- There has been a big increase in investor engagement with policymakers on ESG in recent years, particularly around climate.
- Executives from UK insurer Aviva, British retirement fund Railpen, and Singapore state investor Temasek stress the importance of such action.
- Some feel regulators are focusing too much on climate transition risk and not enough on physical climate risk.
It is not only listed companies that are hearing more these days about their shareholders’ and stakeholders’ preferences on ESG matters. Investors from insurance firms to pension plans to sovereign wealth funds are increasingly engaging directly with – and publicly pressuring – policymakers to drive the sustainability agenda, particularly on climate issues.
In its 2021 annual report the UN-backed Principles for Responsible Investment (PRI) said that the proportion of PRI signatories that engage with policymakers increased from 46% to 51% between 2018 and 2020, with the rise particularly notable among asset owners (see chart below). And for the PRI’s 2021-2024 strategy, engagement will be a key performance indicator for its 3,404 signatories.
This marks a big change since 2014, when the PRI started groundwork on the issue and found that many PRI signatories were not actively engaging with policymakers. It saw this as down to a number of factors, including scepticism about whether such action would make a difference, a lack of understanding on how to influence the policy process, and concerns about the costs and time frames involved in public policy engagement.
This evolution in thinking is coming not before time, as far as some big investors are concerned.
New thinking needed?
Patrick Arber, head of government engagement at UK insurance group Aviva, which had £401bn ($493bn) under management as of end-2021, says the financial sector has traditionally viewed regulation as obstructive but that such thinking needs to change if the climate crisis is to be addressed.
“I think that’s absolutely the wrong way to look at this kind of environmental regulation,” he said, speaking late last month at the City Week 2022 event in London. “It's a huge cross-cutting issue, where none of us alone make the impact that we desire, so we have to do it collectively.” Arber's comments reflect calls from big North American asset owners for greater policy stability on climate.
Steve Waygood, chief responsible investment officer at Aviva Investors, also speaking at City Week 2022, agreed it was becoming important for investors to engage with countries – as they are doing with companies – on climate risk. In fact, the Taskforce for Climate-Related Financial Disclosures (TCFD) framework should address country risk, added Waygood, who is a member of the TCFD. “Countries experience transition and physical [climate] risk and investors need to understand them.”
Similarly, Steve Howard, chief sustainability officer at S$381bn ($274bn) Singapore state investment fund Temasek, stressed the importance of working with regulators and with governments on climate change. “We are in favour of the right incentives, the right carbon pricing, and to be clear where you stand on that,” he said during a panel at City Week 2022.
Exchanges are also getting in on the act. The London Stock Exchange Group (LSEG) on 11 May published recommendations on public policy for sustainable finance and investment, including a call for mandatory disclosure rules for companies that have adopted or aligned with International Sustainability Standard Board standards and the TCFD by 2025. LSEG also says countries should require disclosure of corporate revenues derived from green solutions, mandate the publication of transition plans and facilitate the development of voluntary carbon markets to support climate transition.
Regulators moving on ESG policy
Such thinking appears to be bearing fruit, with regulators (and some state-owned companies) starting to move with the times.
In September 2020, the US’s Commodity Futures Trading Commission (CFTC) had identified climate change as a potential systemic risk – that is, an issue that threatens the very stability of financial markets. And a growing number of central banks are conducting climate scenario analysis to inform monetary policy and assess financial system risks.
Just two weeks ago, meanwhile, the US’s Securities and Exchange Commission (SEC) charged Brazilian miner Vale with making false claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam. This action, on 28 April, is the first emphasising false and misleading ESG disclosures since the SEC formed its Climate and ESG Task Force in March last year, says law firm Arnold & Porter.
All this being said, Waygood feels regulators such as the CFTC are focusing too much on the shorter-term risk of the climate transition and not enough on the long-term physical risks. As a result, he argued, transition risk is in fact slowing the climate transition.
“We need to be addressing the physical risk now because we only have eight years to stop the global economy going beyond two degrees,” Waygood said, “and once it's gotten beyond two degrees it continues to go further and faster because of the feedback loops.”
“A lot of relationship building”
However, effective influencing of public policy does not happen overnight – it takes a lot of relationship building to deliver success, says Caroline Escott, senior investment manager for active ownership at Railpen, the £37bn retirement fund for the UK rail industry.
The scheme’s role in public policy influencing, as outlined in its newly released 2021 stewardship report, forms part of its work in tackling systemic-wide market risk, she tells Capital Monitor.
Railpen has been participating in policy debates for many years, Escott says, but has more recently aligned its approach with its shift towards targeting areas that are a thematic priority for its portfolio, such as climate change, workforce and employment, equal voting rights and cybersecurity.
Escott recommends starting the engagement process even before one has a specific request or proposal. “You build relationships with your membership association, for instance, who often are much more plugged into the policy debate and who will have dedicated, large policy teams that think every day about public policy advocacy,” she says.
Once an institution decides to engage, it can seek to meet a public official with other like-minded investors and with member association representatives, Escott adds.
“Crucially, investors need a good sense of the issues that matter, the jurisdictions where policymakers might currently be active, and the opportunity you may have to influence by yourself or whether you will need to work with others to be listened to.”
Railpen is a member of the Occupational Pensions Stewardship Council, for example, and as such it chairs a working group and provides thoughts on emerging policy thinking around stewardship reporting, Escott says. The fund also contributed to the drafting of the UK government-backed Pensions Climate Risk Industry Group guidance for retirement plans, particularly the chapters on stewardship and governance.
Overseas ESG policy engagement
Railpen also intervenes in public policy in other jurisdictions that are material to its portfolio, such as the US, Escott says. For example, in recent months it has responded to the SEC’s consultation on corporate cybersecurity disclosure and wrote a letter to US policymakers in support of the Council of Institutional Investors’ draft bill to prohibit US listing of companies with unequal voting rights that have no sunset provision of less than seven years.
Ultimately, long-term investors and governments must work together to achieve effective government policy and regulation, Arber says. He cites the UK’s Transition Plan Taskforce, which was launched on 27 April, as a good example.
The initiative will develop a regime requiring financial institutions and listed companies to create climate transition plans. It has a two-year mandate to establish good practice for such plans, including sector-specific guidance for finance and real economy sectors.
Given shareholders’ widespread voting down of banks’ climate plan proposals in recent weeks, it is perhaps not surprising that some want to escalate environmental engagement to a higher level. One hopes it will move the needle further and faster.