Asset manager to “deepen” escalation activities and expand climate engagement programme to focus on hard-to-abate sectors.
Global asset manager Aviva Investors is prepared to take tougher measures with “systemically important” carbon emitters, after releasing details of progress under its Climate Engagement Escalation Programme (CEEP).
Louise Wihlborn, Sustainable Investment Analyst at Aviva Investors, told ESG Investor that this year the firm will continue to increase the stringency of its escalation action, particularly with poorer performers.
Launched in early 2021, the CEEP focused on 30 highly carbon-emitting firms in sectors considered by the firm to be significant global polluters. These sectors were oil and gas, metals and mining, and utilities.
It requested that targeted companies set 2050 net zero Scope 3 emissions targets that cover the whole value chain, integrate climate roadmaps into their corporate strategy, including near-term transition targets, and provide evidence of effective board oversight and alignment of incentives.
It also set a three-year timeframe for engagement, incorporating “clear escalation measures for non-responsive businesses” or those that do not address climate-related issues “quickly enough”.
“We believe robust, persistent engagement can be a powerful agent for change.” Wihlborn said. “Having a seat at the table can have more positive impact on real-world emissions that simply divesting.”
Engagement is “certainly more constructive than leaving heavy emitters with shareholders that do not see improving climate characteristics as a priority”, she added.
Since the introduction of CEEP, Aviva Investors said it had carried out more than 200 company engagements. Wihlborn said that companies have been largely receptive to the firm’s requests and discussions.
Aviva Investors stated it has been most successful in engagements on transition plans, governance, and disclosures, with more than 40 successful engagements in each of the three categories since 2021.
Additionally, 22 of the 30 companies initially focused on by the firm have announced or strengthened their ambition to achieve net zero by 2050 or sooner, with all companies taking steps to strengthen ESG governance structures at the board and management level and provide greater transparency over existing structures and processes.
Wihlborn said that engagement should be informed by the “nuances” of each company’s circumstances and that while CEEP’s initial focus was on setting ambitious emissions reduction targets it has now shifted towards “dissecting the minutiae of specific road maps and the feasibility of their execution”.
However, Wihlborn said that Aviva Investors will continue to “deepen” its escalation activity with the 30 original companies.
CEEP has also expanded its programme to the demand side, with a focus on hard-to-abate sectors.
“Adding renewables like wind and solar into the energy mix has not yet diminished the use of fossil fuel,” she said. “There has been no obvious displacement effect.
“Instead, the overall pool of energy has continued to grow. We must ensure the pattern does not continue, and need a concerted effort to create an energy system where new sources genuinely replace existing ones,” Wihlborn added.
Divestment a “final step”
In 2022, Aviva Investors voted on 73,438 resolutions at 6,732 shareholder meetings. The firm voted against 27% of management proposals, including 49.1% of pay-specific resolutions.
It also sanctioned 18 companies within the CEEP focus group for failing to meet key measures of climate ambition and risk management during the 2022 AGM season.
Aviva Investor’s escalation process for “non-responsive” or too-slow-to-react businesses includes multi-pronged engagement, the creation of broader stakeholder pressure, and requesting shareholder resolutions.
The final step of escalation is divestment, with Aviva Investors stating it is “committed to full divestment of targeted companies that fail to meet its climate expectations”. Mirza Baig, Global Head of ESG Research and Stewardship at Aviva Investor, described divestment as the “ultimate sanction”.
Wihlborn highlighted the scale of Scope 3 emissions (value chain) as “inhibiting progress” for Aviva Investors on climate engagement, with investee firms transition plans “often disconnected from business fundamentals”.
She added that there is little evidence of adequate incentives to encourage a “rapid transition”, with companies taking steps to strengthen their ESG governance structures at a board and senior management level but most still not linking remuneration with their climate transition planning.
Last year, Aviva Investors voted on 30,000 resolutions related to directors and over 8,000 on remuneration.
“We have an obligation to clients and society not to fund activity that could potentially contribute to catastrophic outcomes,” Wihlborn said. “Where momentum falls short of our expectations, we will become more forceful and escalate.”