Laith Cahill, IIGCC Senior Specialist on Net Zero Stewardship, says new voting guidance reflects how climate has become integral to company strategy.
Voting is a critical lever for investors to help support the decarbonisation of the economy as part of their climate engagements, and in line with their fiduciary duties to beneficiaries.
Yet, in recent times, it has been catalysing many tensions between companies and their investees, and between asset owners and their managers – particularly in the context of net zero commitments. A noteworthy example of this was BP’s decision to cut back on its commitment to reduce its oil and gas output last year, deviating from its net zero strategy, without notifying its investors in the first instance.
The company had previously pledged to cut its carbon emissions by 35-40% by 2030 compared to 2020 levels – a plan that received 88% of shareholder support – but subsequently dialled that back to 20-30%. This not only prompted some of its largest investors – including UK pension funds LGPS Central, Nest, Border to Cast, Universities Superannuation Scheme and Brunel Pension Partnership – to vote against the reappointment of then-chairman Helge Lund, but sparked fears among the investment community that it could set a precedent in the oil and gas sector.
“A key area that comes up over and again is this idea of communicating your voting policies and practices, and how that can have an outsized effect on the company at hand or even the wider market,” said Laith Cahill, Senior Specialist on Net Zero Stewardship at the Institutional Investors Group on Climate Change (IIGCC). “What we want to explore is how investors communicate with companies – is it through letters, through pre-declarations, for example? All of that is really important.”
With that in mind, the IIGCC published last week its Net Zero Voting Guidance, aiming to support asset owners and managers in developing their own policies and practices on climate. This followed on from last year’s Net Zero Engagement Initiative, which emphasised the importance of engagement and stewardship as key levers in the path towards decarbonisation.
“Voting is a critical part of stewardship, and it is a fundamental right of shareholders,” said Cahill. “It’s an opportunity to support, punctuate and initiate engagement, and also a chance to communicate the importance of climate to long-term value.”
A key goal for the IIGCC was to stress the crucial need for investors to effectively communicate their intentions to companies. The question, however, is how that can be done in practice – which is precisely what the new guidance focuses on.
“What’s been clear in our conversations with investors is that there’s a real appetite for further engagement on voting practices,” Cahill added. “It is important, however, that it is approached in a holistic way and with a focus on what’s effective.”
The paper moves away from the traditional logic whereby climate-related engagement and voting tools are just shareholder resolutions, expanding that definition to include direct accountability to reports, accounts and auditors, Cahill explained.
“Climate is increasingly integral to company strategy, and investors have shown increased interest in understanding how the two are becoming indistinguishable, as well as the implications this has for voting,” said Cahill. “One area that we’ve been keen to explore is director accountability on climate change, as it’s something we’ve seen increasing appetite from some members on.”
Companies that are part of the Climate Action 100+ investor-led initiative, which aims to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change, are progressively moving from focusing their attention on target-setting to thinking about wider company strategy, which has prompted the IIGCC to respond.
“That requires us to take a slightly different voting approach: one that encapsulates routine resolutions as well as shareholder resolutions, as well as thinking more about how that can be communicated effectively to companies and clients,” Cahill added. “Asset owners are increasingly putting forward stewardship objectives and targets, and want to understand how their external managers are realising those within their own commitments and objectives.”
Forging a path
Three core principles lie at the heart of the IIGCC’s new guidance: aligning with investors’ own net zero objectives and targets; communicating net zero expectations; and supporting net zero stewardship, engagement and investment approaches.
“What we’re trying to support is a net zero voting policy for investors that is more effective to what they’re trying to achieve for clients and beneficiaries,” Cahill explained. “As part of this, they could communicate effectively, both pre- and post-vote, to companies, clients and beyond to create an effective voting tool.”
The latest guidance was developed in line with the Net Zero Investment Framework’s (NZIF) recommendation for a voting policy that is consistent with assets in the portfolio aiming to achieve net zero emissions by 2050 or sooner. It also promotes the idea that investment strategies should prioritise engagement and stewardship as primary mechanisms to drive alignment with the goals of the Paris Agreement, arguing that “votes are an invaluable instrument in the stewardship toolkit”.
IIGCC members that have made individual commitments to net zero through the Net Zero Asset Managers and Paris-Aligned Asset Owners initiatives are expected to develop stewardship strategies with a clear voting policy. The second iteration of the NZIF, widely used by asset owners and managers, is due for release later this year.
“While voting is only one tool amongst many in the stewardship package, utilising the full range of resolutions and options available to shareholders is important for investors seeking to secure real-world emissions reductions,” said Cahill.
Each principle underpinning the guidance is supported by multiple case studies, enabling investors to understand how they can go about crafting their own voting practices and selecting the ones that fit their needs.
“There has always been some concern around voting on director reappointment, with many investors describing this as a ‘nuclear’ option – a sort of final step in an engagement,” said Cahill. “But in developing this paper, we’ve actually heard from investors that they are doing it increasingly, as it’s a step that often brings companies to the table and can be part of a wider engagement approach.”
The final chapter of the paper considers what investors with externally managed funds can do to set the right expectations for managers, and analyse them in the selection and appointment process – a key area of focus for the IIGCC’s asset owner working group, which is due to develop further guidance on this.
Looking ahead, the IIGGC will continue to engage with investors on the importance of voting as a key tool to advance climate-related goals.
“We really want this to be the beginning of a dialogue with investors, working with them to produce natural voting policies and practices, and continuing to monitor what adoption looks,” said Cahill. “We are hopeful this will continue to be a useful guide for stewardship strategies, and importantly, that those will be aligned with investors’ own stewardship approach and investment activity.”
Other work streams for the IIGCC include ongoing discussions with a range of proxy advisors to understand their offerings to the market, and how they can support institutional investors in their efforts to meet climate targets.