UN NZAOA looks to embed due diligence on policy influence into asset owners’ selection and appointment of managers.
Failure to scrutinise asset managers’ climate lobbying activities and governance is posing “a systemic risk” to efforts to decarbonise portfolios, leading asset owners have warned.
A new Net Zero Asset Owner Alliance (NZAOA) discussion paper aims to support asset owners in engaging with asset managers on their own climate policy influence, as well as on stewardship of underlying companies’ lobbying activities.
Jake Barnett, Director of Sustainable Investment Stewardship at Wespath and Co-lead of Engagement Track at the NZAOA, told ESG Investor there is a lack of “ready-made” resources for asset owners wishing to “start to incorporate the principles of aligned lobbying in their selection appointment and monitoring processes for asset managers”.
Better monitoring of asset managers’ climate lobbying activities should also drive change within the investee firms with which they engage on asset owners’ behalf.
Patrick Peura, ESG Engagement Manager at Allianz and fellow NZAOA Engagement Track Co-lead, said investors “must be realistic about what companies can achieve given the current business environment and economic framework”. He highlighted the importance of policy engagement, underlining that investors need to “hold companies accountable to align their policy and lobbying influence with their stated climate commitments”.
A systemic risk
Corporate and industry association climate policy lobbying database InfluenceMap recently found that the most engaged firms on climate policy developments were from higher polluting industries. Last year, the organisation also flagged “rising levels of climate lobbying and misinformation online”.
The Global Standard on Responsible Climate Lobbying (RCLS) framework, developed by Swedish pension scheme AP7, the Church of England (CoE) Pensions Board and BNP Paris Asset Management, launched just over a year ago, while analysis by Principles for Responsible Investment and Chronos Sustainability flagged barriers to investor engagement over indirect lobbying.
Peura told ESG Investor that for “too long companies’ lobbying activities haven’t been transparent enough”, suggesting that the actions of trade bodies were a particular blind spot among institutional investors. He said: “The commitments from companies haven’t been there to ensure that their associations are aligning with their own commitments, and we haven’t seen a strong enough stewardship focus from asset managers conveying this concern”.
Investor-led collaborative initiative Climate Action 100+’s (CA100+) Net Zero Company Benchmark includes in its disclosure requirements for carbon-intensive firms an indicator on climate policy engagement. The initiative also recently emphasised the importance of lobbying activity, including climate lobbying disclosure proposals in its list of ‘flagged votes’ for the 2023 AGM, describing decarbonisation and lobbying activities as “intrinsically linked”.
“If we and companies across our portfolio are aligning our activities with the goal of limiting warming to 1.5°C, any company in the portfolio heavily lobbying against that represents a systemic risk to our actions and to our portfolios,” Peura said.
When evaluating an asset manager’s approach to climate policy engagement, the NZAOA discussion paper says asset owners should prioritise transparency, consistency and accessibility.
“We are under the conviction that an asset manager that’s not doing well on climate will increasingly find it difficult to find new business or at least they would have a smaller target of customers that they can appeal to,” Peura said. “If they’re not looking after climate in a robust way, it’s hard to imagine asset owners would see them as representing their long-term interests”.
Asset manager accountability
The NZAOA discussion paper focuses on three ways that asset managers can influence public policy related to climate: direct and indirect climate policy engagement on financial services regulation, direct and indirect climate policy engagement on real-economy policy, and climate policy engagement-related stewardship.
Alongside transparency, asset owners should seek to ensure managers are following best practices in governance to ensure oversight of climate policy engagement strategy and activities, alignment of direct and indirect climate policy engagement with climate commitments, and stewardship practices for climate policy engagement.
Barnett said that the paper is “not necessarily asking an asset manager to make a new grandiose climate commitment” and instead is “seeking to drive alignment and accountability with climate or net zero commitments that the manager has already made”.
Attention to managers’ and corporates’ lobbying activities should be an integral part of asset owners’ net zero strategies, Peura added, rather than a ‘silver bullet’ in its own right. “We’re not saying if asset managers now care about this one topic that solves the problem, we’re saying in order to solve the problem they need to be doing everything that they’ve previously been doing on stewardship, and they need to be doing this as well.”
As asset owners “start having thoughtful conversations with the asset manager community” about best practices in terms of their own selection, appointment and monitoring due diligence processes, this will eventually “filter down into greater accountability and focus on the broader business community, which will know what asset managers, as a key stakeholder of portfolio companies, expect of their businesses”, said Barnett.
“Engagement is a way to create real world change. We think systemic stewardship is a way to do that which reflects some of the challenges and opportunities and is a way to focus on a specific element of that whole system on which there’s room for progress,” Barnett added.