PGGM: ‘Effective stewardship is vital for net zero commitments’
Geraldine Leegwater, Chief Investment Management at PGGM and her colleague Colin Tissen, advisor Responsible Investment argue that asset managers should step up their came on climate stewardship
A staggering $68 trillion in assets is under the stewardship of supporters of Climate Action 100+ (CA100+). However, the voting behaviors of these supporters frequently deviate from CA100+'s goal to align the strategies of the world's top 100 emitters with the UN Paris Accord's objectives. This incongruity threatens the improvement of companies’ transition plans, as we explained in a letter to the Financial Times last week.
In this piece, we explore actionable solutions for investors and asset owners who are committed to addressing climate change.
For climate-minded investors who allocate a portion of their assets externally or asset owners, it is imperative to incorporate voting and engagement behavior into the criteria for manager selection, monitoring, and evaluation.
For instance, PGGM manages €220 billion in assets from PFZW, the Dutch healthcare sector's pension fund. While PGGM manages a portion of these assets externally, it retains the autonomy to make its own voting decisions. Nevertheless, we increasingly assess the voting behavior of external managers on shares where they possess the discretion to vote for or against.
Each asset manager operates under its own fiduciary duty, and PGGM refrains from dictating how other managers should vote or engage with companies. However, when an asset manager, at its own discretion, lends support to initiatives like CA100+ or commits to becoming a Net Zero Asset Manager (NZAM), that commitment must be substantive and meaningful. Regrettably, this isn't always the case.
Navigating diverse client interests
Large asset managers find themselves catering to a diverse clientele with varying perspectives on sustainable investing. This diversity sometimes leads managers to become part of NZAM by setting targets for a portion of their total assets under management. How can such a manager simultaneously appease both its net-zero and non-net-zero clients when engaging with companies and casting votes on climate-related resolutions?
Inevitably, the compromise tends toward advocating for improved disclosure rather than changes in companies' actions. While enhanced corporate disclosure represents a step forward, it alone cannot fulfill CA100+'s overarching goal of urging companies to make significant reductions in greenhouse gas emissions by 2030. Moreover, such an approach falls short of aligning with the stewardship strategy required for a genuine NZAM commitment to net zero.
For example, in 2021, a Follow This resolution urging Chevron to "substantially reduce the GHG emissions of their energy products (scope 3)" garnered 61% support from investors. In response, Chevron announced a target to reduce scopes 1, 2, and 3 emissions intensity by 5% between 2016 and 2028. It is evident that this target hardly aligns with a 1.5°C pathway. Surprisingly, when Follow This subsequently proposed that Chevron align its targets with the Paris Agreement's goals, investor support dwindled to 33%. Large asset managers who supported the 2021 resolution argued that Chevron's disclosure of an emissions reduction target met their requirements, seemingly indifferent to whether the target conformed to the goals of NZAM or CA100+.
Default policy of voting for climate progress
An asset manager facilitating a net-zero portfolio for some clients while maintaining an overall stewardship strategy misaligned with net-zero objectives is acting counterproductive. In such cases, achieving a net-zero portfolio becomes reliant on capital allocation – selling brown firms and acquiring green ones. This allocation strategy lowers portfolio-level transition risk but does not necessarily lower global emissions.
What we urgently need is tangible, real-world decarbonization. Large asset managers who endorse initiatives like CA100+ and NZAM could adopt a default policy of voting for climate progress. Clients with different preferences could be given the option to opt out with a more conservative voting approach.
PGGM annually evaluates the sustainable investing practices of our external managers, including whether they adhere to the goals of the climate initiatives they have joined. Next to other criteria, it influences our manager selection. We encourage other net-zero investors to follow suit and hold their asset managers accountable for their climate promises.
