Managers Promise Firm Engagement Across ESG Spectrum

2022 will see stronger focus on biodiversity as investors show “teeth” to laggards.

Asset managers are warning companies to expect firmer engagement this year to improve their performance on biodiversity as well as social issues such as diversity and inclusion.

Multiple asset managers’ letters to stakeholders announcing their 2022 intentions, including Aviva Investors and BMO Global Asset Management, said that they were now looking beyond climate.

Aviva Investors, which has £262 billion AUM, said it will develop “teeth” when engaging with directors that do not exhibit sufficient urgency in the pace of change. The asset manager also wants executive compensation structures and performance targets to reflect sustainability goals.

Several managers listed biodiversity as a key engagement priority for 2022. This year will see the Task Force on Nature-related Financial Disclosures (TNFD) launch its proposal for its reporting scheme, expected around March, as well as the Kunming conference in China in Q2 of 2022.

Aviva Investors’ Chief Executive Mark Versey said in a letter to chairs that companies must manage dependencies and impacts on nature more resolutely. “Cutting emissions but allowing the destruction of the rainforest to continue will do little to reverse global warming,” he said. Aviva Investors expressly referred to divestment as a potential strategy to achieve these goals.

Partly driven by COP26, 2021 saw asset owners and managers focused on climate risks with the Net Zero Asset Owners Alliance (NZAOA) reaching portfolio decarbonisation milestones ahead of schedule and many investors engaging with heavy emitting corporates via Climate Action 100+.

Earlier this week, the Universities Superannuation Scheme, the UK’s biggest private pension fund, announced it would move £5 billion away from polluters, which showed climate goals would still be key for many investors.

Wider culture of change

State Street Global Advisors’ (SSGA) CEO, Cyrus Taraporevala, said in his letter to CEOs that the manager will support the acceleration of the systemic transformations underway in climate change and the diversity of boards and workforces.

Other leading managers were more circumspect in their 2022 outlines. BlackRock CEO Larry Fink’s annual letter focused on the benefits of stakeholder capitalism. But he said Blackrock would not pursue a divestment policy from fossil fuels, although the firm would allow clients to do so.

BMO Global Asset Management (EMEA), part of Columbia Threadneedle Investments, said it would prioritise engagement with companies on key environmental issues as well as human rights issues and executive pay.

“The events of the past year have reinforced the importance of creating a more resilient future,” said Claudia Wearmouth, Co-Head of BMO GAM (EMEA)’s Responsible Investment team, in the manager’s 2022 outline. “In 2022, our work will focus on holding companies accountable on their commitments,” she added.

Versey’s letter, which included some of the most detailed proposals and evidence, said the firm wanted to encourage companies to consider the whole picture of sustainability.

“This is how they will create the greatest return for shareholders,” he said. “Companies must turn their pledges into concrete plans of delivery.”

Playing hardball on S and G

Managers also highlighted they would be less patient in 2022 with companies not making advances on diversity and social issues.

Numerous asset owners, NGO and civil society groups have expressed disappointment with asset managers for refusing to draw red lines when it comes to companies flouting social – including diversity and inclusion – and governance policies – such as executive pay – in recent years.

The letters form part of a larger trend in 2022 toward a more combative relationship between shareholders and company directors. Some groups have predicted a more fractious AGM season this year as investors give firmer guidelines to what they expect from companies

As part of its efforts to hold companies more accountable, BMO said it will engage on how executive pay is linked to climate strategy. Specifically, BMO said it expected targets to align executive incentives to the interests of long-term shareholders and will advocate for the introduction of risk-related preconditions to bonus awards.

The issue of remuneration has increasingly drawn the attention of shareholders. Alphabet, Google’s parent company, announced this year that it would increase executive remuneration, but said wider employees would not receive pay increases.

In 2021, Aviva Investors said it voted against the re-election of directors at 137 companies for what it called lack of progress on ethnic diversity and opposed directors at 85 companies due to human rights concerns. Research has shown that ethnically diverse boards can see an uptick in profits.

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