The lignite-fired power station of Boxberg is pictured during sunset in Boxberg, Germany
Coal phaseout: asset managers can use their influence to shape corporate strategy © Florian Gaertner/Photothek via Getty Images

As companies worldwide announce a barrage of commitments to reach net zero emissions by 2050, the role played by their biggest shareholders in holding them to their pledges is coming under scrutiny.

A survey by Ninety One, the UK-listed investment manager, recently found that half of 6,000 individual investors polled across 10 countries believed asset managers should use their influence as shareholders of carbon-heavy companies to help cut emissions.

Climate Action 100+, a coalition of big investors, earlier this year found that half of the world’s largest carbon emitters had set net zero goals to cancel out their carbon emissions by 2050. But, in many cases, these pledges did not cover the full scope of their emissions.

“The decarbonisation of our economy has not even really begun and, if we wish to maintain our way of life, we need to overhaul the entire corporate ecosystem that underpins it,” says Mathieu Chabran, co-founder of France-based Tikehau Capital. “The financial sector is not yet doing enough.”

Venetia Bell, chief sustainability officer at GIB Asset Management, says businesses are at “different places on this journey”, with some better prepared than others for a transition to a cleaner economy.

“Decarbonising the world, as well as our portfolios, requires that we encourage the companies that are producing these emissions to make systemic improvements,” she argues.

To do this, investors need better disclosure of information to help them judge how companies are performing in cutting emissions — and to see how this is aligns with their net zero ambitions, Bell argues.

Asset managers are using several tools in an attempt to influence corporate behaviour around climate change. These include their ability to back greener companies or restrict investments into carbon-intensive companies. But they are also putting more emphasis on so-called stewardship and engagement, whereby investors try to influence companies through a combination of private boardroom discussions, issuing public letters, and voting at annual meetings.

Asset managers such as BlackRock have begun voting against directors who they believe are not acting quickly enough to address climate change. At the same time, investor support for environmental resolutions at company meetings is on the rise. Tikehau Capital is launching specialist investment products designed to fight climate change while also applying pressure to companies in its mainstream portfolios to “transition to a more sustainable future”.

Similarly, US-based Wellington Management says it is focused on engagement rather than exiting carbon-intensive companies, as is M&G, the UK-listed asset manager.

“One of the things that some of our funds are doing is to encourage investee companies to adopt science-based targets to reduce their carbon emissions,” says Rupert Krefting, head of corporate finance and stewardship at M&G.

M&G is working with other investors by jointly leading discussions on behalf of Climate Action 100+ members with two companies with large greenhouse gas emissions: miner Rio Tinto and chemicals company BASF.

As well as launching specialist investment products that focus on encouraging moves to a lower-carbon economy, asset managers have also been overhauling existing portfolios to make them more climate-friendly.

Mirza Baig, global head of ESG investments at Aviva Investors, says fellow asset managers must have a “very clear objective” of how their actions encourage efforts to meet the goals of the 2015 Paris climate accord. “Simply managing a fund with a lower carbon intensity doesn’t [mean] positive change in terms of Paris,” he says. “Whatever we do, it always needs to be driven by what is going to drive real-world change.”

Others are looking beyond equity markets to try to push companies to cut emissions. Hans Stoter, global head of Axa Investment Managers Core, says the European investment house has a framework that sets out its expectations on listed fixed-income assets such as green bonds.

However, despite these asset managers’ growing focus on climate issues, many believe investors will have to get tougher because of the poor progress made to date. Research released by MSCI, the index provider, suggested that the goal of the Paris agreement — to limit global temperature rises to well below 2C compared with pre-industrial levels — was “increasingly out of reach”.

It said only 10 per cent of public companies were aligned with a more ambitious 1.5C temperature rise threshold.

Stephanie Pfeifer, chief executive of Institutional Investors Group on Climate Change, one of the groups behind Climate Action 100+, says asset managers have made good progress on pushing companies but there is still much to do. She argues institutional investors need to be willing to square up to companies and publicly call out laggards if the world is to meet the goals set in Paris.

“There has been a real shift in the way companies are talking to us [investors] about climate change, but we are nowhere near where we need to get to,” she says. “We [investors] need to be doing much more.”

Climate Capital

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