Asset Owners too Timid on Climate Policy Engagement
A majority of large asset owners have been found to be underperforming in their efforts to address systemic risk at a macro level.
Some of the world’s largest asset owners are failing to engage with policymakers to push for ambitious climate policies that align with the goals of the Paris Agreement.
As they increasingly recognise climate change as a systemic risk to their portfolios, asset owners should be powerful advocates for use of government policy to achieve international climate goals, according to InfluenceMap.
However, the NGO’s new report, which has assessed the engagement policies and behaviours of 30 insurers and pension funds collectively representing over US$17 trillion in assets, noted that the majority are “abdicating responsibility” to engage with policymakers on climate. This is despite the fact that 22 out of 30 have set net zero commitments.
“The overall trend is that asset owners really aren’t doing as much as they could,” Cleo Rank, Programme Manager at InfluenceMap, told ESG Investor.
“In [investor] stewardship, there’s typically been a bigger focus on individual engagements with companies, encouraging better and more sustainable practices, rather than more macro stewardship focused on creating an enabling environment raising practices across sectors.”
Seventy-three percent of asset owners assessed scored a D+ or below in policy-focused climate engagement, according to InfluenceMap’s analysis.
Only 13 out of 30 (42%) of asset owners mentioned policy engagement in their stewardship policies and processes, while just six have started to integrate climate-related policy engagement more systematically into their policies.
In addition, 60% have disclosed limited or no summary statistics about policy-focused engagements and stewardship. Six of these asset owners are members of the Net Zero Asset Owners Alliance (NZAOA).
No asset owner was considered fully transparent around its indirect climate policy lobbying via industry associations, the report noted.
Seven of the 30 asset owners assessed maintain links to industry groups whose climate policy advocacy is misaligned with science-based pathways to limit warming to 1.5°C and have actively obstructed climate policies, InfluenceMap said.
Allianz, Prudential Financial, MetLife and AIG are members of The US Chamber of Commerce, which InfluenceMap has identified as one of the most obstructive industry associations globally, opposing multiple climate-related policies.
“Given how climate change is a system-level risk, which might have significant negative long-term impacts on investor returns, asset owners have a fiduciary duty to address this,” said Rickard Nilsson, Head of Stewardship Success at investment stewardship management platform Esgaia.
“As beneficiaries, we should be able to expect them to use their investment and stewardship powers to protect the commons on which portfolio returns depend.”
Shaping the rules
Asset owners and managers have typically conducted government-level engagement on climate policy through regional investor networks. These also combine to advocate for policy initiatives and reforms as part of the Investor Agenda, which issued a series of ‘asks’ ahead of COP29.
Institutional investors also participate in nature-focused initiatives focused on policy engagement, such as the Investor Policy Dialogue on Deforestation, and the UN Principles for Responsible Investment’s Spring initiative, which engages firms on their nature-related advocacy positions.
InfluenceMap did identify a cohort of leaders – including Phoenix Group, Aegon and the New York City Retirement Systems (NYCRS) – which have led collaborative engagements challenging anti-climate policy lobbying at investee companies.
“Aegon also demonstrated some of the strongest performance [in the assessed pool] in terms of setting expectations for external asset managers [on anti-climate policy lobbying],” said Rank.
Three quarters of assessed asset owners demonstrated policy engagement that is at least partially aligned with science-based goals, InfluenceMap said. However, 93% fell under the threshold for ‘strategic engagement’, with the bulk of more impactful policy engagement left to more active industry associations.
With their long-term investment horizons and influence over sometimes thousands of companies globally, more robust policy engagement should be a “natural and necessary extension” of investors’ fiduciary duty, said Rebecca Chapman, the PRI’s Head of Climate and Environment.
Although governments’ net zero corporate and financial policy is gathering pace, it remains insufficiently aligned with a 1.5°C future, according to a recent report published by the Taskforce on Net Zero Policy.
The 2022 ‘Integrity Matters’ report produced by the UN High-level Expert Group (HLEG) on the Net Zero Emissions Commitments of Non-state Entities included a recommendation to accelerate mandatory action by creating an enabling policy environment for non-state actors.
“Policymakers now face a decisive moment, at which they can still reduce systemic risk by committing to and implementing national policy in line with 1.5°C pathways,” said Chapman.
Turning the tide
Investor-led bodies such as the NZAOA have clearly outlined the importance of engaging with policymakers on systemic risks like climate change.
As well as encouraging members to take a three-pronged approach to climate stewardship – engaging with companies, asset managers and policymakers – the alliance has also published a call to action for policymakers to drive a systematic shift to renewable energies by implementing appropriate and equitable carbon-pricing mechanisms and legislating the phase-out of all coal-fired electricity.
But engaging with policymakers to influence them towards stronger climate policies is still a “relatively new” approach for asset owners, said Roger Urwin, Co-founder of the Thinking Ahead Institute (TAI), which noted an increasing trend toward systems thinking in a recent report.
“It has had limited take-up so far, because it does involve new thinking and new engagement activities, but that should change,” he said.
“[There is nonetheless] a strong conviction among investors that systemic risks like climate change – being pervasive, inter-connected, non-linear and not reducible through portfolio diversification – are likely to grow significantly and need more attention.”
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