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April 11, 2022updated 14 Apr 2022 2:51pm

How investors are stepping up scrutiny of climate plans

Companies can expect to face far greater shareholder pushback on their emissions-cutting proposals during this year’s AGM season.

By Joe Marsh

Voting on the environment: Shareholders are becoming more demanding about what they want to see in climate action plans. (Photo by bee32 via iStock)
  • Most companies’ net-zero strategies are well short of being Paris Agreement-aligned, shows a growing body of research. 
  • Investors are becoming more rigorous in their assessment of emissions-cutting plans as the Say on Climate initiative gains momentum. 
  • Some expect to see a lot more voting pushback from shareholders on climate action plans during this year’s AGM season. 

The evidence is piling up to show that most corporates are doing nowhere near enough to achieve the goals of the 2015 Paris Agreement on climate change. More and more research is vindicating widespread scepticism over proliferating net-zero commitments – and leading investors to scrutinise and challenge companies’ climate action plans more rigorously.  

Stark warnings from the Intergovernmental Panel on Climate Change’s latest report last week have been complemented by research published last month by CDP, a non-profit organisation that helps companies disclose their environmental impact, and in February by Corporate Climate Responsibility Monitor (CCRM). 

Just one-third of some 13,100 organisations that disclosed to CDP last year reported developing a low-carbon transition plan, and only around 1% (135) reported on all 24 key indicators of what CDP sees as a credible climate transition plan. Meanwhile, CCRM shows that the headline climate pledges of 25 of the world’s largest companies only commit to reducing their emissions by 40% on average, not the 100% suggested by their ‘net zero’ and ‘carbon neutral’ claims. 

For its part, Climate Action 100+, an investor collective representing $68trn in assets, said on 30 March it was “alarming” that the vast majority of its 166 focus companies had not set medium-term emissions reduction targets or fully aligned their future capital expenditures with the Paris goals.  

Further adding to the momentum for corporate climate transparency is the publication of the International Sustainability Standards Board’s first two proposed standards and the US’s draft climate disclosure rules, on 31 and 21 March respectively. Not to mention the UK’s climate reporting rules coming into effect this month.

Say on Climate gaining momentum

Accordingly, with this year’s AGM season now under way and following record levels of shareholder support for climate resolutions last year, companies can expect to see further ‘climate escalation’ among asset managers and owners under initiatives such as ‘Say on Climate’. The latter was launched in 2020 with a view to give shareholders a vote on climate transition plans and in the process increase transparency around such commitments.    

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“At first shareholders were just excited to see [the Say on Climate scheme],” says Maria Nazarova-Doyle, head of pension investments and responsible investment at UK life and pensions firm Scottish Widows. “But now they are looking more closely at the substance of Say on Climate resolutions and becoming more demanding about what they want to see in it rather than just approving the targets.” 

“If a company found it easy to get support for their first Say on Climate resolution, it will be harder now to gain shareholder support for follow-up plans,” she tells Capital Monitor

For instance, Scottish Widows now wants to see short-term emissions-cutting targets rather than just 2050 net-zero pledges, and plans to incorporate Scope 3 emissions for the more carbon-intensive sectors, not just Scope 1 and 2, says Nazarova-Doyle. “We also want to see a named director accountable for climate risk. And we want executive remuneration to be linked to climate targets with a believable target for capital expenditure in this area.” 

However, Scottish Widows, which has £188bn ($245bn) under management, appears to be ahead of the curve compared with many investors. 

Proxy voting services provider Georgeson gave Capital Monitor an early look at the findings of its latest survey of asset managers before publication. Most respondents said they would not penalise directors if companies didn’t put a ‘Say on Climate’ vote forward, but if companies did put one forward, 70% would most likely support it.  

What’s more, 85% of respondents said in general they would not apply a strong voting policy regarding Scope 3 emissions disclosure or targets. However, in carbon-intensive sectors such as oil and gas, they would expect to see, at a minimum, alignment with the TCFD framework, according to the survey. 

Ultimately, Georgeson noted in the research, most Say on Climate proposals passed “with flying colours”, and there remains a debate whether investors must be stricter even with the most transparent and progressive companies. 

Changing voting policy

Accordingly, Georgeson expects to see “more investors make changes to their voting policy regarding their climate-related expectations of companies’ scope and tighten the expectations around climate-related governance, disclosure and targets”, Kiran Vasantham, head of investor engagement for the UK and Europe, tells Capital Monitor.

Moreover, 70% of respondents to the survey want – like Scottish Widows – to see a climate-related metric in executive pay, and ideally one that is linked to long-term strategy, in what is a rising trend among corporates in general, asset managers and banks.  

Kiran Vasantham of Georgeson tips more investors to tighten their expectations around climate-related governance, disclosure and targets. (Photo courtesy of Georgeson)

The 2022 AGM season marks the second year that companies will voluntarily propose Say on Climate resolutions, Georgeson’s Vasantham says. Usually, these proposals involve three areas: annual disclosure of greenhouse gas (GHG) emissions; disclosure of a company’s climate transition plan; and submitting the plan for advisory approval by shareholders at the annual general meeting. 

However, it’s no simple task for most asset owners to assess companies’ climate action plans.  

Decarbonisation trajectories need to be assessed at a granular, individual company level, which asset owners cannot do directly, says Paul Lee, head of stewardship and sustainable investment strategy and investment consultancy Redington. “They have to lean on their managers to operate at this level and hold companies to account for delivery against their climate promises,” he tells Capital Monitor

Of course, this means there is the risk of managers “marking their own homework” and reporting that their portfolio companies are better than average at delivering on their undertakings, says London-based Lee. Hence the importance of the independent assessments of corporate progress from the likes of the Science Based Targets initiative (SBTi), Climate Action 100+ and the Transition Pathway Initiative (TPI). 

Investors are increasingly incorporating a combination of frameworks to measure companies’ climate strategy and progress, confirms Georgeson in its survey report. “Investors inform us that Climate Action100+, SBTi and the TPI data will help identify which companies are leaders, in the pack or laggards.” 

Transparency is key

Ultimately, the increased transparency around climate action plans is key, stresses Michael Hugman, director of climate finance at the Children’s Investment Fund Foundation, the British non-government organisation that launched the Say on Climate initiative.  

“A lot of traditional stewardship has taken place privately, and it’s often extremely difficult to see what the results of that stewardship have been,” he tells Capital Monitor. It is crucial that activism takes place publicly, Hugman says. “There has to be a public discussion to really get companies to move.”  

Various influential asset owners and managers, and related associations – including the UK’s Local Authority Pension Fund Forum, Australian Council for Superannuation Funds and French Sustainable Investment Forum – are backing Say on Climate. Legal & General Investment Management (LGIM), a British $1.8trn fund house, last month stated its support for the initiative as a powerful tool for shareholders. 

“A big feature of Say on Climate is that we need that transparency not only around what companies are doing, but what asset managers are doing,” Hugman says. “Are they really using their role as the owners of companies to deliver what their clients want?” 

Pressure building on climate plans

Many asset managers have voted in favour of climate action plans that – from CIFF's perspective and according to independent analysis – are not Paris-aligned, Hugman adds. Likewise, there are votes on climate plans coming up this AGM season where there's also clear evidence that companies are not Paris-aligned, Hugman says. Mining groups BHP and Glencore are two examples. 

“We're expecting to see much bigger votes against those plans that will really start to raise pressure on companies and give serious investors like LGIM, Aviva and the Church of England Pensions Board the evidence they need next year to come back and start voting against boards," he adds.  

“We're going to see resolutions filed specifically around accounting and audit misalignment [in respect of such plans], which is one of the indicators in the Climate Action 100+ benchmark,” Hugman says. “You are also going to see banks putting Say on Climate votes up that I think are going to get challenged.” 

Some companies may have seen shareholder approval of a Say on Climate proposed action plan as a potential defence against charges of an inadequate climate strategy. Oil major Shell is one example. Such an argument appears likely to hold less weight in the coming years. 

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