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Supporting Investor Focus On Climate Commitments - Governance Insights From The EQ Conference

Monday, 23 January 2023

Despite the fact that we’ve been talking seriously about climate change for over 50 years, holding firms to account on their environmental impact is still relatively new. Firms are at different stages when it comes to their carbon cutting/environmental journey. Are investors helping the momentum of climate commitment from organisations? We think so.

All investors or asset managers will have different strategies when it comes to deciding the firms in whom they invest. The future goals and targets of the asset organisation may well determine the nature and extent of their engagement as prospector/investor. This seems wholly justifiable.

At our recent EQ Conference we gave this discussion to our expert panel, comprising: Carol Storey - Active Ownership Manager | Climate - Schroders, Elliot Gamble – Manager - Index Investment Group LSEG, and Iancu Daramus - Responsible Investment Associate - Fulcrum Asset Management.

The panel considered how they work with firms to influence their approach to climate change/ climate commitments. As late adopters might bring down the ESG score of a portfolio, it’s an important topic both environmentally and financially.

Here’s our panel’s recommendations on how to engage and communicate when it comes to climate commitments.

You have the right to enquire (and be given a sensible response)

Suggestions that sustainability is taking a backseat may represent a red (or, perhaps, green) herring. EQ’s Shareholder Voice research flagged that 34% of UK investors have divested from ethical stocks in search of greater returns due to market volatility. However, in the eyes of the experts, this is not a long-term trend, as sustainability is not taking a backseat. Renewables are starting to meet increasing energy demands, with RWE even retiring coal power plants early, demonstrating the strength of the green sector.

CO2 emissions have been flat for a decade, and 80% of the global population is now covered by net zero. This translates to 91% of GDP but only 28% of assets under management, showing a dichotomy, and reinforcing the need for all sectors to unlock share price increases from reducing emissions. That being said, the Green Economy is now the fifth biggest sector, worth more than banking. So the movement is underway, it just comes down to how quickly and ambitiously firms can meet their targets.

Iancu Daramus made the point that the carrot and stick approach is working well in helping keep companies honest. Nuance is important when it comes to reporting. While votes against directors may be used in severe cases, Daramus believes the quality of reporting and knowledge across top teams is actually improving.

Use climate engagement frameworks to help guide engagement

Schroders made the point that its framework helps to guide interactions with firms.

  • Firstly, they assess climate expectations, including targets, the expectation of updates, disclosures etc., to help open the gateway to other discussions.
  • Next, they prioritise those who have and have not made progress, and who is best placed to engage with them.
  • Third comes monitoring, with dashboards designed to track engagements and targets over time and at scale, keeping note of who is responsible for these targets.
  • The fourth and fifth points - voting policy and escalation - are interlinked, depending on the severity of the case. If targets are not being met, then dialogue and its regularity are increased, to understand any headwinds and try to change the course of action. If this is not adhered to, then more serious voting policies might be implemented - but collaboration is the main aim.

A main takeaway was the importance of having investors involved in climate decisions, and engaging them early is vital; giving them time to digest information and to come to conclusions.

Not all firms will hit the Paris requirements of 1.5 degrees at the same time, so it’s more about understanding the situation and looking for solutions for everyone at every stage. Divestment of emitters will soon come to the fore, as ESG is now in a transitional phase where polluters will soon see investment drop if they don’t start changing their ways.

Keep reporting. It’s starting to yield value

It was noted how TCFD has raised the bar in terms of climate disclosures, with the granularity and clarity of the data improving transparency. Yet without standardisation of reporting, like-for-like comparison is not yet possible. Hopefully this will develop soon.

One takeaway from discussion, was that signposting to documents – e.g. on the corporate website - is crucial for investors. Being able to locate documents quickly and easily is vital in helping the assessment of reports. The panel noted that the next development will likely be in scenario analysis. This is the process of setting out more clearly the risks facing investors, and what it means financially.

The Board should do all they can (they’re central to bringing everyone together)

The issue of Board versus dedicated climate expert is one that continues to rumble on. All our panelists agreed that Boards need to be talking about climate commitments, and be able to discuss it fluently. Dedicated experts are helpful when it comes to granularity, but for firms to be taken seriously, the top teams need to be engaging investors for workable and agreeable solutions.

There is also a sympathy for Boards and the feeling they should be given time to improve their climate communications. Firms have had to deal with a multitude of challenges outside ESG commitments. Talking to suppliers about their supply chain and environmental impacts may not be a top priority when markets are causing liquidity issues. It takes time and resource, so Board climate training will no doubt become more common in the near future.

Continue momentum in the US

The US’ role in climate matters has been chequered in recent years, with government u-turns prevalent. That being said, our panelists believed there is no slowdown in US sentiment; institutions are looking at what Europe is doing, and the increase in green inflow will continue.

Keep doing as much as you can

Are we doing enough? The panel’s short answer is no. We could be doing more but we’re moving in the right direction, with increasing interest in the area. More consideration is needed, but investors can’t simply do it alone - it will take a collective effort. The good news is, we’re gaining momentum.

In fact, making your pension green is 21x more powerful than giving up flying, going veggie and switching energy provider. So with the climate movement growing, we hope to see effective results soon.