Asset owners up their game with increasingly sophisticated stewardship strategies

Gone are the days of asking nicely if companies will consider integrating net zero principles or improve their ESG record. Asset owners are becoming more forceful, pushing for change with a range of different engagement strategies.

Net Zero Investor spoke to a range of investors to find out which approach they prefer to take in order to push through changes.

In a much-talked about case, London CIV recently joined other investors including NES and AP3 in adding their voices to ClientEarth’s lawsuit against 11 directors of Shell, which alleges the company’s climate strategy is inadequate to meet targets and puts Shell at risk as the world transitions to net zero.

Jacqueline Jackson, head of responsible investment at London CIV, said its support was part of its strategy to engage with the top contributors of carbon emissions in is portfolio. 

“We've been analysing our climate-related risk across a range of different detailed metrics since the end of 2020 and we started looking into our top contributors, one of which is Shell,” she told Net Zero Investor.

“We had written privately to Shell (amongst other oil and gas majors) with our concerns, and engaged through our stewardship provider, but when no response was received, we were happy to support ClientEarth.”

The desire to push Shell was given a boost by other lawsuits against the company. 

“Given the court case that's taken place in the Netherlands [in which Shell was ordered to cut emissions from oil and gas by 45% by 2030] we had regulatory risk, social risk and financial risk on our radar with that particular issue,” Jackson said.

However, Francois Humbert, active ownership lead manager at Generali Investments, argued that lawsuits can be limited tools. 

“If the lawsuit is successful, then the question will be – what next? What precisely, in terms of CAPEX, year after year, should the company do to be aligned with the Paris Agreement?” he explained. 

“Our approach is to work collaboratively with companies to find these answers because it's a very complex discussion.”

Partnerships and collaboration

Humbert likens his style to a more private-equity approach, working closely with investee companies to better understand how he can support them in aligning with ESG principles and building long-term relationships. 

This means doing his homework and bringing solutions to the company, explaining that "if a company doesn’t do what we propose, we always ask ourselves, were we able to create a partnership with that company?”

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A partnership can take time to pay off. 

Humbert points to a long-term engagement with the CEZ Group, the sixth biggest emitter of CO2 from coal in Europe, which began in 2018 when he asked the company to disclose the timeline for coal plant decommissioning. 

“They did, and they got benefit from it,” he said.

Later, Generali approached CEZ within a collaborative initiative with other Climate Action 100+ investors about working towards validation of their 2030 emissions targets by the Science Based Target Initiative (SBTi) as being aligned with the Paris Agreement. 

The investor group introduced CEZ to the SBTi methodology, organised meetings with the CDP and worked with CEZ to help it understand how they could adapt their strategy to meet the criteria of the SBTi.

The collaborative engagement followed Humbert’s private-equity style approach.

“We allocated one topic to each investor - governance, strategy, capex alignment, etc,” he revealed. “Each investor takes ownership of their space and they work to create value for the investee company. It is an engagement activity in some respects close to advisory.”

Challenges

While some investor groups are earning criticism for not being tough enough on investee companies, asset owners want more concrete outcomes in 2023.

“Collaborations have an important role to play, and we assess the potential for each collaboration to have the desired outcomes,” says Innes McKeand, head of strategic equities at USS Investment Management.

“We are likely to seek greater focus and more tangible results from our collaborations going forward.”

For Humbert, “my focus is demonstrating our impact. And the only way to do that is the company telling me, ‘we achieved this because of you’.”

He pointed proudly to press release announcing CEZ’s validation by SBTi, in which the company details what each investor in the group contributed to the journey.

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Collaboration by investors has many benefits, Jackson added. “We see it as much more efficient, for both ourselves and for the companies, for shareholders to come together on engagement efforts."

However, as the number of investor groups grows, the demands on those involved grow as well.

“I see more and more collaborative initiatives, but proportionally not enough resources at industry level,” said Humbert, adding that the UN PRI has started a working group on resourcing.

With resources limited – and most asset owners investing in hundreds of companies - they must be selective about who they engage with and which topics they prioritise for those engagement.

“While climate change is a priority financial issue, we are also considering how to clearly identify and prioritise other issues. We believe it may be better to focus on a small number of important issues with each company to drive better financial outcomes,” said McKeand.

Systematic financial risks

Even before the Shell lawsuit, Jackson pointed out that “climate change was already our key focus in terms of our most material ESG risk when translated into financial risk.”

She added: “We're also focused on the balance between social and financial materiality, looking at where stakeholder priority and client priority lie. That's very important, because we believe that very quickly, social risks can become financial risks.”

Institutional investors are increasingly looking at the intersection of different priorities and risks. 

USS will be “looking at how we can address systemic risks that may have a financial impact, such as biodiversity loss or antimicrobial resistance,” said McKeand.

London CIV has also added biodiversity, as well as deforestation, to its key factors, targets and objectives that feed into its new climate policy.

“That's not only because of the importance of those topics on their own, but in their critical influence in fighting climate change,” Jackson noted.

She added that despite its importance, biodiversity has “taken a bit of a backseat in terms of priority for so long because it’s hard to measure."

However, "imperfection of metrics or difficulty of measure is not really an excuse for inaction. Just because it's harder to measure doesn't mean that it can't be managed. With the rise of the TNFD [Taskforce on Nature-related Financial Disclosures] and its framework, it's clear that more and more investors will need to focus on biodiversity loss, understanding what that means and thinking of ways to manage that within the portfolio.”

While investors will welcome guidance on how to assess the impact of their investee companies on biodiversity, Humbert warns of the dangers of simplification when trying to quantify biodiversity.

“If we follow the same path, we could end up with what we see today - this focus on carbon footprint and portfolio decarbonisation and not real-world decarbonisation.”