Commentary

ICYMI, We’re Rewriting the Rules of Engagement

New frameworks can only go so far in managing evolving risks.

Scenes at the AGMs of large corporates held this week reflected heightened investor – and activist – concerns over the rigour of firms’ climate strategies and net zero commitments. Banks in particular were under scrutiny for their fossil fuel finance policies, but they were far from alone. Other ESG priorities were evident, with shareholders pushing back on issues from executive pay to sustainable agriculture, not to mention fears over resilience and returns in the face of a coming economic storm.

Help was at hand for asset owners trying to assess the credibility of the transition plans of investee firms, with the release of the One Earth Climate Model, which outlines net zero pathways for carbon-intensive industries based on their share of the remaining carbon budget consistent with limiting climate change to 1.5°C.

Asset owners and managers planning their future engagement priorities many find the model useful – it’s already being adopted by members of the Net Zero Asset Owner Alliance – but it might also help firms falling within the scope of the UK’s planned transition plan disclosure framework, designed to increase transparency to investors and regulators.

Firms’ responses to Russia’s invasion of Ukraine were not yet in evidence on most proxy voting schedules, but many institutional investors are looking for answers. As highlighted at a webinar this week hosted by EIRIS Conflict Risk Network, corporates and investors need to take a nuanced approach, balancing sanctions compliance with responsibilities to protect against human rights abuses and sector-specific factors, such as the supply of essential services to communities on both sides of the conflict.

While accepting that information flows are hampered by the fog of war, investors can still expect firms to provide risk assessments and related disclosures about their operations in affected areas, ideally informed by and benchmarked against pre-existing policies, experts said. It is here that established frameworks are at their most useful, as investors compare actions with firm’s commitments to the UN General Principles on Business and Human Rights.

Speakers argued that boards which fail to provide oversight of material conflict risks are neglecting shareholder value, while admitting that evidencing of access to human rights remedies is no easy task. For many, the bigger focus is on learning lessons, by revisiting and strengthening human rights due diligence practices, augmenting quantitative indicators with qualitative assessments, and updating responsible market entry guidelines.

Investors are also paying close attention to government policy responses to Putin’s war, aware that energy and food security risks are long-term issues that require structural reforms which dovetail with pre-existing moves toward greater sustainability and resilience.

The fact that electoral cycles put a premium on quick fixes is one of the many reasons why investors are increasingly widening their engagement activities beyond active ownership to policy advocacy. Governments which have fought shy of policies to manage down energy demand over the past decade – fearing an electoral backlash from consumers – may rue their indecision as they look to achieve energy independence while tackling resurgent inflation.

As they say, the cheapest energy is the energy you don’t use.

 

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