IIGCC Presents 5 Demands for Paris Aligned Reporting

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Stockholm (NordSIP) – Five years after the signing of the Paris agreement, much of the journey to climate neutrality still lays ahead. However, sustainable investors continue to pressure companies to align themselves with the goals of the 2015 agreement.

On November 16th, the Institutional Investors Group on Climate Change (IIGCC) sent a letter to 36 of the largest European companies discussing their expectations for Paris-aligned accounts. The letter demanded that these companies’ financial statements reflect the implications of global commitments to limit temperature increases to well below 2°C, and ideally to 1.5°C. Among the Nordics, AP Pension, AP2, the Danish Labour Market Pension Fund (PKA Ltd.), Nordea, Öhman and P+ are members of the IIGCC.

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An accompanying report set out five disclosures, which IIGCC members believe these companies must provide in their annual report and accounts to ensure that they are aligned with the Paris Agreement. First, companies are expected to inform investors that the goals of the Paris Agreement have been considered in drawing up the accounts. Second, directors are expected to discuss how critical accounting judgments are consistent with achieving net-zero carbon emissions by 2050. Third, IIGCC members expect these companies to conduct a sensitivity analysis linked to the impact of variations in the aforementioned assumptions. Fourth, investors demanded the annual report and accounts also include a discussion of the implications for dividend-paying capacity of Paris-alignment. Lastly, they warned they would be attentive to the consistency between narrative reporting on climate risks and the accounting assumptions. Throughout, investors expect an explanation when the steps described above are not followed. Should these expectations not be met, the IIGCC warns that investors can follow any of three courses of action: engagement, voting and divestment.

“Companies can no longer afford to ignore what climate change means for their business. Investors need financial impacts of getting onto a net-zero pathway to be booked and acted on,” explains Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change. “Climate change is material and the importance of alignment with the Paris Agreement is beyond doubt, what investors now need is visibility from companies in their accounts. They are making this clear today and expect companies to report in line with existing global accounting standards.”

The letter focused on firms operating in the energy, materials and transportation sectors, which were selected due to their exposure to decarbonisation risks brought about by the transition requirements outlined in the 2015 Paris Agreement. The companies have a total combined value of US$1.7 trillion by market capitalisation and combined revenues of US$3.2 trillion, according to the IIGCC.

Of the 36 companies targetted by the letter, the only Nordic company was Danish shipping giant AP Moeller Maersk. The other companies included in the letter included EDF, Endesa, Enel, Engie, EON, Equinor, Iberdrola, OMV, Repsol & Uniper,  Air Liquide, Anglo American, Arcelor Mittal, BASF, BHP, Glencore, LafargeHolcim, Linde, Saint-Gobain and ThyssenKrupp, Airbus, AP Moeller Maersk, BMW, Continental, Daimler, Deutsche Lufthansa, Fiat Group, Groupe PSA (Peugeot), Renault Group and Volkswagen, BP, CRH, Eni, Rio Tinto, Shell and Total.

“Investors expect corporate strategy and capex to be aligned to the Paris Goals and this must be supported by Paris-aligned accounts,” added Bruce Duguid, Head of Stewardship at EOS, Federated Hermes. “This will be critical to investors managing climate-related financial risks as well as shifting capital to avoid the worst impacts of climate change. This report sets out clear expectations of both board directors and auditors and we will be reviewing 2020 annual accounts for clear evidence of their response.”

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The coronavirus epidemic has further accelerated the rise of ESG into the investment mainstream. As deficits skyrocket, bond investors have an opportunity to engage with governments on climate change, argues Thomas Dillon, Senior Macro ESG Analyst at Aviva Investors.

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