Asset owners underline the importance of contributing to ‘field building’ as the Transition Plan Taskforce unveils sector-specific guidelines.
Asset managers must “work smarter, not harder” when working with climate-invested companies and policymakers, according to the UN-convened Net Zero Asset Owner Alliance (NZAOA).
The call comes in a new one paper which outlines four principles that asset managers can apply to their climate engagement strategies. It highlights the importance of aligning climate engagement outcomes with portfolio management and stewardship decisions if asset managers are to continue winning mandates from asset owners committed to a net zero climate.
“We are calling on asset managers to be clearer, more explicit and more strategic in their climate commitments,” said Hilkka Komulainen, head of responsible investing at Aegon UK. ESGdescribing the article as a contribution to industry efforts to “sharpen our pencil from a climate engagement perspective.”
“How does their involvement fit into their broader climate risk management strategy? What are their investment beliefs when it comes to climate change? How does this affect the way they assess companies and their transition plans?” she posited.
“We also want managers to set priorities and tell us about their choices. [Telling us they have conducted] More than 5,000 engagements don’t tell us much about their engagements [climate] priorities.”
The NZAOA, which now includes 86 asset owner members with $9.5 trillion in assets under management, is already asking asset managers to set their own net-zero commitments. The principles of the document apply to all asset managers who invest in public and private asset classes in different markets.
“The purpose of this document is to deepen trust, transparency and authenticity in the climate engagement dialogue between asset owners and managers,” the NZAOA noted, adding that the document aims to enable both owners and managers to allocate resources more efficiently.
So was the issue of limited resources in stewardship marked by asset owners who were present ESG‘s first Stewardship Summit in May.
Third leg of the stool
The document defines climate engagement as increasing climate risks and/or opportunities at an entity that the investor has identified and setting expectations for the issuer’s action.
One of the principles set out in the document concerns governance and inclusion. The Alliance calls for asset managers to establish governance and oversight structures that ensure engagement activities are integrated across their businesses in a way that supports climate-related engagement.
Alliance members also called on asset managers to create and publish a climate engagement strategy that highlights their related investment beliefs, how their climate engagement contributes to their overall climate strategies, their time-bound expectations for issuers, and an action plan for when issuers do not meet expectations within a certain time frame.
Many asset managers already publish their climate management policies and engagement priorities, the report acknowledges, noting that the additional detail provided should enable asset managers to “articulate the outcomes they are targeting, with an emphasis on quality over quantity of the involvement”.
The four principles outlined by the Alliance are also aimed at ensuring that asset owners have the information they need to assess whether a manager’s climate approach is sufficiently aligned with their own expectations.
Subsequent climate engagement practices should reflect the asset manager’s published climate engagement strategy, the paper said, with asset managers making “appropriate disclosures” regarding the implementation of their climate engagement strategy to promote greater transparency.
“The Alliance recognizes that the world is not yet on track for a 1.5°C future and that the challenges associated with adaptation vary by region and sector,” the paper said.
“That is why asset managers must be explicit and transparent about their expectations of stakeholders. This includes identifying where they see opportunities to close the gap between ambition and implementation at corporate, issuer, sector and policy levels.”
Patrick Peura, Co-Lead of Engagement and ESG Engagement Manager of NZAOA at Allianz, said: “[The paper] is the third leg of the stool, which finalizes the Selection, Appointment and Monitoring Guidelines (SAM) that the Alliance has published.
Published in 2021, ‘Increasing climate diligence in remote voting approaches‘ outlined a set of principles and considerations considered the basis for assessing and engaging asset managers in climate-related proxy voting, focusing on four key themes: governance, alignment of interests, merit-based evaluation and transparency.
‘Aligning climate policy engagement with Net Zero commitments‘ introduced key principles for members to assess asset managers’ climate policy activities and management of their investments’ policy engagement activities, encouraging asset owners to integrate the assessment into their asset managers’ SAM processes.
Asset owners joining the NZAOA are expected to set climate targets for their portfolios in line with those of the Alliance Goal setting protocol.
Earlier this year, the NZAOA published it third annual progress report, which showed the members’ continued commitment to the transition. Absolutely financed greenhouse gas (GHG) emissions fell by 3.5% to 213.4 million tonnes of carbon dioxide equivalent (tCO2e) in 2022.
Fly on the wall
After the 2023 proxy season, so have asset managers challenged on their declining support of the most important climate and ESG-related shareholder proposals. Voting is often used as an escalation strategy when engagement does not deliver the results investors want to see; Greater transparency of engagement efforts to that point is paramount if asset owners are to accurately assess their external managers on the progress and alignment of their climate-related engagement.
“The dialogue between managers and companies takes place behind closed doors, and usually the asset owners are not in the room,” Komulainen said.
Peura added that slow corporate action on climate-related targets “is not a lack of commitment [by investors]but it is a signal that there is a need to take action elsewhere and support stakeholders elsewhere.”
“Rather than thinking that the best way to address this failure is to escalate or name and shame at every turn, we say [asset managers] we also need to think about the broader system and how they can contribute to public discourse and field building to understand what the systemic barriers are and how they can be addressed,” he added.
Peura said there is a need for “field building” by a range of stakeholders in the investment industry, including NGOs, civil society and academia, and that this document encourages asset managers to be a “productive part” of the discussion and “to to be clear about what they can achieve, to also identify cases where decarbonisation incentives need to be accelerated elsewhere.”
An example of such a field building initiative is that of Great Britain Transition Plan Task Force (TPT)which was established by HM Treasury in April 2022 to provide a ‘Golden standard‘ for private sector climate transition plans.
This week the TPT published seven sector-specific guidance documents for consultation to support entities in their sector-specific interpretations of the final TPT Disclosure Framework. The consultation is open until December 29, with a final sector-neutral disclosure framework, implementation guidance and sector-specific guidance expected Q1 2024.
“The TPT sought to identify sectors for which additional guidance would be beneficial in initiating the disclosure of transition plans, while also identifying opportunities to leverage existing sectoral guidance and consolidate it in the context of the Disclosure Framework,” the statement said. TPT.
It noted the “critical role” of asset managers in mobilizing transition finance and developing transition plans that “preserve and create value for their clients”. [asset owners and others] by reducing their emissions, managing exposure to climate-related risks and opportunities and contributing to the transition across the economy.”
The TPT has recognized that many of the issues addressed in asset managers’ transition plans are at least partly dependent on the investment mandates they receive from asset owners, encouraging owners and managers to work together on issues such as engagement with accelerating the climate transition.
In addition, TPT has underlined the importance of asset owners incorporating climate-related considerations into their contractual governance and accountability mechanisms for asset managers.
The specific guidance for asset owners applies to public and private sector pension schemes, reinsurance/insurance companies, sovereign wealth funds, endowments, foundations and family offices that invest assets on their own behalf or on behalf of their beneficiaries.
The TPT has designed its disclosure framework this way supplement and build on other sustainability-oriented work, such as the standards and guidelines established by the International Sustainability Standards Board (ISSB) and the Glasgow Financial Alliance for Net Zero (GFANZ).