2030 is looming – time to look under the bonnet of managers’ climate stewardship
Leanne Clements, head of responsible investment for the People’s Partnership argues that a constructive relationship between asset owners and managers is vital in order to meet 2030 decarbonisation targets
It is a very polarising time for climate stewardship. On the one side, companies are faced with increased urgency to align their business model to net zero, and on the other hand investors are facing political pressure due to ESG backlash.
In the middle of this, fund managers are responding to this tension through new stewardship offerings. This evolving landscape creates complications and opportunities for asset owners looking to hold their fund managers to account for climate stewardship.
One of the complications centres around the whole “carrot-stick” approach when it comes to the asset owner-fund manager relationship. This is an unhelpful framing of the issue, pitting one against the other, resulting in the “stick” sometimes getting a bad rap.
I strongly believe in creating strategic partnerships with fund managers as this will ultimately create better value for beneficiaries. But with that same beneficiary-focussed approach, we must also not be afraid to register our dissent as a fundamental part of that partnership approach, should our expectations not be met. With respect to climate stewardship, these expectations are now under a much more urgent timeline in the lead up to 2030. As the world gets closer to key energy transition dates, harder choices must be made.
Let’s unpack what these climate stewardship expectations mean in practice. As a bedrock, it is reasonably fair to say that all asset owners would expect robust systematic processes for embedding climate stewardship into their decision making. There are a number of industry-led guidance documents in this regard[1], which all asset owners should take to account in their monitoring processes.
Leanne Clements will be speaking at Net Zero Investor's Annual Conference on 25 October in London
However, there may be some asset owners who wish to go further, lifting the bonnet under these systematic processes and focussing on certain areas to test their resilience. To that end, there is a group of UK asset owners currently looking to do exactly th[MD1] is, as part of aligning their expectations of asset managers with respect to climate stewardship.
Let’s look at two key focus areas as an illustration of testing these systematic processes.
Theory of change/prioritisation framework
With an underinvestment in the stewardship function[2] and an ever-evolving complicated industry landscape on climate, it is even more imperative that fund managers provide their clients with their prioritisation framework for climate stewardship, routed in a robust theory of change, that delivers maximum value for beneficiaries. But we need to go further in that assessment by ensuring that fund managers are:
- Where permissible, prioritising collaborative initiatives/frameworks in order to exert greater influence and embed necessary efficiencies in their engagement activities.
- Allocating significant resources to industry and policy engagement to address systemic risks in their clients’ portfolios. An illustration of this would be prioritising the mining and the demand side of fossil fuel reliance (e.g., auto sector) in its industry engagement activities given their respective importance to the transition to a net zero economy.
- Prioritising CAPEX, financial statements, and lobbying as tests of a company’s net zero commitment. For sectors linked to agricultural-linked commodities, scrutinising their approach to tackling deforestation, given its importance to achieving net zero.
- Ensuring that the social and physical impacts of climate change are incorporated into their approach and demonstrate an appropriate evolution over time as analytical tools/company disclosures improve in this space.
Voting escalation
Fund managers need to have robust escalation processes in place, using the various stewardship levers at their disposal, when climate expectations are not met.
However, is that enough in terms of scrutiny or do we need to delve deeper? Given the urgency, as 2030 looms and the amount of company engagement that has been undertaken thus far, I believe there is a now a need for a more systematic approach to voting targeting director accountability.
This position is reflected in The People’s Pension net zero voting guidelines forming part of its Responsible Investment Policy, which the Trustee currently uses to hold its fund manager at account as part of its “expression of wish”.
Concluding remarks
It is true that there is mounting pressure on fund managers to align their stewardship proposition to individual clients’ needs. While this at times may create tension between fund managers and their client base and challenge the former’s business models, I believe these growing pains are a necessary interim step on the road to where we should have always been in the first place if the financial ecosystem was operating effectively. As owners of capital, asset owners should be at the forefront of shaping the stewardship proposition to better serve its needs. Fund managers’ business models need to continue to evolve to reflect this necessary power shift - from supply to demand-led.
With this perspective in mind, I will continue to advocate for strong strategic partnerships with fund managers. In my view, a good fund manager will welcome the deeper scrutiny as a strength not a weakness to that relationship, and as a catalyst for innovation. Perhaps the “stick”, in this case, shouldn't be feared or vilified after all, especially when it is in the beneficiaries’ best interests.
[1] Net Zero Asset Owner Alliance climate stewardship expectation documents are a good illustration of this.
[2] Stewardship resources need to match investor ambitions - WTW (wtwco.com)
