PAAO progress report highlights value of commitment over quick fixes

Paris Aligned Asset Owners Initiative (PAAO) signatories strengthened engagement and escalation strategies over the past year, targeting fossil fuel companies and developing asset class-specific strategies, the collective’s first progress report has shown.

But while the implementation of stewardship practices has accelerated, the lack of an industry standard benchmark for financing climate solutions has resulted in a broad and inconsistent range of quantitative investment targets amongst members.

Escalating engagement

The 57 signatory-strong initiative represents more than $3.3trn of assets under management. Its report suggested that, where engagement had proved to be unsuccessful, legal action could be an “effective tool and help secure positive climate outcomes, objectives or returns”.

It pointed to Swedish pension fund AP7’s engagement in “long-term dialogue” with portfolio companies, but then resorting to escalation and legal proceedings where necessary.

AP7’s case against Volkswagen was described in the report as having “implications for other civil law systems in Europe,” after proceedings were brought against the German car manufacturer over its failure to table an investor-led amendment to report on climate lobbying activities. AP7 and other investors are taking the matter to court in a case that tests whether the company has the right to refuse the agenda item.

Such actions are needed to underpin long-term objectives, says Charlotta Dawidowski Sydstrand, head of ESG at AP7. She says achieving “real economy emissions reductions,” a factor at the core of the PAAO commitment, is “more urgent than ever given the deepening climate crisis”.

“Among the variety of net-zero strategies showcased in the progress report, AP7 provides its perspective on targets and escalation tactics as a universal active owner,” she adds.

Convincing climate strategies

Elsewhere, the report highlights the Dutch care sector pension scheme Pensioenfonds Zorg & Welzijn (PFZW) and its intention to only remain invested in fossil fuel companies that have a “convincing and verifiable climate transition strategy” in line with the Paris Agreement by 2024.

From that year onwards, the scheme will cease investments in fossil fuel sector companies that fall short of the scheme’s climate benchmark.

An ultimatum of divestment by 2023 has also been issued by the scheme for companies that do not make a clear commitment to the Paris Agreement by the end of 2022.

Other figurehead institutional investors have also opted for a hard-line approach to fossil fuel divestments. In September, Princeton University announced its intention to dissociate from 90 fossil fuel companies, including a refusal to accept research funding.

It comes as pension schemes increasingly turn away from asset managers that cannot demonstrate engagement success, a recent survey by consultancy bfinance found. Of 170 schemes surveyed, 53% said they were unlikely to hire a manager that could not provide evidence of positive engagement outcomes, while four in ten demand asset managers that can demonstrate their willingness to divest on ESG grounds.

Divestment dilemma

Yet “divest and move on” is not the best solution, says Jupiter Asset Management’s head of sustainability Sandra Carlisle. She says divestment tactics employed by investors only “move the problem elsewhere”.

“Fossil fuels are systemic and if we are serious about decarbonising the global economy and moving to a sustainable and equitable economic model, then we need energy companies to be part of that transition.

“What is important, as the initiative’s report states, is that energy companies commit to a business model and activities that are consistent with the 1.5-degree warming target in the Paris Agreement with low or no overshoot,” she adds.

But AXA Investment Managers’s head of sustainability coordination and governance, Clemence Humeau, says while engagement and open dialogue are “crucial to understanding and influencing the net-zero trajectories,” if commitments are not maintained, managers must be “brave and bold” and be “ready to divest” where appropriate.

“The road to net zero is all about transition. We must give companies the time to adjust but also adopt a no-compromise approach with investee companies that don’t take climate change seriously,” she adds.

Walking the walk

Broadly, 98% of PAAO signatories that have disclosed targets have established either a quantitative target or qualitative goal for increasing investments in climate solutions.

Yet an absence of an industry standard that can be applied across an investment portfolio has resulted in a broad range of allocations towards climate-solution investments, ranging from 6% of AUM to 25% of AUM by 2030.

Despite the disparity, Adam Matthews, Paris Aligned Investment Initiative steering group co-chair and chief responsible investment officer of the Church of England Pensions Board, said the “collaborative” forum has offered insight into how best practices can be developed for investors.

“It has been extremely valuable to see the different approaches taken by other investors, to be able to share what works and to learn as we individually work to achieve our net-zero goals,” he adds.

But Jupiter’s Carlisle says the commitment being demonstrated by signatories is a more crucial factor than the percentage value of asset allocations being made towards climate solution investments, as they will inevitably “grow over time as new climate solutions and innovative technologies emerge and more commitments to real-world decarbonisation [are made].”

“By setting targets and making commitments to real-world decarbonisation, the asset owner signatories of the initiative are sending a clear market signal. They are walking the decarbonisation walk, not just talking about it,” she says.