Investors with net zero commitments share a challenge regarding the carbon-intensive companies in their portfolios. For now, most Canadian investors choose – at least publicly – engagement over divestment as the way to decarbonize their portfolios. But this is an unhelpful dichotomy and escalation is necessary for soft engagements that are not working. To decarbonize (and de-risk) their portfolios, Canadian investors need to flesh out their climate engagement strategies. This means a willingness to escalate to stronger engagement tactics, and, where there is no meaningful progress, divest.
At present, the state of investor climate engagement in Canada – as we have come to understand it in our climate shareholder advocacy work over the past two years – is characterized by:
– Confidential meetings between investors and publicly traded companies;
– Some investor-led initiatives like Climate Engagement Canada and CA100+;
– Some voting support for climate-themed shareholder resolutions, although a reluctance by investors to pre-declare their support and file resolutions (especially larger investors);
– Little attention paid to holding directors accountable for climate inaction; and
– A reluctance to extend engagement to fixed income instruments and private equity investments.
In the UK, engagement without escalation is somewhat cheekily called “tea and biscuits” – the practice of having a nice chat with the company and calling it a day. Unsurprisingly, there is little expectation that this will result in much change. Indeed, when we look at the plans of major oil companies, including Canadian ones, despite investor engagement they are doubling down on oil and gas expansion, thereby making investor portfolios even less aligned with net zero.
The Columbia Center on Sustainable Finance recently published a great overview of net zero finance best practices. It states that for any engagement policy to be effective it should “set clear targets, disclose engagement strategies and outcomes, communicate and execute escalation strategies, and have clear consequences for poor performance.” Engagement tactics require teeth to drive change. The Columbia Centre lists the following as best practices for escalating engagement:
– For public equity, lobbying for more stringent public policies and regulatory enforcement to make client engagement more effective. In addition, escalating from shareholder resolutions to voting against financial statements, executive remuneration, and/or directors where no meaningful action is taken on climate-related shareholder resolutions (e.g. BCI is one of the first Canadian investors to publicly do so with Imperial this season).
– For debt holders, “there is an opportunity, particularly during critical moments of refinancing, to require debt issuers to include climate strategies and transition plans as part of debt obligations.”
– For private equity investments, there is an opportunity to buy and restructure “non-1.5ºC-aligned companies to ensure credible and meaningful transition planning for 1.5ºC. Their longer time horizon as compared to public markets as well as their full ownership governance models grant them a strong lever.”
– Asset owners have the potential to “select (or terminate) asset managers on the basis of their climate or other sustainability engagement strategies (which may be laid out in the asset manager’s fund prospectus); the more publicly they do so, the more influential their efforts.”
– Banks have the ability to implement financial incentives and penalties that encourage companies to decarbonize.
Climate engagement is an important tool for decarbonizing financed emissions, but must be associated with these types of escalation tactics to influence management.
This brings us back to the unhelpful engagement vs. divestment dichotomy. In fact, when engagement has failed, and it is clear that a company has no real intention or ability to transition to net zero, financial institutions must be willing to walk away to avoid the transition risk associated with these assets. Rathbones, a UK-based investment firm with over 60 billion GBP under management, is a prime example of an investor willing to commit to divest when engagement escalation fails. This is essential for accountability and will help reduce the liquidity available for bad actors.
This coming year, we expect to see Canadian financial institutions improve their climate engagement practices by adding escalation tactics – per trends in Europe and from some of North America’s most progressive investors – as their clients and the public expect them to follow through on their climate pledges. To support this shift, investors would benefit from more quality, independent assessments of the net zero plans of major emitters, especially financial institutions and the oil and gas sector. In particular, we have noticed an appetite for more information on climate engagement best practices relating to private equity and corporate bond investments. Additionally, daylighting the climate-related proxy voting practices of major Canadian investors will help hold investors accountable to their stated commitments to climate engagement. Voting in support of climate-related shareholder resolutions is a relatively soft engagement tactic, but it is a critical first step in the escalation process and is an effective means of communicating shareholder priorities.
RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Kyra Bell-Pasht
Director of Research and Policy
Investors for Paris Compliance
Matt Price
Executive Director
Investors for Paris Compliance
