About the Growing Role and Impact of Stewardship on Sustainable Investing
Asset owners and investment managers are striving to reach new goals in sustainable investing as investor appetite continues to rise alongside an increased regulatory focus. These investors are seeking to foster sustainable business practices in their portfolios. Effecting meaningful change while demonstrating that sustainable investing pays off and translates into a long-term, disciplined and tangible commitment to sustainability.
Asset managers possess a key tool to encourage sustainable investment practices: stewardship – which is a combination of engagement and voting. Stewardship provides asset managers with a global opportunity across industries to influence companies towards practices that address the most important environmental, social and governance issues. Using ourselves as an example, in 2020 alone through more than $1 trillion assets under management across 10,000 companies globally, we voted on 148,039 resolutions at 15,681 meetings. We supported 79% of climate shareholder resolutions, according to a ShareAction Voting Matters 2020 report. We conducted 222 engagements with companies where 57% showed progress on milestones and 31% showed substantial progress. Other top global asset managers possess a similar opportunity, with both targeted proxy voting powers and through purposeful engagement with companies based on stewardship priorities supportive of sustainable investing.
We believe that the long-term financial returns of companies are connected to their strategic environmental, social and governance performance. Our priorities are to influence specific companies’ policies and practices to get them to demonstrate a consistent commitment to sustainability.
These are four examples of our key stewardship priorities for sustainable investing:
1. Reduce Climate Risk
Reducing exposure to climate risk is a key challenge for investors and countries. The reduction in the private sector starts with companies that produce most emissions that trap heat in the atmosphere and cause global warming making commitments to become net-zero emissions businesses by 2050 and setting time-bound quantitative targets. Investors seek more measurable action by companies across the most carbon-intensive industries that are largely responsible for global warming. They push such companies to specify their business strategies that gradually reduce carbon emissions to a net-zero stance within the next couple of decades. There is still work to be done to make sure the commitments made by companies translate into delivering those outcomes.
Governance is the core priority since it strengthens accountability to shareholders, clients and other key stakeholders. Investors are seeking governance that articulates boardroom oversight of climate risks and opportunities and keeps management accountable for taking action to reduce greenhouse gas emissions consistent with the Paris Agreement’s goals and improve climate-related disclosures.
2. Promote Diversity, Equity and Inclusion
Promoting diversity, equity and inclusion fosters a culture of inclusion in the workforce and in executive ranks. Board diversity occurs when there is an adequate mix of skills and backgrounds on corporate boards. Companies must also improve the quality of their workforce diversity reporting to include not just qualitative information but quantitative metrics of diversity across different levels of employment.
3. Improve Occupational Health and Safety
The improvement of occupational health and safety practices produces better workplace safety for companies and their suppliers. The risks for the majority of lower and middle income workers who cannot work from home during the global pandemic persist. The safety and wellbeing of employees can be achieved when companies introduce flexible work from home arrangements, increase employee benefits and protections, address the physical and mental health of the employees, improve whistleblowing procedures and encourage more board involvement.
4. Align Pay For Performance
Aligning pay for performance is a critical issue of a company’s overall governance structure. This goal can be achieved by fostering compensation policies that motivate executives to achieve strong long-term results for shareholders and avoid excessive risks.
Case Studies on Successful Stewardship
Climate Change: Climate Action 100+ Initiative
The Climate Action 100+ investor engagement initiative was formed in 2017 to engage with companies to address their climate risk — the initiative now has over 617 investors with $55 trillion in assets. Investors have sought more measurable action by companies across the most high-carbon industries. The impact has led to results already — 70% of the 167 companies who represent 80% of corporate greenhouse gas emissions globally have set some kind of long-term quantitative targets for reducing greenhouse gas emissions linked to global warming. However, only 30 of the Climate Action 100+ companies have their targets aligned with the net zero pathway by 2050.
Climate risk is a key long-term investment theme since natural resource stocks remain vulnerable. We have targeted companies and industries that contribute a large percentage to the release of greenhouse gases. We used analytical sources such as the Transition Pathway Initiative, Carbon Tracker and Science Based Targets Initiative and, later, the Net Zero Benchmark (NZB) developed by Climate Action 100+ to assess how well companies are aligned with plans and targets of various scenarios consistent with the goals of the Paris Agreement. The NZB tool has created a much needed robust and comprehensive framework for assessing the strategic commitment of companies and their progress towards the climate goals.
As a result of these collaborative efforts, the six largest oil and gas companies and the four largest mining companies in Europe, along with some of their Australian and U.S. peers, have committed to net-zero carbon emissions by 2050 or earlier. Two U.S oil and gas majors have followed suit. Most of them set ambitious enough greenhouse gas emission reduction targets and disclosed details of strategies and investment plans outlining how they are going to achieve their goals. Further, all European electric utilities have worked to set out plans detailing how they will reduce their exposure to coal and increase exposure to renewable energy.
In 2020, we withheld votes for certain sitting directors at energy firms ExxonMobil and Chevron and mining company Glencore since we felt they were not responsive enough to shareholder concerns and fell short on management of climate risks, including quality of climate-risk disclosure.
In 2021, we withheld votes for directors at all companies that did not meet the critical majority of the climate transition criteria outlined by the NZB.
Occupational Health & Safety: Retailers, Financial Institutions
We engaged with Bank of America, Gap, PayPal and Amazon, among other companies, on the immediate steps they took to protect the health and safety of frontline employees and customers during the earlier months of the pandemic. We also sought answers on how their boards oversaw those efforts and what additional investments they made for the medium-term “return to normal.” Companies with directors who sat on multiple boards brought insights from other companies and sectors – Bank of America used lessons from Hurricane Katrina and the California wildfires.
Pay for Performance: Royal Dutch Shell
We withheld votes for Royal Dutch Shell’s pay policy at the 2020 AGM because of the lack of strategic alignment between executive compensation and carbon reduction targets. Shell plays a leadership role in climate commitments, however the company’s executive compensation policy was 55% weighted to the growth of oil and operations while achieving climate targets composed only 10% of the weighting. Since we hold both stocks and bonds in the company, we voted against the pay policy on behalf of both investors. Shareholders still approved the policy with 93% of votes, however the remuneration committee is developing changes that are more likely to be in line with the feedback of investors. However, the company made efforts to address the investors’ concerns and have since introduced the changes to their executive remuneration policy.
Diversity, Equity & Inclusion: Amazon
We met multiple times with Amazon in 2020 to discuss their talent management for their large workforce. The company said their focus was on creating an inclusive workforce and less on the diversity numbers. Their approach to diversity, equity and inclusion is informed by employee groups established to champion underrepresented categories in the organization. The groups wanted to keep the focus on programs to educate and facilitate the leap from mid-to-senior level management for racial, ethnic or gender minorities.
The challenges to investing in companies that demonstrate a lack of clear and consistent commitment to sustainability persist. Stewardship is essential to managing ESG risks and to achieving improved ESG outcomes. We will continue to monitor the goals set by companies, what strategies they are creating, if they meet our sustainability objectives and the level of transparency. For example, we still seek additional emission-reducing efforts from companies across high-carbon industries, especially energy companies. We will continue to use our voice and scale in constructive, relationship driven engagement to influence companies to achieve improved outcomes for our clients
Our role as an active owner of our investee companies means we will continue both our direct stewardship activities and partner with other investors to encourage companies to focus on best practices, standards, data and reporting.
Featured image: Maximilian Weisbecker on Unsplash
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