By Simon Watkins
This article is brought to you by FT Specialist’s Agenda, a publication that focuses on corporate boards.
One of the UK’s largest institutional investors fired a shot across the bows of Britain’s boardrooms in January. Aviva, which manages assets of £262bn, said it would vote against directors it perceived to be dragging their feet over climate change. Aviva is not alone. Schroders has also said it will target directors at companies that it believes are climate “laggards”.
European institutions voted for more environmental and social resolutions in 2021 compared with 2020, according to analysis by ShareAction, a nonprofit that aims to promote responsible investment. The report looked at the votes of 65 of the largest asset managers on 146 social and environmental proposals.
But only Impax Asset Management, which is based in London, voted in favour of all environmental solutions. The average across European asset managers was 69 per cent. Indeed, the report notes that the “voting performance of the industry overall has remained stagnant”, with only a four percentage point rise in “for” votes on environmental and social measures.
Investors say, however, that boards should expect support for environmental, social, and governance (ESG) resolutions to continue this year and, if anything, expectations will become more stringent.
Most resolutions on climate action have been broad commitments but in 2022, investors are demanding detail.
“If I look back a couple of years, it was a big win for a company just to come up with a long-term carbon reduction target,” says Michiel Van Esch, engagement specialist at Robeco, an institution that has €200 billion under management.
“Now, the expectations are much higher. Just having such a reduction target is no longer deemed good enough: they need to be accompanied by plans for implementation, for short-term changes and so on. Investors’ expectations are rising.”
Carol Storey, climate engagement lead at Schroders, agrees. “The most credible targets are those that have been verified as ‘science-based’ by an independent third party such as the Science-Based Targets initiative (SBTi),” she says.
“We are also keen to see detail on the financial implications of a company’s transition plan. [We] value transparency over any assumptions and dependencies the company is making to reach its goals,” she adds.
Investor concerns about climate change, and the wider ESG agenda, will raise the temperature for individual directors.
“The biggest change we’ll see this year will not be in relation to climate resolutions but votes against directors,” says Storey. “As a result, we will see more institutional investors vote against individual members of the boards on the grounds of lack of action on climate change.”
“Specifically at Schroders we initially plan to vote against board members in companies we consider to be the most exposed climate laggards,” she says.
Investors are also increasingly asking if climate targets should be linked to pay and bonuses. After all, if climate is important to the board, it should sit alongside other strategic objectives and key performance indicators.
“If a board says action on climate change is a critical component of strategy, but it’s not linked to [executive] remuneration, then you kind of wonder how critical it is,” says Nazmeera Moola, chief sustainability officer at Ninety One, an Anglo-South African asset manager with £139bn under management.
What matters for directors is that the focus on ESG resolutions is intensifying, alongside the sophistication that investors expect from companies in response to the climate emergency. The focus will be on detail, transparency, measurable targets and accountability.
Directors can turn this to their advantage by taking action to understand the details, and what is and is not feasible, says Moola.
“You need non-executive directors smart enough to understand when they are being pacified and who have enough knowledge to ask the questions.
“If you are promising a 30 per cent reduction in carbon emissions by 2030, what are the technologies that are going to do this? Are those viable? What happens if that doesn’t work?” Moola asks. “What’s plan B? How are you going to pay for it?”
Engaging with institutions and explaining in detail the plans and targets, as well as what is realistic, may help, particularly when it comes to well-meaning but crude resolutions tabled by campaigning groups, she says.
“If after a two-year engagement with a company you know they’ve made significant progress and you have commitments from them on a timeline, you are not going to vote in favour of a climate resolution that effectively says they’ve done nothing,” she adds.
This article is an edited version of a piece published by Agenda.