South 32 (ASX:S32) share price sinks amid increased climate risk scrutiny

Pressure to take into consideration climate change risks is increasing on ASX companies.

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The COP26 Summit on climate change action has been a source of enlightenment for many investors around the world, lifting the veil on how the world intends to tackle the contentious issue.

Whilst many nations have secured their “phasing down” of coal use from the summit, a report from the Investor Group on Climate Change (IGCC) has slammed the boards of several ASX-listed companies for their lack of climate action.

The IGCC is a collaboration of Australian and New Zealand institutional investors focused on the impact of climate change on investments.

Board’s of 15 companies such as Qantas Airways Limited (ASX: QAN), Woodside Petroleum Limited (ASX: WPL) and South 32 Ltd (ASX: S32) are said to “lack the skills and experience to lead the corporate transition to net zero emissions by 2050, and it is unclear how they are addressing this gap”, according to the IGCC.

The report, titled “‘A Changing Climate: what investors expect from company directors on climate” studies 15 of Australia’s most carbon intensive companies. It sets out investor expectations regarding climate change risk.

Whilst not price-sensitive, shares in South32 took a hit today and edged lower to finish 1.4% in the red amid the release of IGCC’s analysis.

Here are the details.

What does the IGCC report mean for South32?

The report comes as investors are becoming more and more aware of the role companies are set to play in the climate risk transition.

Even the big guns are joining the cause. A recent push sees some of the world’s top asset managers sign up to the “net zero asset managers initiative” that now has over 220 signatories and $57 trillion in assets under management.

Suffice to say, there is a huge wave of steam gathering behind climate change initiatives from the finance world.

It, therefore, comes as no surprise that several shareholder meetings have advocated board members be removed this year due to their failure in acknowledging climate change risks.

For instance, the IGCC refers to ExxonMobil which “lost two board seats due to growing concern by investors over the risk of failing to adjust its business strategy to address global efforts to combat climate change”.

Not only that, the IGCC submits that these 15 companies don’t see climate change as a material risk, instead viewing it as “a separate risk issue and not integrated into the overall company strategy”.

The group doesn’t name the company in isolation, but calls on companies such as South32 to “ensure investment confidence” by adopting a range of measures that would see its board “reflect the climate change challenges ahead”.

These include ensuring board representatives have expertise in:

  • Skills in disruption and transition
  • Ability to challenge existing business models
  • Knowledge of climate change
  • Change management skills

It also advocates for the company and its colleagues to integrate climate change fully into company strategy, including capital allocation decisions and risk management.

The IGCC also reckons remuneration should be reflective of the company’s climate change targets, and for companies to put their money with their mouth is when issuing public statements.

With regards to its analysis, IGCC’s director of corporate engagement Laura Hillis stated:

We are at a tipping point for the transition to net zero emissions in Australia as evidenced by recent announcements from the federal government. While promisingly, many of the companies assessed for this report have set net zero targets, it is unclear based on the findings of this report how prepared the boards of these companies are to lead the transition to net zero.

Hillis continued:

Boards that fail to recognise the risk of climate change and their role in driving the company transition to a low carbon business, will leave the company and investors exposed to unacceptable financial, strategic and market risks. Not to mention they will miss out on the opportunities on the decarbonisation pathway, including jobs for regional communities

Investors are sure to keep a close eye on this space as pressure mounts on ASX-listed entities to recognise the risks outlined by the COP26 summit and align with the principles set out there.

South32 share price snapshot

The South32 share price has soared over 58% in the past 12 months, after rallying as much as 42% this year to date.

These returns are ahead of the benchmark S&P/ASX 200 index (ASX: XJO)’s gain of around 17% in that time.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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