Investors Must “Sharpen” Climate Engagement Efforts

Asset owners underline importance of contributing to “field-building” as Transition Plan Taskforce unveils sector-specific guidance.  

Asset managers must “work smarter, not harder” when engaging with investee companies and policymakers on climate, according to the UN-convened Net Zero Asset Owner Alliance (NZAOA).  

The call comes in a new paper outlining four principles asset managers can apply to their climate engagement strategies. It emphasises the importance of aligning climate engagement outcomes to portfolio management and stewardship decisions if asset managers are going to continue to win mandates from asset owners committed to net zero. 

“We are calling for asset managers to be clearer, more explicit, and more strategic in their climate engagements,” Hilkka Komulainen, Head of Responsible Investment at Aegon UK, told ESG Investor, describing the paper as contributing to industry efforts to “sharpen our pencil from a climate engagement perspective”. 

“How does their engagement fit into their broader climate risk management strategy? What are their investment beliefs when it comes to climate change? How does this impact the way they assess companies and their transition plans?” she posited.  

“We also want managers to prioritise and tell us about their choices. [Telling us they have conducted] 5,000+ engagements doesn’t tell us a lot about their [climate] prioritisations.” 

The NZAOA, which now includes 86 asset owner members with US$9.5 trillion in assets under management, already asks asset managers to set their own net zero commitments. The paper’s principles are applicable to all asset managers investing in public and private asset classes across different markets.  

“The goal of this document is to deepen confidence, transparency, and authenticity in the climate engagement dialogue between asset owners and managers,” the NZAOA noted, adding that the document aims to enable both owners and managers to allocate their resources more efficiently. 

The issue of resource constraint in stewardship was highlighted by asset owners who attended ESG Investor’s inaugural Stewardship Summit in May. 

Third leg of the stool  

The paper defines climate engagement as raising climate risks and/or opportunities with an entity that the investor has identified and setting expectations for issuer action.  

One of the principles outlined in the paper covers governance and integration. The Alliance requests that asset managers put in place governance and oversight structures that ensure engagement activities are integrated across their business in a manner that supports climate-related engagement. 

Alliance members have also called for asset managers to set and publish a climate engagement strategy that highlights their related investment beliefs, how their climate engagement contributes to their overall climate strategies, their time-bound expectations for issuers, and a plan of action for when issuers do not meet expectations within a set timeframe.  

Many asset managers already publish their climate stewardship policies and engagement priorities, the report acknowledged, noting that the additional details provided should allow asset managers to “articulate what outcomes they are targeting with a focus on quality over quantity of engagements”. 

The four principles outlined by the Alliance aim to also ensure asset owners have the information they need to assess whether a manager’s climate approach is sufficiently aligned with their own expectations.  

Subsequent climate engagement practices should mirror the asset manager’s published climate engagement strategy, the paper said, with asset managers making “appropriate disclosures” relating to their climate engagement strategy implementation to promote greater transparency.  

“The Alliance recognises that the world is not yet on track for a 1.5°C future and that the challenges associated with alignment vary by region and sector,” the paper said. 

“Therefore, asset managers should be explicit and transparent about their expectations of stakeholders. This includes indicating where they see the opportunities to close the gaps between ambition and implementation at the company, issuer, sectoral, and policy level.” 

Patrick Peura, NZAOA’s Co-Lead of Engagement and ESG Engagement Manager at Allianz, said: “[The paper] is the third leg of the stool, rounding out the selection, appointment and monitoring (SAM) guidance that the Alliance has published.” 

Published in 2021, ‘Elevating Climate Diligence on Proxy Voting Approaches’ outlined a set of principles and considerations considered to be the foundation for assessing and engaging asset managers on climate-related proxy voting, focusing on four key themes: governance, interest alignment, merit-based evaluation, and transparency. 

Aligning Climate Policy Engagement with Net Zero Commitments’ introduced key principles for members to assess asset managers’ climate policy engagement activities and stewardship of their investees’ policy engagement activities, encouraging asset owners to integrate the assessment into their SAM processes of asset managers. 

Asset owners which join the NZAOA are expected to set climate targets for their portfolios in line with the Alliance’s Target-Setting Protocol. 

Earlier this year, the NZAOA published its third annual progress report, which demonstrated members’ continued commitment to the transition. Absolute financed greenhouse gas (GHG) emissions saw a collective 3.5% reduction to 213.4 million tonnes of carbon dioxide equivalent (tCO2e) in 2022. 

Fly on the wall  

Following the 2023 proxy season, asset managers have been challenged on their decreasing support of key climate and ESG-related shareholder proposals. Voting is often utilised as an escalation strategy when engagement fails to deliver the results investors want to see; increased transparency of engagement efforts up to that point is paramount if asset owners are to accurately assess their external managers on their climate-related engagement progress and alignment. 

“The dialogue between managers and companies takes place behind closed doors, and typically the asset owners are not in the room,” said Komulainen. 

Peura added that slow action from companies on climate-related goals “isn’t a failure of engagement [by investors], but it’s a signal that there is a need to be pushing elsewhere and supporting stakeholders elsewhere”.  

“Rather than thinking the best way to address that failure is to escalate every single time or to name and shame, we’re saying that [asset managers] also need to think about the broader system and how they can contribute to the public discourse and field-building of understanding what the systemic hurdles are and how they can be addressed,” he added.  

Peura said there is need for “field-building” from all kinds of stakeholders across the investment industry, including NGOs, civil society, and academia, and that this paper is encouraging asset managers to be a “productive part” of the discussion and “to be clear on what they can deliver on, so as to also point out instances in which decarbonisation incentives need to be accelerated elsewhere”.    

Crossing tracks 

One such field-building initiative is the UK’s Transition Plan Taskforce (TPT), which was established by HM Treasury in April 2022 to develop a ‘gold standard’ for private sector climate transition plans. 

This week, the TPT published seven sector-specific guidance documents for consultation to support entities in their sector-specific interpretations of the final TPT Disclosure Framework. The consultation is open until 29 December, with a finalised sector-neutral disclosure framework, implementation guidance and sector-specific guidance expected Q1 2024.  

“The TPT sought to identify sectors for which additional guidance would be beneficial in kick-starting transition plan disclosures, while also identifying opportunities to leverage existing sectoral guidance and consolidate it in the context of the Disclosure Framework,” the TPT said. 

Alongside industries like food and beverage and metals and mining, the TPT has produced guidance for asset owners and managers. 

It noted asset managers’ “crucial role” in mobilising transition finance and developing transition plans that “preserve and create value for their clients [asset owners and others] by reducing their emissions, managing exposures to climate-related risks and opportunities and contributing to the economy-wide transition”.  

The TPT has recognised that many of the issues covered by asset managers’ transition plans are at least partly dependent on the investment mandates they receive from asset owners, encouraging owners and managers to collaborate on topics like engagement to accelerate the climate transition. 

Additionally, TPT has underlined the importance of asset owners incorporating climate-related considerations into their contractual governance and accountability mechanisms for asset managers. 

The asset owner-specific guidance applies to both public and private sector pension plans, re-/insurance companies, sovereign wealth funds, endowments, foundations, and family offices that invest assets on their own behalf or on the behalf of their beneficiaries.  

The TPT has designed its disclosure framework to complement and build on other sustainability-focused work, such as the standards and guidance produced by the International Sustainability Standards Board (ISSB) and the Glasgow Financial Alliance for Net Zero (GFANZ). 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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