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Investors Must Expand Engagement Activities to Keep 1.5°C Alive

The UN-convened Net-Zero Asset Owner Alliance’s Jake Barnett and Patrick Peura make the case for complementary forms of stewardship to drive systemic change.

The core commitment of the UN-convened Net-Zero Asset Owner Alliance members is to align our portfolios with the net-zero transition to protect our core business and portfolios from the transition and physical risks of climate change. One of the most important tools to support this change is engagement, whereby investors use their leverage as stewards of capital to influence change.

Bilateral and collaborative corporate engagement has been the primary tool used by investors to directly address material idiosyncratic risks in their portfolios. Climate change is different. Although corporate engagement has seen great progress on climate topics, it has limits to what we can expect it to achieve.

For a systemic problem like climate change, doing more of the same does not overcome these limits. This is because engagement outcomes are bound by the policy and economic incentives, the proverbial ‘rules of the game’, that shape the playing field that companies must compete on. Therefore, when corporate engagement does not accelerate decarbonisation at a pace required to achieve a 1.5°C scenario, investors must find other ways to exert their influence and represent their long-term interests.

Systematic stewardship

In a new discussion paper published by the Alliance, The Future of Investor Engagement, we call on all institutional investors to ramp up complementary forms of systematic stewardship to accelerate decarbonisation in the real economy by addressing the rules of the game.

We say ‘complement’ because corporate engagement is a fundamental investor action that must continue, including expanding active participation in leading collaborative initiatives like Climate Action 100+. However, investors committed to net zero also have a responsibility to expand the breadth of their engagement work to include efforts in sector/value chain engagement, policy engagement, and asset manager engagement. Both asset owners and asset managers have important roles to play in each of these engagement streams to support the more systemic changes needed for a transition to net zero.

In sector engagement, asset owners can play a unique role as conveners of sector/value chain dialogues, helping bring together multiple stakeholders. These dialogues lay the groundwork for collaboration to reduce emissions across value chains and to identify industrial regulation and policy hurdles that must be addressed to achieve net-zero alignment. We look to networks like the Mission Possible Partnership and the Climate Action 100+’s Global Sector Strategies workstream as valuable initiatives to facilitate these efforts.

Once key interventions are identified through sector engagement, investors must embolden policymakers to take sector-specific regulatory and policy action to accelerate decarbonisation. This can include indirect actions like pushing for mandatory corporate disclosure of material climate information, incorporating expectations on corporate climate lobbying into existing engagement dialogues, and supporting policy that effectively addresses climate change’s broader risks. The latter, sometimes referred to as ‘positive climate lobbying’, is an important step for companies committed to demonstrate they stand by their decarbonisation commitments and the actions needed to make them viable.

Our final focus is on the importance of elevating asset owner engagement with their asset managers. This might look like rewarding asset managers that strongly contribute to public discourse and policy messaging as part of their climate-related systemic stewardship, as well as building the evaluation of these stewardship efforts into ongoing asset manager selection and monitoring processes.

We propose that the evaluation include an analysis of: 1) asset manager proxy voting approaches (as discussed in our Proxy Voting Guidelines), 2) level of support for the CA100+ initiative and the need for companies to reach ‘full green’ across the CA100+ benchmark indicators, and 3) contribution to sector and policy discussions to change the ‘rules of the game’, to help support a transition to a 1.5°C aligned-future. Integrating these elements into asset manager engagement helps ensure that their actions are properly representing the asset owners’ interests for rapid, real-world decarbonisation.

A broader stakeholder push

Investors alone cannot bring about a transition to a 1.5°C scenario. As the most recent Intergovernmental Panel on Climate Change report makes abundantly clear, all of society’s stakeholders must act now to keep 1.5°C alive. Businesses know best the hurdles inhibiting their rapid decarbonisation and policy makers hold the authority to re-write the rules of the game to incentivize decarbonisation at the pace necessary. However, given that we need a broader stakeholder push, the Alliance believes that asset owners are in a unique position to leverage their natural alignment with the long-term health of the global economy to strongly signal the need for systemic change. We call on all asset owners and managers to do the same. Not as a competitive advantage, but as a competitive necessity.

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