As the world’s largest chemicals producer, BASF emitted almost 22 million tonnes of CO2 equivalent in 2018, equivalent to those of a small country such as Estonia or Lebanon. Despite impressive efforts to reduce the carbon produced for each unit of production, the chemicals giant had resisted pressure to commit to a net-zero goal.
By the beginning of 2021, the investors engaging with BASF management through the Climate Action 100+ (CA100+) collaboration were running out of patience. “We were beginning to get a bit frustrated by the company not agreeing to set a [net-zero] target,” says Rupert Krefting, head of corporate finance and stewardship at M&G Investments. The UK-based asset manager, alongside Dutch peer NN Investment Partners, was leading the CA100+ engagement process with BASF.
The investors were “drawing up the battle lines” to table a shareholder resolution, says Krefting. That would have markedly escalated an engagement process that had begun the previous September. CA100+ – on behalf of the 575 investors it represents – had written to the CEO and chair at BASF and another 160 large emitters requesting they set out credible strategies to achieve net-zero emissions.
But, at a virtual meeting between Krefting, some fellow CA100+ members, and BASF’s chief executive, the company hinted its climate strategy was about to take a significant step forward. While corporate governance rules meant they could not say much, “it was enough to make us stand down”, says Krefting. “It was good news – the last thing we wanted to do was to have to table a formal resolution or ask questions at the AGM.”
A few weeks later, at the company’s investor day in March 2021, BASF unveiled a commitment to reach net-zero emissions by 2050. Also, and crucially for Krefting and his fellow CA100+ investors, it shifted from a pledge to hold emissions flat over the next decade to begin to reduce them by 2030, even as the world’s biggest chemicals producer continued to grow. “That was a big change,” says Krefting.
CA-100+ responded by declaring it was “pleased to welcome BASF’s increased aspiration and pledge to get to net-zero emissions by 2050”, and stated that “the steps that BASF has taken so far on the journey towards net zero demonstrate its commitment to being an innovative and ambitious player in the sector”.
Having that endorsement from investors was, in turn, welcomed by the company. “Climate Action 100+ was helpful in confirming that our path to climate neutrality… was heading in a direction that would be welcomed by investors,” says Stefanie Wettberg, senior vice-president of investor relations at BASF.
Krefting is in no doubt the company had already decided to take climate change seriously and understood the climate-related risks to its own business. He underlines how BASF took a hit to earnings of $237m (€200m) in 2018 when the unusually low level of the Rhine, due to drought, meant it was unable to deliver inputs to some production sites. However, the company was reluctant to make the sort of commitment the CA100+ investors wanted and “make promises without a very detailed plan of how to deliver them”, Krefting says.
Accelerating the process
Pressure from the CA100+ investors accelerated the company’s efforts, Krefting believes. “We are not expecting companies to have a detailed pathway” to net zero, he says. In many cases, the technologies necessary to reach net-zero emissions have not been deployed at a commercial scale, he adds. “What we are expecting is ambition … Once a company has stated an ambition … you then move on to start thinking about it, working on plans. It makes a huge difference.”
The engagement process does not end with the net-zero commitment. The next phase will be to encourage BASF to start thinking about its Scope 3 emissions – those up and down its value chain that it does not directly control.
Companies have said to me in the past that, if shareholders don’t ask the question, [company management doesn’t] think it is important to shareholders. If we all sat silent, there wouldn’t be any net-zero commitments. Rupert Krefting, M&G Investments
The next meeting with the CA100+ investors is scheduled for November, and Krefting says they will also be looking for more detail on the company’s short, medium and long-term targets. Underpinning the CA-100+ engagement is a ten-point benchmark, which includes targets, green revenues, capital expenditure and disclosure.
Having the benchmark in place helps to address one drawback of investors working collaboratively – the need to reach consensus on the issues to raise and questions to ask. Krefting praises the “simplicity” of the approach, and the discipline it imposes on the engagement process. Without such a benchmark, “it becomes very easy to get dragged down rabbit holes”, he says.
Doubling down on emission cuts
When asked if the engagement process led to outcomes that would not have been the case otherwise, Wettberg stresses that the company had “already been working hard” on “fundamentally new low-emission production technologies and processes for several years”. Between 1990 and 2018, the company reduced its emissions by 50%, despite doubling its sales volume over the period. The company did not “discuss our specific roadmap” with CA100+ before the announcement, she adds.
However, Krefting believes the engagement process “definitely forced the issue”. Peer pressure from other companies in the sector would also have been a factor for BASF, he believes, but maintains that such a large number of significant investors raising the issue does make a difference.
“Companies have said to me in the past that, if shareholders don’t ask the question, [company management doesn’t] think it is important to shareholders … If we all sat silent, there wouldn’t be any net-zero commitments.”