Investors need to be more stringent in holding companies to account if they are failing in their efforts to reach carbon neutrality, finds Andrew Holt.
Investors collectively managing more than $14trn (£10.2trn) of assets are pushing for more robust corporate governance measures to help companies hit their net zero emission targets.
At least a fifth of the world’s 2,000 largest public companies have committed to such a goal, including 52% of the high-emitting companies that investors are engaging with through the Climate Action 100+ initiative.
But the lack of standardisation in the commitments made so far pose a challenge for investors, who are increasingly looking to decarbonise their entire portfolio.
To achieve this, investors need to ensure that targets set by companies are robust and properly implemented. This is what the IIGCC, a European membership body for investor collaboration on climate change, is working to achieve.
Without sound management of corporate climate change policies, investors are exposed to higher risks while wider efforts to transition to a net zero emissions future could be undermined.
Investors are, therefore, calling on companies to do three things: one, disclose a net zero transition plan. Two, identify the director responsible for the plan. Three, provide a means for investors to have a say on progress through an annual vote.
“In order for investors to do their job as stewards of capital, companies must establish effective mechanisms to demonstrate their net zero transition plans to shareholders and outline how they will be achieved,” said Stephanie Pfeifer, IIGCC’s chief executive. “It is clear that shareholder voting and director oversight is needed to hold companies to account on their commitments to achieving a net zero future.”
Rule of three
The transition plan should use the Taskforce on Climate Related Financial Disclosures and the Climate Action 100+ Net Zero Company Benchmark as core metrics to demonstrate progress towards net zero alignment.
Meanwhile, identifying directors responsible for the plan shows investors who they should engage with, or, in addition to the chair, potentially – as a last resort – vote against if a plan has not been provided or if its implementation is insufficient.
Having a say on progress is important. Yet if there is no chance to vote on progress, due to weak governance conventions, then investors might consider reflecting their opinion on the implementation of the transition plan in their voting behaviour on other agenda items, such as the election of board members.
Publication of the investors’ expectations is intended to mainstream new corporate governance standards on net-zero alignment.
The aim is also to place the topic firmly on the corporate governance agenda for 2022’s AGM season, ahead of which companies will be asked to demonstrate alignment inline with investor wishes.
Following the engagement initiatives by IIGCC’s members, more than 10 companies – including Shell, Unilever, Nestle, Glencore, Iberdrola and TotalEnergies – implemented measures outlined in such statements.
Institutional investors supporting the move include the BT Pension Scheme and the Church of England Pension Board.
“Investors are increasingly setting net zero goals to address climate change, but to be successful, the companies in which they invest have to be aligned,” said Victoria Barron, head of sustainable investment at BT’s pension scheme.
“Growing numbers of companies are developing net zero plans recognising that climate change is a core consideration. But we need more urgent action and more consistent disclosure,” she added.
Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, said: “Time is against us and if a company is to carry the confidence of their shareholders they need credible transition plans with clear short, medium and long-term targets covering all material emissions.
“Directors will be voted out if the plans are not credible, do not provide a clear basis to deliver targets or if companies are not delivering against them,” he added.
Investors involved in engagement through Climate Action 100+ will be pressing to put the expectations into practice through related company engagements.
Overall, the process represents a big drive to a secure a step change in corporate governance on climate risk.