Despite increased activity, lack of baseline engagement and stewardship targets is limiting ability to cut portfolio emissions.
Asian investors are being encouraged to utilise a wider range of engagement tools to cut portfolio emissions, including shareholder resolutions, as focus their increases on engagement and stewardship to implement more impactful decarbonisation measures.
Asia Investor Group on Climate Change (AIGCC) CEO Rebecca Mikula-Wright said that climate-related discussions in the region primarily “traditionally featur[ing] close private dialogues” between investors and investee corporates. This means that Asian investors can be missing out on key tools for maximising the effectiveness of engagement in combating climate change.
For investors, the AGM can offer particularly useful opportunities, but it is an option Asian investors are yet to maximise. They have historically tended to be non-confrontational and voice dissatisfaction behind closed doors, but speaking out publicly at AGMs has a proven global track record of affecting meaningful change.
Different tools for different situations
“Approaches in different jurisdictions will vary, but global momentum for engagement dialogue to be complemented with shareholder proposals on climate is increasing,” said Mikula-Wright. “There is no one-size-fit-all approach, investors will need to explore how different forms of engagement are complementary to each other and ultimately identify the appropriate engagement approach.”
In order for investors to affect companies they will need to undertake “constructive discussions” in engagements and dialogue which is “guided by climate science”, according to Mikula-Wright. This will mean investors need to exercise responsible stewardship in considering how they use their ownership rights – a key part of the investors’ toolkit – to influence a company’s decision-making process.
The AIGCC CEO said filing shareholder proposals on climate change, proxy voting and other escalation options can “play a complementary role to private dialogue in broader engagement strategies”. The combination of “carefully crafted” shareholder proposals could reinforce other forms of engagement, including “shap[ing] more focused private dialogue” between investors and companies.
According to the AIGCC’s recently released ‘Translating to Action – Net Zero Investment in Asia’ report, investors are already using some more assertive stewardship actions, including votes against management on climate grounds and ‘Say on Climate’ votes. The AIGCC recently collaborated with ClientEarth on guidance for investors in Asia to consider shareholder resolutions as part of effective engagement with companies on climate-related matters.
With this rising interest, the AIGCC says the approach to engagement must be specific, time-bound, and paired with effective escalation strategies when active ownership and engagement are being used over divestment. This joint guidance compares options for filing climate-related resolutions 11 key Asian jurisdictions, including Japan, China and Malaysia.
“Different stewardship practices would mean there is a level of novelty with some measures”, acknowledged Mikula-Wright. These different practices would mean Asian investors will “need to constantly test [their] methods and then recalibrate on engagement tactics” to effectively use the tools available to cut portfolio emissions. Communication over stewardship is key, with asset managers needing to demonstrate to their institutional clients that they are voting in favour of policies that investors are supportive of and holding companies to account on climate-related targets.
No established baseline
Asset managers and owners responding to this year’s annual AIGCC survey displayed a stronger preference for stewardship, but with just over half having so far determined a baseline for financed emissions in material sectors to reduce their exposure to climate risks and meet their “fiduciary duty”.
AIGCC’s report said despite investment stewardship and corporate engagement being a “favourable investment strategy” among Asian investors, many have not set a baseline for engagement targets.
The report suggested this signifies that while Asian investors are keen to pursue investment stewardship and corporate engagement strategies, in practice they have not yet linked their stewardship actions to net-zero pledges and targets. The AIGCC stated its members need to be active stewards to “achieve ambitious 2030 targets in investor portfolios across the globe”, with portfolio alignment tools – including the Net Zero Investment Framework (NZIF) – emphasising the importance of the role of stewardship.
Of investors surveyed by the AIGCC, 87% are currently undertaking corporate engagement directly, either through a third-party provider or through the Climate Action 100+ and the Asian Utilities Engagement Program. These programs assist in aligning investor expectations with a common agenda and shared objectives, including climate policy engagements.
Despite this, 53% stated they have “yet to determine” a baseline for their financed emissions in material sectors, which are subject to direct or collective climate engagement or stewardship actions. Asian investors are yet to set any rules about what they want to achieve through the use of engagement and stewardship, with the adoption of these practices still in a fairly early stage.
“Asian companies have shown ambition in climate but will need to proactively communicate 2030 targets to achieve net zero targets by mid-century“, said Mikula-Wright. “Through identifying direct and indirect policy engagement activities undertaken by companies, investors will be able to understand a company’s positioning in various climate policies, and assess whether they are aligned with the company’s corporate ambition in climate change and decarbonisation strategies.”