The New Rules of Engagement

Patrick Peura, Co-lead of Engagement at the Net Zero Asset Owner Alliance, says collaborative engagement needs to adapt to survive and thrive.

Net zero targets and portfolio decarbonisation have been the test bed for collaborative engagement among asset owners, with encouraging but mixed results. This has led to a progression towards pragmatism in investors’ thinking regarding what they can realistically achieve through dialogue with investee firms, says Patrick Peura, Co-lead of the UN-convened Net Zero Asset Owner Alliance’s (NZAOA) engagement track. 

Last year, the NZAOA published a discussion paper on the future of engagement, calling for systemic stewardship to address climate-related risks, while also cautioning investors to not “over-state” their influence on policy nor their potential to provide solutions to complex multi-stakeholder climate problems. 

“While it may be possible to move many companies towards responsible practices and selling higher-end products with lower negative impacts, there are still market opportunities for others and therefore not all companies may follow suit,” says Peura, who co-wrote the discussion paper, alongside Jack Barnett, Co-lead of the NZAOA engagement track. 

There are limits to how much companies can be pushed, he says, especially when their products are in demand or deemed essential to society, such as those produced by the oil and gas industry.  

“Investors cannot force companies to shut down by meeting targets that would lead to their closure,” he tells ESG Investor.  

Increasingly, discussions in hard-to-abate sectors revolve around determining the points at which policymakers need to intervene and where investors can and should focus their efforts to ensure the best results. 

In June, the Church of England Pensions Board (CoEPB) and Church Commissioners announced plans to divest from oil and gas firms failing to align with climate goals, with energy majors, including BP, ExxonMobil and Shell, among others, accused of not listening to “significant voices in the societies and markets they serve and are not moving quickly enough on the transition.” 

Further, the CoEPB said that it will no longer prioritise engagement with the oil and gas sector on climate change, with the asset owner instead refocusing its efforts on reshaping demand for oil and gas from key sectors such as the automotive industry.  

Stephanie Maier, Founding Global Steering Committee Member at investor-led initiative Climate Action 100+ (CA100+), recently told ESG Investor how, given the supply-demand dynamics of the oil and gas sector, investors are increasingly aware that a more “joined-up approach” to engagement is vital.  

Her sentiments are shared by the NZAOA which is prioritising a more holistic approach to stewardship to avoid energy dislocations and increase policy ambition to rapidly reduce oil and gas demand, while increasing the availability of renewable alternatives. 

“The challenge lies in identifying the areas where investors can make a difference, while also recognising the limitations to engagement and calling on other stakeholders where and when necessary,” says Peura. 

No magic wand 

When done right, collective engagement can drive meaningful change within investee firms on climate-related issues and foster better business practices. 

Earlier this year, CoEPB and Swedish pension fund AP7 began engagement with UK-based energy company National Grid on corporate climate lobbying due to the firm’s lack of disclosure. As a lead engager with the company as part of CA100+, CoEPB announced its intention to vote against the re-election of Chair Paula Rosput Reynolds and CEO John Pettigrew at its annual general meeting (AGM) on 10 July.  

The escalation tactic was successful, with National Grid opting to release an updated lobbying policy, along with a commitment to conduct a lobbying review – prompting CoEPB and AP7 to vote in favour of management at its AGM.  

“Across the board, there have been high levels of success from multilateral engagements in terms of improving climate transparency, awareness, and focus from companies,” says Peura, adding that investors can and should request for better disclosure on investee firms lobbying activities which has historically been a barrier to achieving good policy outcomes on climate change.   

However, he admits that there are sectors where addressing climate-related issues are challenging through investor engagement alone, with certain industries slower to adapt to the climate challenge and the transition to net zero.   

“It is unrealistic to believe that engagement alone can solve all these issues overnight,” he says, adding that voluntary, market-led initiatives will not be sufficient to solve specific problems of a systemic nature.   

Instead, he says, it’s essential to highlight the need for more support in areas, for example, like research and development (R&D) or value chain collaboration in hard-to-abate sectors.   

“These are complex issues that cannot be magically fixed by investors.”  

the NZAOA discussion paper outlines that while corporate engagement plays a valuable role in addressing acute ESG-related issues in investors’ portfolios, its impact on systemic risks is limited in isolation, as well as being heavily contingent on policy “moving in tandem” or ahead of corporate action.  

“Perhaps the most consequential limit to corporate engagement is its inability to move outcomes beyond the boundaries of the ‘playing field’ as set by the rules of the game,” the paper said.  

“Regardless of how ambitious investor commitments are, the systemic change required to achieve net zero targets will not materialise if there are no plausible pathways, business cases or incentives to allow it under existing economic frameworks.” 

There is an evident “ambition gap” between the current trajectory of policy and where the world needs to be regarding its climate commitments, says Peura, adding that there is also an “implementation gap” between commitments and the current state.    

Peura says investors can play a role in closing this gap by supporting inclusive policymaking on industrial policy. However, there is a “misunderstanding” that investors hold all the answers when it comes to industrial policy.   

“Asset managers should instead seek to align the lobbying and policy activities of companies with the companies’ own commitments,” he says, adding that the companies themselves are better positioned to understand their sector’s challenges and opportunities. 

The NZAOA published a paper discussing these issues in April. 

“Companies must be clear about their climate commitments, explain why they might be falling short, and outline what is needed to bridge the implementation gap,” says Peura, who also ESG Engagement Manager at Allianz Investment Management.   

“Expecting investors to have all the answers on industrial policy is unrealistic as it is not their primary area of expertise. Therefore, the focus should be on collaboration and alignment with companies’ insights and actions.” 

Future of engagement 

Increasingly over the past five years, corporates, banks, insurers, asset owners and managers have collaborated within their respective industries on ESG initiatives to achieve climate-related and broader social goals, with collective action required to move the needle on systemic issues such as the phasing out of fossil fuels and the scaling of renewables in its place.  

However, as with all collaboration between industry participants, ESG initiatives are subject to scrutiny under anti-trust laws. While regulators in Europe have regarded climate collaboration as a special case, US legislators and state officials have taken a different view, with the fear of breaking anti-trust laws shaking the foundations of alliances falling under the Glasgow Financial Alliance for Net Zero (GFANZ) umbrella, following insurers’ mass exit from the Net-Zero Insurance Alliance (NZIA).  

In July, the CoEPB left the NZAOA. The pension fund – which has £3.2 billion (US$4.1 billion) in AuM – will continue to collaborate with the NZAOA on engagement topics and will stay in close contact, CoEPB Director of Climate and Environment Laura Hillis told ESG Investor, adding that the CoE’s endowment fund (US$10.3billion in assets) – managed by the Church Commissioners for England – will remain part of the NZAOA. 

According to Peura, it’s evident that a degree of pragmatism from all stakeholders is required when coming together to discuss as complex an issue as climate change. 

“By embracing the exchange of information all stakeholders can work more effectively.”  

For this reason, all eyes are on CA100+’s second phase, he says, which will see the initiative’s focus shift from corporate climate-related disclosure to the adoption of climate transition plans for corporates, as well as introduce ‘lead sector investor’ and ‘lead thematic investor’ categories to “improve and expand” investor participation.  

Another core component of CA100+’s second phase is the evolution of it’s Net Zero Company Benchmark, with the latest iteration – Benchmark 2.0 – drawing on analytical methodologies and datasets from public and company disclosures that are categorised into two types of indicators: disclosure framework indicators, which evaluate the adequacy of corporate disclosure; and alignment assessments, which evaluate the alignment of company actions with the Paris Agreement goals.   

“It remains to be seen how well investors can organise and how companies respond to requests for conversations within their sector and value chains,” says Peura, adding that there are still many aspects to be determined regarding what can and cannot be achieved and what approaches will and won’t be effective.  

 “To ensure the success of such conversations, it is essential to be transparent and avoid overstating what can be accomplished,” he says. “Maintaining realistic expectations is vital for the effectiveness of this form of dialogue.” 

Sector/value chain engagements focused on climate continue to emerge, such as the Mission Possible Partnership, a coalition seeking to speed up the decarbonisation of seven sectors involving heavy industry and transport, including aluminium, cement, chemicals, steel, aviation, shipping and trucking. 

Peura believes that investors have the role of being “great conveners” that are often clear and concise in communicating their interests, including how climate change poses a significant risk to their investment portfolios and long-term returns.   

To address transition risks in portfolios, investors have set targets for decarbonisation in the real economy, he says, but while they can signal the need for climate action, it might not always be within their purview to dictate specific solutions. Further, without addressing climate change in the real economy, there are systemic physical risks that could impact all asset owners’ portfolios if the root cause isn’t addressed with sufficient ambition.  

Instead, investors can convene stakeholders from across the financial system and the value chain of the companies they invest in, he says. By doing so, they can prompt these stakeholders to put forward solutions that align with the investors’ ambition.    

“This multilateral approach allows for a more comprehensive and effective response to climate challenges.”

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