Plus, 4 things that effective climate engagement needs to include
Is engagement the only way to ensure real-world emissions reductions? Or, is divestment the key to achieving net zero? – the perennial net zero asset management question that never fails to elicit a hot debate.
Like so much in life, this issue is not binary. The answer is more subtle, lying somewhere in the middle, and is evolving. Engagement done well is critical but needs the real threat of divestment to be effective. In a subset of cases, divestment is probably the only reasonable option, financially and environmentally.
However, despite the central importance of engagement in the decarbonization of so many trillions of dollars of assets under management, the term is used by asset managers in a style that could be described as vague and slippery. Indeed, our recent report, Canadian CA100+ Signatory 2022 Voting Record, highlights the significant variability in climate engagement among Canadian asset managers that hold themselves out as leaders in the space. Their stated commitment to engagement is not always reflected in their actions – for example, their uneven support for filing and supporting climate-related shareholder resolutions. Some asset managers voted in support of all resolutions assessed (e.g. Vancity Investment Management), while others voted against most (e.g. RBC Global Asset Management).
Investors can have substantial influence over the companies in which they invest, whether through voting rights in public equity or influence over the board of directors in private equity. The key is using this influence effectively. For engagement to be effective, it must be clearly and explicitly linked with a time-bound escalation policy, that includes divestment. Otherwise, investor engagement strategies risk being toothless.
What does an effective public equity investor climate engagement policy include? It involves:
- a clear and explicit requirement that companies develop and implement a science-based net zero transition strategy (ideally third-party verified); if not, investors will
- file or vote in support of shareholder resolutions demanding meaningful progress towards a science-based net zero transition strategy; if no meaningful progress is made within the year, then
- investors will vote against the re-election of responsible directors (and or the adoption of financial audited statements), and if no meaningful action is taken within then year, then
- Investors will divest from the company.
To be clear, engagement can and should also involve carrots, such as supporting companies with education and other resources that will support their net-zero transition.
Again, in some cases, net-zero transition plans will not be a realistic possibility for certain sectors, such as thermal coal, in which case divestment and exclusion policies are needed. See our public equity engagement guide for more details and some examples of best practices.
As a final note, it is worth highlighting that the most urgent form of engagement required by major financial actors is with our governments. Major financial institutions have significant sway over public policy and regulation, arguably more than they should. They could use their influence to speed up an orderly net-zero transition for Canada. Unfortunately, some are still choosing to do the opposite. Financial institutions have a self-interested motivation for better regulation. For example, if standards are put in place for corporate net zero plans, then financial institutions would have an easier time assessing their climate-related financial risks when deciding to invest.
Wondering what kind of financial regulation to lobby for? Look no further than the fantastic work done by Ecojustice, Environmental Defence, and Shift in the Roadmap to a Sustainable Finance System in Canada.