Asset Owners Target “Material Divergence” on Climate Stewardship
Institutional investors look to address increasing misalignment with asset managers and remedy issues identified in 2023 stewardship review.
A newly released climate stewardship statement supported by 26 large asset owners has presented five principles-based expectations of asset managers, seeking to clarify investor demands.
The statement looks to catalyse constructive conversations between asset owners and asset managers and embed efficiencies into the stewardship chain, as well as support asset managers’ stewardship teams in delivering on asset owner climate objectives as part of their mandates.
The statement was backed by investors from Australia, Europe, the UK, and the US representing US$1.5 trillion in AUM, including Aegon UK, the Church of England Pensions Board, Nest and Phoenix Group.
It also aims to address what the statement brands a “material divergence” between asset owner expectations and implementation of climate stewardship, which is limiting progress towards a net zero and improved outcomes for beneficiaries.
“The statement calls on asset managers to evolve and strengthen their climate stewardship strategies in light of the imperative need for climate action and most importantly, for the benefit of our members,” Leanne Clements, Head of Responsible Investment for the People’s Partnership, told ESG Investor. “Ultimately, the coalition seeks to raise the bar on climate stewardship across the investment sector.”
The statement was developed from the Asset Owner ‘Aligning Expectations roundtable’ which looked to address the central challenges identified in the 2023 UK Asset Owner Stewardship Review. The review was commissioned by the UK Asset Owner Roundtable to explain how asset owners’ long-term interests have been served by their asset managers when exercising their stewardship and proxy voting at major oil and gas firms.
It was co-authored by Clements alongside Vaishnavi Ravishankar, Head of Stewardship at Brunel Pension Partnership and Shipra Gupta, Investment Stewardship Lead at Scottish Widows. Brunel, the People’s Partnership and Scottish Widows led the investor coalition.
“It is now more important than ever as an asset owner community to send a strong collective principle-based signal to our asset managers as to what we expect of them,” said Clements. “Asset owners and asset managers must work together in partnership to drive meaningful change: not only in the companies in which we invest, but in the underlying economic, social and environmental systems upon which our members depend.”
Five stewardship focuses
One of the five principles set out in the statement is industry, market and public policy engagement being core to climate stewardship propositions across asset classes. This includes expecting asset managers to have a commitment to align their climate engagement activities with Paris Agreement goals, with appropriate governance and oversight, and transparency and reporting to their client base.
It also calls on asset managers to allocate “significant time and resources” to communicate their policy positions on climate to policymakers and demonstrate this resource commitment through client reporting.
Another principle states that asset managers’ prioritisation frameworks for company engagement should be rooted in a robust theory of change that delivers maximum impact. This expectation operates at two levels: value-chain/sectors and companies.
On a sectorial basis, prioritisation should be given to those that are critical to achieving a low carbon economy, including fossil fuel dependent sectors such as utilities, automotive and steel, sectors linked to commodities that cause deforestation and nature degradation, and other hard-to-abate sectors critical to the transition to a low carbon economy, such as cement, technology, financial services, mining.
In terms of individual companies, the signatories said greater emphasis was needed for engagements, including escalation, focused on the robustness of corporate net zero commitments, rather than purely on disclosure of climate risks and opportunities and nature, beyond deforestation, and social-related impacts.
The other three principles are: prioritisation of collaborative initiatives to achieve greater impact and embed efficiencies in engagement activities, a systematic approach to voting being “imperative”, and appropriate resourcing of stewardship functions.
“As identified in the statement, asset managers need to have robust escalation processes in place and articulate how different types of escalation are used within what timeframes when climate expectations are not met,” said Clements. “Asset managers should make use of the currently under-utilised routine agenda items, [such as] director elections, remuneration, [or] audit to drive their stewardship escalation activities. Therefore, an example of ‘promising movement’ would be to see greater director accountability on climate issues through voting escalation, on the back of failed engagement.”
Redressing the rift
The rift between asset owners and asset managers on engagement on sustainability issues, including climate, increased in 2024 and has intensified so far this year.
Last month, the Net Zero Asset Managers initiative (NZAM) announced a temporary suspension of its activities following a series of high-profile asset manager exits, including BlackRock. Following the suspension, asset owners are looking to step up engagement with their external asset managers to make sure that individual climate commitments are upheld.
Institutional investors have expressed increased dissatisfaction over asset managers’ voting on ESG-related shareholder proposals, with asset manager support for environmental proposals continually slipping.
Political pressure on major asset managers has led to an evolution in the range of stewardship and voting options offered to institutional investors, which have not been universally welcomed.
This political pressure included a letter from the US House of Representatives in December which branded both NZAM and investor initiative Climate Action 100+ as “climate cartel[s] of left-wing environmental activists and major financial institutions”.
Going forward, the statement signatories intend to incorporate the expectations into its individual manager monitoring and frameworks, as well as independently considering appropriate action to augment alignment. “Now more than ever, by working together asset owners and asset managers can contribute to a more efficient and competitive industry, ultimately benefiting beneficiaries,” the statement read.
“The intention is for these principles to be used to guide manager selection and ongoing monitoring processes,” said Clements. “Codifying these principles into manager evaluation allows you to track progress against them and ultimately, determine whether that progress has been reasonable or not over a given timeframe.”
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