In recent years, asset owners and asset managers responsible for trillions in assets have made commitments to align their portfolios to net zero, but the question remains what tangible action can or will be taken by those organisations to meet those commitments. Unsurprisingly, stewardship and engagement plays a key role. The Net Zero Investment Framework produced by the IIGCC calls for adopters to implement an engagement goal to ensure at least 70% of financed emissions in material sectors are either net zero, aligned to net zero pathway, or the subject of direct or collective engagement and stewardship actions.
Although many asset owners and asset managers already have engagement and voting policies in place, there is a sense that stewardship practices must evolve given the urgency with which action must be taken to tackle the impact of climate change. To this end, the IIGCC has recently launched the Net Zero Stewardship toolkit which provides investors with a “foundational framework” to enhance their stewardship practices in order to facilitate the delivery of net zero by 2050. The emphasis is on bolder, more decisive engagement: “To achieve [the rapid adoption of target emissions by companies], investor stewardship must be swift and bold…This unprecedented challenge will require an unprecedented shift in stewardship practices.”
The toolkit itself sets out certain key steps to help inform asset managers’ (and indeed investors more generally) stewardship strategy and process. Some observations on the toolkit:
Prioritise engagement with key companies but ensure a baseline level across the board. Given the number of companies within any given portfolio, it is unrealistic to expect asset managers to have the same level of engagement across the board. The toolkit emphasises the establishment of prioritisation criteria (which it facilitates by setting out a series of steps that may be undertaken), the undertaking of portfolio analysis against that criteria, and identification of priority companies as key to ensuring maximum effort is targeted at those companies which would have most real-world impact on decarbonisation goals. However, the toolkit also recommends that investors establish a baseline engagement and voting policy that applies to all companies in scope. A baseline net zero voting policy may include voting triggers for “routine matters” that typically come up for voting during AGMs which are linked to whether or not certain net zero policy actions have been taken by the company.
Dialogue is necessary but be prepared to escalate. Communication is obviously vital especially at the initial stages of engagement – asset managers should make clear their expectations to management of priority companies. Constructive dialogue should also help them understand a company’s context and its transition pathway rationale.
Nonetheless, the toolkit suggests that investors put in place a clear escalation plan which can be executed where appropriate. Both non-voting (e.g: increased senior or board-level engagement, public statements, collaborative action with other investors) and voting escalation actions are helpfully set out. Divestment is very much seen as a tool of last resort – only to be used “where escalation has been exhausted or change is otherwise seen as infeasible”.
Asset owners and asset managers need to be aligned. It is imperative that asset managers’ net zero objectives and priorities are aligned with those of asset owners. Given each individual portfolio company will be held across many client portfolios, it will be a challenge for asset managers to tailor their engagement with any portfolio company in a way that is aligned with the different clients’ specific mandates and targets. This is acknowledged in the toolkit. Nonetheless, with many asset owners now requiring their mandated asset managers to adhere or commit to net zero initiatives, it should over time become easier for asset managers to reconcile their assessment and engagement across different client portfolios.
Companies should expect more robust engagement. It may no longer be sufficient for companies simply to express some vague ambition to achieve net zero over the long term. This is already the direction of travel with the UK government proposing mandatory requirements for listed companies to publish net zero transition plans – but the pressure will compound if increasingly, investors adopting the toolkit’s approach demand that companies implement clear targets with measurable milestones within specified, and perhaps relatively short, timeframes. Indeed, the toolkit suggests that steep emissions reductions will be required “in the short term, meaning short term objectives should be prioritised”. In addition, “routine” voting matters (such as the re-election of directors or the laying of annual accounts) may become linked with the company’s stance on climate change as well as their progress in implementing net zero commitments.
 As stated on its website: "The Institutional Investors Group on Climate Change (IIGCC) is the European membership body for investor collaboration on climate change…. IIGCC has more than 375 members, mainly pension funds and asset managers, across 23 countries, with over €51 trillion in assets under management."