UK Investors to Challenge Corporates on TCFD Compliance

Executive remuneration, human capital and diversity also key stewardship themes in 2022.

Task Force on Climate-related Financial Disclosure-aligned (TCFD) reporting will be a major 2022 stewardship priority for UK-based investors, in anticipation of new disclosure requirements for publicly quoted and large private companies from 6 April.

The Pensions and Lifetime Savings Association (PLSA) and stewardship service provider EOS, have published reports outlining ESG-related themes that will steer engagement and voting in 2022. Both reports noted the importance of high-quality TCFD-aligned reporting from companies so investors can effectively measure their exposure to and management of climate impacts.

This annual general meeting (AGM) season is “an opportunity for pension scheme trustees and their asset managers to engage with company directors, to revisit ESG policies and seize the chance to build back better than before,” said Nigel Peaple, Director of Policy and Advocacy at PLSA.

“As part of this, we have strengthened the language on expectations on TCFD disclosures, to which all companies should be held accountable,” he said.

With the UK’s largest pension funds already required to provide TCFD disclosures, the PLSA report said “investee companies should expect more scrutiny on climate matters as a result [with pension schemes wanting to see] all listed companies’ reference TCFD in their reporting”.

“There should be clear evidence that companies are considering the issue of climate change across the high-level TCFD areas of governance, risk management, strategy, metrics and targets, and scenario analysis,” the report added.

The trade association has recommended pension schemes vote against the re-election of the relevant corporate director or chair if the business is not already moving towards disclosures consistent with mandatory TCFD obligations. Smaller investee companies must also be able to demonstrate that they are readying themselves for TCFD-aligned reporting “at a pace proportional to the resources available and the government’s TCFD roadmap”, PLSA said.

With US$1.64 trillion in assets under advice, EOS – the engagement services arm of asset manager Federated Hermes – noted that its clients also expect investee companies to disclose “key indicators on a comparative year-on-year basis in line with reporting guidance from TCFD, the CDP and the Science Based Targets initiative”.

Environmental issues were already a big focus in 2021, the report said, accounting for 28.9% of ESG-related engagements. Almost 80% of these were climate-related, followed by pollution waste and management (10.4%), forestry and land use (5.2%), water (2.6%) and supply chain management (1.9%).

Initially consulted on last year, the Department for Business, Energy and Industrial Strategy (BEIS) has published guidance this month for companies disclosing under the incoming regulations, including descriptions of how organisations should identify, assess and manage climate-related risks and opportunities.

Not just climate

EOS and PLSA said investors will also be focused on a number of social and governance-related factors during the 2022 AGM season.

Following the impact on Covid-19, PLSA noted that executive remuneration will be under increased scrutiny.

“We will be calling for caution to be shown on executive pay proposals, especially where companies have benefitted from government support during the pandemic, and in light of the increasing cost of living,” PLSA said.

Last year, the Investment Association called for FTSE 350-listed companies to link executive pay and bonuses to ESG targets.

The EOS’ report cited the importance of human and labour rights. This year, its stewardship efforts on behalf of clients will address the exacerbation of social inequalities, such as modern slavery, lack of access to food and healthcare, and fair employee wages and benefits.

“We ask companies to respect all human and labour-related rights linked to a company’s operations, products and supply chains, including through the provision of affordable essential goods and services to help reduce poverty,” the report said.

EOS will also be encouraging companies to develop and implement a human capital management strategy to promote best practice physical and mental wellbeing in the workplace.

Both reports said diversity will continue to be an important theme this year, with investors focusing on the gender and ethnic diversity of company boards. Those that cannot demonstrate progress will be challenged by investors, PLSA and EOS said.

“While climate change matters remain vital to address, it’s also important to not forget the other aspects of ESG investing,” said PLSA’s Peaple. “This is not only the right thing to do but also numerous studies have shown that companies that uphold the highest ESG standards tend to financially outperform as well, adding value to the millions of pension savers they count among their shareholders.”

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