NZAOA: Climate Action “Material to Mandates”

Asset owners committed to net zero have outlined heightened expectations around asset manager assistance on climate-related voting and engagement.

At a time when some US asset managers are backpedalling on climate commitments, the Net Zero Asset Owner Alliance (NZAOA) has reinforced member expectations on voting and engagement at upcoming AGMs and beyond.

Echoing recent guidance, asset owners this week warned that asset managers risked losing business unless they could demonstrate their commitment to best practices in integrating climate considerations into investment stewardship.

The alliance, comprised of 88 institutional investors with US$9.5 trillion in assets under management, recently issued a ‘call to action’ for the asset manager community. The NZAOA identified four principles that it wants asset managers to implement, which it argues will help protect the long-term financial interests of both the asset managers and their asset owner clients:

  • Bring the focus of addressing the systemic risk of climate change to the entirety of investments and operations;
  • Support a consistent, clear, and accountable proxy voting landscape (for public equity);
  • Align lobbying activities with asset manager’s own stated climate-related commitments do the same for portfolio companies; and
  • Ensure that climate engagement is more systematic and transparent (especially on its own limitations).

The call to action references three sets of best practice guidelines published in the past two years by the alliance, relating to asset owner engagement of asset managers in the areas of proxy voting, engagement and lobbying.

In a webinar held on 2 April to discuss the details of the three guidance papers, ten members of the NZAOA, including AkademikerPension, Kenfo and University Pension Plan Ontario, highlighted the need for better transparency, consistency and accessibility in asset managers’ stewardship practices when it comes to ESG issues.

NZAOA members are signalling to asset managers that aligning with their best long-term interests, protecting their portfolios from climate risk and driving change at a systemic level is “material to mandates”, said Jake Barnett, Managing Director of Sustainable Investment Strategies at US faith-based investor Wespath.

Other speakers suggested asset owners are already increasing their level of scrutiny over how managers are embedding climate considerations into their stewardship activities.

“We expect external [asset] managers to manage our money in the same way that we manage it ourselves. We therefore spend a lot of time and effort analysing our external managers’ climate-related practices, and engaging with them on the best way to implement their practices,” said Bertrand Millot, Head of Sustainability at Caisse de dépôt et placement du Québec (CDPQ), an institutional investor that manages several provincial pension plans. “[NZAOA’s] guidance is very important because it sets the stage for best practices and how to influence asset managers to do your bidding.”

Votes and consequences

Like CDPQ, UK-based Phoenix Group also undertakes a comprehensive, regular ESG due diligence assessment of its asset managers, which includes specific questions on climate using the NZAOA guidance documents. Engagement and voting statistics on relevant shareholder and management proposals are also analysed, according to Kalina Lazarova, Governance and Voting Lead at the UK long-term savings and retirement business.

“These are scored and the consequences of a poor overall score could lead to asset allocation sanctions, especially where there is a demonstrable lack of improvement over a period of time,” she said.

Another important area of focus for the Phoenix Group is voting inconsistency. “We do not currently instruct voters directly, but we have developed a set of voting principles, which include how we expect our asset managers to evaluate corporate climate strategies and escalate concerns through [voting],” Lazarova explained.

In 2023, the company conducted an internal synthetic exercise to understand how its principles would apply to meetings of 100 focus group companies. On an ex-post basis, it compared predictions to the actual votes cast by its asset managers at those meetings.

“Our key observation was that voting on climate topics was inconsistent, both between managers and also against their principles. However, the data collected through this analysis has allowed us to engage with our managers on their specific areas of greatest inconsistency,” said Lazarova.

Following the exercise, Phoenix Group made specific suggestions tailored to each asset manager on greater policy alignment and sought their reflections on commitments and alignment. Overall, Lazarova reported a mixed picture, with only some managers having a mature and systematic approach.

The webinar presented two case studies for each of the three guideline topics. The main theme that emerged across proxy voting, engagement and lobbying is that asset owners want asset managers to increase transparency, consistency and accessibility.

Commitment questioned

The call to action from NZAOA follows some very visible splits between asset owners and managers on climate-related votes at AGMs last year, which could widen in the coming proxy voting season.

At the beginning of this year, JP Morgan Asset Management, State Street Global Advisors, and Pimco decided to withdraw from Climate Action 100+ (CA100+), whose members pledge to achieve net-zero emissions by 2050 or earlier. More recently, Larry Fink, CEO of BlackRock, failed to mention ESG in his annual Chairman’s Letter to Investors, as well as advocating “energy pragmatism”. This has led many to question whether US managers are backtracking on their commitment to climate action.

In response to a question about the CA100+ departures during the webinar, Patrick Peura, ESG Engagement Manager, Allianz, pointed to NZAOA’s 2022 paper, ‘The Future of Investor Engagement’, which outlines the benefits of collaborative engagement.

Speaking in a personal capacity, he said: “If there are instances where an asset manager says we can do this better ourselves, then we want to see them prove it. Show us how you are sticking to the ambitions that we need. Show us how you’re being effective in your engagement on your own, as opposed to through collaborations.”

Wespath’s Barnett added: “Regardless of whether an asset manager is CA100+ or not, we want them to recognise that climate risk is a key financial risk, that it’s systemic in nature, and that it requires more ambitious and innovative approaches than what we commonly see in the marketplace today.

“The principles we’ve been talking about – the work on proxy voting, engagement, policy and lobbying – all remain highly relevant for the conversations we’re having with asset managers. The call to action, even though it came out before the announcement of withdrawals, remains central to what we’re looking to engage and push managers on in a collaborative dialogue,” he said.

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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