struggle in the low-carbon transition show leadership: Norges Bank
Though firms face challenges on multiple fronts, they need to juggle developing long-term strategies with managing short-term profitability
[NEW YORK] In being transparent about the dilemmas and failures faced while transitioning their businesses to be low-carbon, companies demonstrate leadership, said Carine Smith Ihenacho, chief governance and compliance officer at Norges Bank Investment Management (NBIM).
“(The low-carbon transition) is really difficult for many companies. And then we see some companies, they are open about the dilemmas, they’re open about failures, they’re open about successes,” said Ihenacho during a panel on Monday (Sep 22), held as part of Climate Week in New York City.
“In that way, other peer companies can learn from them, and that’s where I think you really (show) leadership.”
Ihenacho was responding to a question on how companies that are strategic about incorporating climate-related risks and opportunities show leadership.
In addition to being transparent, Ihenacho said companies need to engage with their whole value chain – and not just within their operations – and see how sustainability can be integrated at each part.
This could also mean engaging with one’s competitors at times to solve problems together.
A NEWSLETTER FOR YOU
Friday, 12.30 pm
ESG Insights
An exclusive weekly report on the latest environmental, social and governance issues.
Incorporating sustainability as a core part of a company’s strategy is the third element among those that have demonstrated leadership, she added.
“When we discuss with companies about their transition plan (and) climate risk, we believe that conversation should start in boardrooms,” she said. “It should be a clear part of the overall strategy for a company. It should be about how you allocate capital, how you assess risk. So, that’s really not an add-on, but that core part of a company’s strategy.”
Ihenacho said the Norweigian sovereign wealth fund – the largest in the world – is not a shareholder that just focuses on the quarterly results of its portfolio companies. Their long-term profitability, which would increasingly be affected by climate-related events, is also important.
SEE ALSO
“We are a financial investor; our mission is to safeguard and create wealth for future generations,” said Ihenacho.
“That means we really have to take climate into account, and what we want to do is to support and challenge the companies in our portfolio, so they can reduce their emission and have a long-term viable business strategy. Because what is clear is that, in a low-carbon society, companies with high emissions will struggle to be competitive.”
Out of NBIM’s total of about US$2 trillion in assets under management, about US$800 billion has been invested in the US. Based on scenario analyses the investor has conducted, the US’ current climate policies could reduce its equity holdings by as much as 20 per cent.
While Ihenacho acknowledged that companies are facing challenges on multiple fronts – be it geopolitical risks, tariffs or inflation – they need to develop long-term strategies even as they manage their short-term profitability.
“The most successful companies are just companies that really find that nice spot where they think about short-term profitability, but also have a strategy that’s going to make sure they are profitable for the longer term,” she added.
These companies also benefit in terms of their share prices.
Ihenacho said NBIM has found companies that have had their Science Based Targets verification removed saw a 2 per cent drop in their share prices on average.
“And what we read from that is that actually investors find climate governance important,” she added.
Copyright SPH Media. All rights reserved.
