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    Great Expectations on Climate Engagement

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    Stockholm (NordSIP) – Although the relationship between asset owners and asset managers is one of mutual dependence, misalignments of their interests can and do occur. One way to avoid these is to communicate the expectations to the other party as clearly and unequivocally as possible. In an effort to do just that, on 16 November, the UN-Convened Net-Zero Asset Owner Alliance (NZAOA) published a discussion paper outlining asset owner expectations of asset managers’ climate engagement, Elevating Asset Manager Net-Zero Engagement Strategies. The report is the latest instalment in a series. It complements the topics discussed in the previous papers, Elevating Climate Diligence on Proxy Voting Approaches, and Aligning Climate Policy Engagement with Net-Zero Commitments.

    “For Alliance members, it is critical that their long-term interests are consistently represented by their asset managers,” the report’s authors assert. “For this to be the case, asset managers must adopt a consistent, transparent, and outcomes-oriented climate engagement strategy, which recognises that climate change poses systemic risks to asset owner portfolio returns. This alignment of engagement outcomes to portfolio management and stewardship decisions is critical for asset managers’ continued ability to win mandates of clients committed to net zero.”

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    Defining climate engagement

    Given that investors engage in a range of interactions with companies, issuers, and other stakeholders as part of their investment and stewardship processes, it is crucial to settle on a common definition of ‘climate engagement’ to start with. The NZAOA paper sets up two key criteria for an interaction to qualify as climate engagement.

    The first criterion requires that the asset manager raises climate risks and opportunities with an issuer that have been identified through a process-driven approach such as scoring, thematic research, or consideration of portfolio- and economy-wide impact. Providing the investor’s description of why it is important that the issuer addresses the specified topic is a necessary requirement.

    The second and equally important condition is that there are clear and well-defined objectives for each climate engagement. These should be linked to public accountability frameworks, standards, or equivalent to ensure rigour and transparency.

    A matter of principles

    The NZAOA paper lists four key principles for asset managers aspiring to engage on climate issues. Each of these principles is accompanied by a list of clear and detailed expectations on how to deliver on them, creating a blueprint for members to render their processes more robust. The principles are briefly defined as follows:

    1. Asset managers should put in place governance and oversight structures that ensure engagement activities are integrated across their businesses in a manner that supports their broader climate engagement strategies.
    2. Asset managers should publish their vision and strategy for climate engagement. This vision should include their investment beliefs related to climate change, how climate engagement contributes to their overall climate strategies, their time-bound expectations for issuers, and a plan of action for when issuers do not meet expectations within the set time frame.
    3. Climate engagement practices should reflect asset managers’ individual, published climate engagement strategies.
    4. Asset managers should make appropriate disclosures relating to the implementation of their climate engagement strategy. These disclosures should both enable asset owners to assess alignment and foster transparency and learning across the market on the effectiveness of climate engagements.

    The NZAOA encourages all asset owners committed to net zero to consider incorporating these four principles into their RFPs, due diligence, and ongoing asset manager selection, appointment, and monitoring processes. Hopefully, articulating engagement priorities within the context of a broader climate risk strategy in this way should help them understand how their long-term interests are being integrated into asset managers’ activities.

    Image courtesy of Shane Rounce on Unsplash
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