Climate change may affect company and portfolio return over time. It may also give rise to business opportunities. Climate change is one of our three focus areas. We publish expectations, analyse and engage with companies on climate change strategy.
We expect companies to plan for relevant climate scenarios, and incorporate potential climate risks in strategic planning, risk management and reporting. We have been assessing companies exposed to climate risk since 2010.
Relevance of climate change strategy
The point of departure for our climate change expectations is our long-term financial objective of safeguarding the fund’s assets. The challenges of climate change, both the physical impacts and the regulatory and technological responses, may give rise to risks and opportunities for companies. How companies manage the transition and physical risks and opportunities, may drive long-term returns for us as a shareholder.
The scientific basis for climate change is widely accepted1. Climate change has the potential to affect the global economy. The economic impacts of climate change on specific markets and regions are complex, varied, and uncertain, rendering the timing and extent of impacts hard to predict at a company level.
Climate outcomes may affect company and portfolio return over time. To reduce future risk and increase opportunities, Norges Bank Investment Management has an interest in well-functioning carbon markets and other measures that may contribute to an efficient transition to a low-emissions economy.
Our expectations are high-level guidance for companies. We promote effective climate disclosures, as these contribute to sustainable market outcomes and enable a better understanding of the financial system’s exposure to climate-related risks. We welcome efforts such as those of the Task Force on Climate-related Financial Disclosures (TCFD) to standardise climate reporting according to internationally agreed principles. We expect companies to address climate change in a manner meaningful to their operations and wish to support their efforts to manage the risks and pursue the opportunities.
Our expectations are directed at all companies in our portfolio. We are, however, mindful that climate change risk may be especially relevant to companies engaged in activities such as coal mining, oil and gas production, electricity production from fossil fuels and other business activities with large greenhouse gas emissions. Some expectations are also specifically related to activities such as tropical forestry, agriculture, or other activities that result in the clearing of tropical forests.
As an investor, Norges Bank Investment Management analyses opportunities and risks to our investments. We encourage companies to be transparent about the topics raised in this document. We use such information to identify how climate change may affect companies’ economic performance and prospects, and to assess whether management is taking relevant steps to develop a long-term business strategy for a transition to a low-emissions economy.
Expectations towards companies
Boards should integrate relevant climate change challenges and opportunities in their business management, such as investment planning, risk management, and reporting. Boards should ascertain that the ensuing responsibilities are clearly defined within the organisation and they should effectively guide, monitor, and review company management’s actions in carrying out these efforts.
A. Integrate relevant climate change challenges and opportunities in business strategy and financial planning
- Companies should incorporate potential physical or regulatory climate impacts that could have a material financial impact in their investment planning and execution in the short, medium, and long term. They should understand the business implications of directly or indirectly generating greenhouse gas emissions, and achieving reductions over time. Companies may consider putting in place a mechanism for third-party evaluation of company climate strategy, for example a committee of relevant experts.
- Companies should consider the sensitivity and resilience of their long-term business strategy and profitability to different future transition and physical climate scenarios. To support strategic decision-making, they should identify future scenarios for climate regulation, carbon prices, technological developments, and environmental conditions. The scenarios should include low-emissions scenarios incorporating countries’ expressed national, bilateral or international climate commitments and ambitions.
- Companies should take into consideration a transition to a lower carbon economy consistent with a 2 degrees Celsius or lower scenario, and where relevant, scenarios consistent with increased physical climaterelated risks. In line with the TCFD recommendations, companies should strive to achieve transparency around their assumptions, sound governance over scenario application, and effective disclosure of scenario analysis that will inform and promote a constructive dialogue between investors and companies.
- Companies should monitor climate-related issues and regularly consider whether their remuneration and incentive systems promote sustainable business practices and support the long-term profitability of the business.
- Companies engaged in activities with large greenhouse gas emissions or intensities, should have a strategy addressing a transition to a low-emissions energy system. This should include specific attention to the sensitivity to climate impacts of major investments. The strategy may also consider research and development to enhance the company’s competitiveness under changing market conditions.
- Companies engaged in activities that may cause clearing of tropical forests should have a strategy responding to stricter future regulation and market expectations concerning the conservation of tropical forests.
- Companies engaged in activities with a direct or indirect impact on tropical forests should assess their impact through, for example, lifecycle analysis, and have a strategy for reducing deforestation as a result of their own activities or from their supply chains.
B. Integrate material climate change risk in risk management
- Companies should identify and incorporate material climate change risk, including physical and transition risk, in a robust and integrated framework. This should include appropriate processes for prioritising, monitoring, classifying, reporting, and regular reassessment. Companies should describe whether they consider existing and emerging regulatory requirements related to climate change.
- Companies should identify and consider relevant risk adaptation and mitigation measures, for instance programmes to improve energy and resource efficiency, increased use of less carbon-intensive raw materials, optimisation of logistics and distribution, protection of high carbon stock landscapes, business restructuring, or measures to increase the resilience of operations.
- Oil and gas companies and companies with coal mining operations should evaluate their exposure to downstream climate risk and, where relevant, consider initiatives to promote a more efficient or low emissions’ use of the fuel they produce.
- Companies should adopt, where relevant, industry standards and best practices in climate change risk management and the sustainable management of forests.
- Companies should identify and monitor material climate change risk in their supply chains. To this end, they should implement relevant procurement policies for products and services, engage with strategic suppliers and share best environmental practices and integrate the cost-of-carbon into supply chain management systems.
- Companies should monitor whether suppliers that deliver forest-linked commodities, products, and materials linked to tropical forests adopt best practices to avoid deforestation and adhere to international, recognised and robust standards and certification systems for the sustainable management of forests.
C. Report material climate change risks and greenhouse gas emissions
- Companies should disclose a view and strategy to address material physical and transition climate change risks and opportunities in annual reports, or in case of incompatibility with national disclosure requirements, in other official company reports. Companies should seek to align their disclosures with the emerging standards set by the TCFD recommendations.
- Companies should also consider reporting greenhouse gas emissions to appropriate, internationally recognised reporting initiatives to better enable investors to analyse portfolio greenhouse gas emissions.
- Benchmarks and targets, and performance against these, should be quantified where relevant. Metrics and targets on climaterelated risks associated with water, energy, land use, and waste management, as well as internal carbon prices used and revenues associated with climate-related opportunities should be disclosed. Metrics should be provided for historical periods to allow for trend analysis. Companies should provide a description of the methodologies used to calculate relevant metrics.
- Companies should develop a framework to monitor greenhouse gas emissions associated with their business operations. They should report, in annual reports or on websites, absolute and relative greenhouse gas emissions in accordance with the Greenhouse Gas Protocol. They should report any emissions directly generated by industrial facilities they own or operate, emissions associated with purchased or acquired electricity, steam, heat, or cooling, and if appropriate, scope 3 greenhouse gas emissions. As appropriate, companies should consider providing industry-specific greenhouse gas efficiency ratios.
- Companies with direct or indirect impact on tropical forests should disclose information about the climate impact of their operations and their tropical forest footprints. Companies should also disclose how they monitor their impact on tropical forests over time. Finally, companies should disclose whether and how they seek best practice and adhere to international standards for sustainable production of agricultural commodities or sustainable management of forests.
D. Transparency on interaction with policy makers and regulators, and positions on climate change legislation and regulation
- Companies should have policies or guidelines for engaging with policy makers and regulators on climate change and related topics and be transparent about relevant associated spending and activities.
- Companies should review their membership in industry associations and interest groups on a regular basis and assess whether the advocacy positions on climate and energy policy held in these groups are aligned with their own positions on these issues.
- Companies should promote the conditions for well-functioning markets and approach new market-based climate regulation constructively, within their financial objective.
- Companies should outline their position on specific climate change regulation relevant to their business profitability and outlook.
- Companies engaged in activities with large greenhouse gas emissions should report on activities to secure existing production or use of fossil fuels and disclose whether they, financially or otherwise, support industry groups or other initiatives seeking to influence climate regulation or policy.
1 The scientific research on this issue is summarised in the Fifth Assessment Report (AR5) from the International Panel on Climate Change (IPCC).