New report: What Investors Need To Know To Accelerate Green Transition In Climate Intensive Sectors

In a new report from Stockholm Sustainable Finance Centre, sustainability experts give an overview of what is required to achieve net zero transition in climate intensive sectors such as steel, cement, agricultural commodities and oil and gas and what investors engaging in these sectors need to know in order to have real economic impacts on green transitions. 

Very disruptive changes must start to be implemented in this decade to align high emitting sectors with the Paris targets –but none of the sectors examined has begun to make those changes in earnest.

-In the oil and gas sector, no new investments in expanding aggregate production can be considered compatible with global climate targets and there is a need for large annual decreases in production volumes, but the current trend is of production increases.
-In the agricultural commodities sector, companies must commit to adopting climate-smart approaches at scale, both on and off-farm, including the elimination of deforestation from supply chains.
-Current trends point to significant GHG emission increases. For steel and cement, although the first sites are under development, there are to date no commercial scale sites for zero or close to zero emissions production.

Aaron Maltais, Program Director for Stockholm Sustainable Finance, Senior Scientist and Lead author at Stockholm Environment institute (SEI) says;

“It might appear that the easiest route for investors is to divest from emission-intensive sectors and companies, however, there is an enormous opportunity to influence the level of emissions and make an impact on the real economy by placing coordinated pressure on companies and other actors in high emitting sectors to plan and implement serious transitions of their businesses”.

The experts suggest that investors put focus on engaging with value chains, advancing sector wide transitions, aiming for sectorial targets, and committing to not providing financing to new oil and gas exploration and development.

It is crucial to engage with value chains  

There need to be buyers willing to pay the additional costs associated with green industrial products for investment in green steel and green cement to accelerate. Investors can help to create lead markets for green industrial products by engaging with sectors such as transport and construction to encourage these actors to choose materials with lower climate impacts and thus help to create demand for green industrial products. Similarly, curbing commodity-driven deforestation requires coordinated engagement with actors that play a central role in the value chains that cause deforestation. Investors can also support policies to help level the playing field, enabling sustainable practices to be competitive.

Interventions should promote sector wide transitions 

A recommendation for investors to advance sector-wide transitions is to push companies to fix problems with their polluting assets or supply chains, rather than offloading. It may not be sufficient to simply invest in companies with the lowest emissions in a climate intensive sector.

“In the case of oil and gas companies we see the problem of companies adopting ambitious climate targets but at the same time selling off polluting assets to actors that are not reducing their emissions. Likewise in the agricultural sector, companies that simply change to sourcing of commodities away from emissions intensive regions may do little to change the unsustainable practices of these regions when producers can secure other buyers”, says Olle Olsson, Senior Research Fellow at the Stockholm Environment Institute.

Pushing for sectoral targets  

To achieve long-term business transitions there might be advantages in combining emissions trajectory targets with targets on the specific steps companies and other actors must take to implement new business models. For example, can investors set targets on the number of new CCS projects initiated by cement companies, the number of companies with high levels of deforestation exposure that are implementing new anti-deforestation policies, or the share of oil and gas production fields that have moved into planned production decreases. Investor coalitions should do more to coordinate on the specific practical steps they expect companies to make in order to bring about major reductions in emissions.

Oil and gas- divest or engage? 

Investor coalitions have had some success in getting major oil and gas corporations to commit to reducing the emissions they create in the production of oil and gas, but much less success in getting companies to commit to major cuts in production itself and the winding down of their current business models. Moreover, nationally owned oil and gas companies account for more than half of global production and an even greater share of proven reserves and it is more difficult to influence nationally owned companies to the same extent.

“We find that investors serious about making a real impact on the production of oil and gas cannot rely only on engagement and need to find other ways to use their financial leverage to influence what happens in this sector. We recommend that investors and banks commit to not providing debt financing to new oil and gas exploration and development and to reducing the financing going to oil in gas in line with the production declines needed to meet global climate targets.”, Aaron Maltais concludes.