Role of active stewardship across environmental and social themes emphasised at ESG Risk & Investment Asia 2022.
An investor’s decision to divest “doesn’t mean an end to all ESG-focused engagement with that company”, according to Eric Nietsch, Head of Sustainable Investing for Asia at Manulife Investment Management.
“Investors may want to contact recently-divested companies to explain their reasoning, for example, and outline what course of action they would like to see companies take in the future. Similarly, investors can engage with companies they chose not to invest in from the outset. An investor’s typical approach isn’t so binary as either engaging or divesting,” he said, speaking at ESG Investor and Regulation Asia’s ESG Risk & Investment Asia 2022 conference.
Divestment should be considered as a final resort if engagement and escalation has failed, panellists said, but noted the door is never completely closed to future conversations.
Strategy ultimately depends on an investor’s objectives, said Måns Carlsson, Head of ESG at Australian asset manager Ausbil Investment Management.
“If a company has big value-destructive events, and if the investor’s goal is only financial returns, then they may divest due to the damage done both financially and reputationally. But if the investor has ESG objectives as well, then that needs to be considered before putting those shares into the hands of someone who might not be as actively engaged on ESG,” he said.
Last year, US-based asset manager Federated Hermes divested from oil giant Pemex across its credit strategies, citing concerns such as weak governance and an unsafe workplace environment, but nonetheless pledged to continue its climate and social-related engagement efforts.
The firm has been engaging with Pemex since 2017, both independently and as part of the broader investor coalition under Climate Action 100+ (CA100).
“There’s ultimately a place for both engagement and divestment,” said Nietsch. “If the company can demonstrate that it’s open to engagement, even if progress is slow, then that is always going to be the preferred tool over divestment.”
Multi-year effort
Investors are under pressure to escalate engagement or divest from the most carbon-intensive companies failing to implement plans to reduce emissions in line with the goals of the Paris Agreement.
NGO Reclaim Finance’s 2022 Asset Manager Scorecard assessed 30 asset managers collectively holding stakes worth US$82 billion in companies developing new coal projects, highlighting that 25 were members of the Net Zero Asset Managers initiative.
Only eight of the 30 had publicly asked companies to adopt short-term emissions reduction targets, the report said, adding that only one asset manager had extended that requirement to include Scope 3 emissions.
In May, two US public pension schemes faced being forced to divest by law following an accusation that they had “wildly exaggerated” the costs of divesting fossil fuel holdings. Both funds emphasised the importance of engaging with fossil fuel companies and investing in climate solutions.
“In many cases, active engagement is a multi-year journey – change certainly doesn’t happen overnight,” said Ausbil’s Carlsson. “If a company is visibly improving, an investor doesn’t necessarily want to penalise them if those improvements are gradual.”
A number of asset owners and managers have explicitly adopted active engagement strategies which outline how they will be stewarding their holdings on the path to net zero.
The Canada Pension Plan Investment Board, which manages US$432 billion in assets, has an active engagement strategy targeting carbon neutrality which specifies that “blanket divestment” is not the best way to maximise returns without undue risk of loss.
The UN-convened Net Zero Asset Owner Alliance (NZAOA) published a paper on the importance of taking a multi-pronged approach to climate engagement, collaborating with policymakers and asset managers as well as companies to accelerate decarbonisation progress.
Earlier this year, the Institutional Investors Group on Climate Change (IIGCC), the European investor membership body, launched a new stewardship toolkit to help asset owners and managers enhance their climate-focused engagement practices with corporates.
“Progress isn’t linear and there isn’t a one size fits all approach to active engagement – investors can either point the finger or try to be part of the solution,” said Carlsson.
