By Peter Uhlenbruch, Interim Director of Financial Sector Strategies, ShareAction
This has been a complicated year for responsible investment.
We have witnessed unprecedented flows of finance into the responsible investment space. Combined assets in ESG funds recently hit nearly $4 trillion.
But this positive shift has been overshadowed by scepticism and accusations of hypocrisy over ESG practices, and their true impact in tacking systemic crises like climate change.
In one extreme incident of this, an asset manager was investigated by financial regulator for allegedly overstated ESG claims, while the former CIO of sustainable investments at the world’s largest asset manager has called out the ESG industry for overstating its impact.
While money continues to flow into ESG products, credibility is on the line.
COP 26 finance commitments – the need for quality over quantity
At COP26 last week, the global finance community took centre stage. The Glasgow Financial Alliance for Net Zero (GFANZ) announced that financial giants – with a mind-staggering $130 trillion in assets – were now committed to the net-zero transition.
A closer look at this bold claim, however, shows it might not live up to the hype – with a strong likelihood of double-counting, and few concrete details on how this shift will take place.
The emergence of these net-zero finance coalitions is promising and welcomed. But valid concerns remain about the yawning gap between these bold long-term aims and current practice, and if the bar for entry is set too low.
A 1.5C future means no new fossil fuels – can financial institutions step up to the challenge?
Early this year, the International Energy Agency (IEA), the world’s leading authority on energy policy, made it clear: holding global heating to 1.5C – as laid out under the goals of the Paris Agreement – means no further expansion in fossil fuels.
Yet, analysis from Reclaim Finance shows not one of the six net-zero alliances across banking, asset management and ownership, insurance, investment advice and data provision requires a halt to investments in fossil fuel expansion by signatories.
This should be especially concerning for banks. The sector has been responsible for $4 trillion of fossil fuel financing since the Paris Agreement.
Earlier this year we sent investor-backed letters to 68 of the world’s largest banks asking them to go beyond the minimal requirements of the Net Zero Banking Alliance (NZBA) and to publish robust coal policies ahead of COP26 (their public responses are available here and make for mixed reading).
It is not much better when we consider the Net Zero Asset Managers (NZAM) Initiative – a similar coalition for the asset management industry. It sets the bar too low for an initial round of targets. Some signatories have committed under 2 per cent of their assets under management (AUM) to be initially managed in line with net zero – falling far short of the ambition needed to meet the scale of the climate crisis.
To bring credibility to commitments, financial institutions must step up on climate stewardship
And while a lot of the focus has been of shifting the trillions out of fossil fuels and into the low-carbon companies of the future, the question around investor stewardship is often lost.
How do we define what good climate stewardship looks like? And how do we hold investors to account?
If investors use their leverage as owners of shares, or providers of debt, they can play a critical role in unlocking action at investee companies.
But current climate engagement practices by investors are falling short.
This was made clear in the first benchmarking progress report by Climate Action 100+, which revealed only glacial process from the world’s largest 159 most polluting companies, responsible for 80% of global industrial emissions. Not a single company had committed to align their capital expenditures with a 1.5C scenario.
The climate crisis demands investors start immediately escalating their engagements with companies.
Unfortunately, the Net Zero Asset Owners Alliance’s (NZAOA) updated target setting protocol provides no guidance on how signatories should begin escalating their engagements with high-carbon targeted sectors.
This is a missed opportunity.
As shown in our global ranking and leading practice research of the world’s largest asset managers and insurers, investors are capable of escalating their engagements via powerful escalation tools. This includes voting on AGM resolutions or co-filing shareholder proposals.
Unfortunately, they are yet to do so at scale.
2022 – A call to action for next-level climate stewardship
This year, we wrote to the CIOs of 26 of the world’s largest asset managers – all of who are members of CA100+ and have made net-zero commitments. We asked them to show leadership on climate stewardship in the 2022 AGM and company engagement season.
We called on them to:
- Vote against one or more directors of companies (such as the chair of the main board or audit committee) where climate performance is insufficient;
- Vote against remuneration reports or policies where executives are not rewarded for delivering a credible 1.5C aligned business strategy;
- Vote against auditors and/or reports and accounts where climate-related disclosures are misleading; and
- Write to companies to explain votes and escalation policy should climate expectations fail to be met.
Promisingly, an investor coalition recently signalled they will begin voting against the reappointment of the world’s big 4 auditors should company accounts fail to integrate climate risk.
We also worked to develop the COP26 Declaration of asset owner climate expectations of asset management. This sets out the following useful climate-related active ownership expectations highly relevant for application next year.
- A presumption to vote in favour of shareholder resolutions on climate change;
- Active shareholder engagement on 1.5C aligned transition plans across sectors and asset classes; and
- The development and disclosure of engagement escalation policies.
We invite all asset managers and owners to socialise these practices into their climate stewardship programmes.
End the hypocrisy – it’s time the financial sector close the loopholes to achieving net-zero
Staying on a 1.5C pathway means investors have to radically phase-out fossil fuels and step-up their climate related engagement. Not in a few years, but today.
As non-reversible climate tipping points edge closer and closer, there's no time to lose.
The finance sector is increasingly taking centre stage on climate change. With their commitments to net-zero in the public eye for all to see, they can no longer hide from their responsibility.
As governments, businesses and financial institutions head home from a long two weeks in Glasgow and with a new rulebook on limiting greenhouse gas emissions, it's clear that 2022 will offer no time to rest.
For the finance sector, 2022 needs to be the year that we close the loopholes which threaten the integrity of its growing commitment to the net-zero transition.
This will mean clear, concrete steps to phasing out fossil fuel financing, starting with commitments to no further expansion, and bold new climate stewardship practices.
We’ll be watching, and testing the integrity of financial institutions claims. This will include:
- An analysis of the voting practices by the world’s largest asset managers across a range of key climate and social resolutions;
- An assessment of the climate stewardship reporting of a selection of Climate Action 100+ participants, including guidance on leading practice; and
- Our flagship public rankings of the world’s largest asset managers and Europe’s largest banks on responsible investment and financing.
We look forward to deepening our own monitoring and engagement with these sectors on this critical topic.
It’s time for the global finance community to prove their commitment to net-zero.