Can active ownership get us to net zero?

The role of active ownership in the path to net zero

The extent of any greenwashing is often cited as a concern among ESG investors, and is one noted by the regulator too.

In a now closed consultation on sustainability disclosure requirements and investment labels, the FCA mentions growing concerns that firms may be making exaggerated, misleading or unsubstantiated sustainability-related claims about their products, which do not stand up to closer scrutiny.

The regulator has suggested amending its ESG sourcebook so that, broadly speaking, a firm must maintain an active investor stewardship strategy in order to label a product as sustainable, among other criteria.

But does active ownership actually work in encouraging investee companies to meet net zero targets?

“Shareholders are essentially owners of the company, and the company should act in the best interests of their investors to enhance shareholder value," says Jade Coysh, a senior research analyst and ESG specialist at Momentum Global Investment Management.

"So it is important for investors to highlight key issues that they believe management should address."

Whether a company’s motivation for meeting net zero targets stems from a genuine interest in preserving our planet, or whether they are trying to reduce the risk of a share price fall due to reputational damage or stranded assets, investee companies are accountable to shareholders and do not want to risk losing assets, she adds. 

As well as constructive dialogue with investee companies, Michiel van Esch, an engagement specialist in Robeco’s active ownership team, lists the following as examples of means available to shareholders to influence companies:

• Voting against relevant management resolutions at shareholder meetings;
• Filing and supporting climate-related shareholder resolutions; and
• Nominating board directors with climate expertise.

“When we have exhausted our tools of influence, without achieving sufficient improvement, we will have to assess whether we can remain invested in a company,” he says.

Indeed, only focusing on reducing a portfolio’s carbon footprint by divesting from carbon-intensive sectors would lead to the “unsatisfactory” outcome of investors selling carbon-intensive companies, without leading to a change in real-world emissions, Esch says.

“Decarbonising the real economy requires a more sophisticated and forward-looking approach. It is through investing in the low-carbon transition, and by advocating for it, that investors can contribute to reducing real-world emissions,” he says.

An example of a shareholder resolution that Stephen Beer, senior manager, sustainability and responsible investment at LGIM, gives is one the asset manager co-filed in April ahead of oil and gas company ExxonMobil’s 2023 AGM.

“[We requested] the board to fully disclose the quantitative impact of achieving net zero with all their asset retirement obligations,” says Beer.

“This is active ownership in action, calling for the transparency we need to evaluate the long-term value and economic viability of ExxonMobil’s business in a carbon-constrained economy.”

Is active ownership on retail investors’ minds?

Many retail clients may not be aware of the impacts their investments can have on the world, says Ray Dhirani, head of impact management at Tribe Impact Capital, a wealth manager.

“They may eat less meat, drive a hybrid car or choose a low carbon lifestyle; but when it comes to their investments, they may be unaware of the positive and/or negative impacts of their investment portfolios,” Dhirani says.

“Retail clients are informed by their financial advisers, and while many advisers know about engagement, it may not necessarily be central in conversations with clients.

"Engaging in the active ownership practices of a client’s investments is a great opportunity for advisers to differentiate their advice offering.”

Indeed Olivia Bowen, a financial advice partner at Castlefield, which specialises in responsible investing, says: “Our clients are always really interested to hear about the engagement we do with investee companies. It brings their portfolios to life, and helps them to understand the power of responsible investment.”

Victoria Hasler, head of fund research at EQ Investors, which also focuses on sustainable investing, says many topics that the firm engages in are stories that reach the news.

“A recent example is water companies discharging sewage into rivers and oceans,” says Hasler. “This has hit the headlines several times recently, and we have received communications from clients who want to discuss the topic with their advisers, and find out what we are doing about it.

“In this example we had already engaged with our funds that hold water companies, and this led to some great conversations with clients who were keen to find out what we were doing, what progress has been made so far and to push us to do more.”

How advisers can monitor active ownership

So what can advisers do to ensure that portfolios continue to meet any client requirements on active ownership?

Working with specialist investment and fund managers who have a robust and transparent process on active ownership will help advisers to meet client requirements in this area, says Dhirani.

“An adviser can look to evidence active ownership through tangible examples and by asking managers, for example, where and why they would vote against management on resolutions.

"They could also ask for a written document that lays out the manager’s voting and engagement process.”

At LGIM for example, Beer says the asset manager publishes its active ownership report annually. “[It] details the action we’ve taken over the last year to raise standards across the companies in which we invest.

“When it comes to voting, we also disclose all our decisions within 24 hours of a vote taking place with supporting rationale, so advisers and their clients can see how we have voted on a particular issue, and why.”

Bowen at Castlefield likewise suggests advisers obtain stewardship reports from fund managers, and ask what they are doing to engage with investee companies and how this helps to improve corporate behaviour.

“If they aren’t employing active ownership, then consider moving clients’ money elsewhere. This could help to avoid funds which may be accused of greenwashing later down the line,” she says.

Nina Roth, head of active ownership at Columbia Threadneedle Investments, highlights both a portfolio manager and asset manager’s role in engagement.

She says: “[Advisers] can make sure that major ESG risks are being addressed by the portfolio’s manager through engagement, voting and, if suitable, over time through re-weighting or even divestment.

“They can [also] make sure that the asset manager with whom their clients are invested has a decent level of corporate commitment to responsible investment and publishes its policies, engagement outcomes, and proxy voting results.”

How investors are influencing investees

So how are investment managers using active ownership to influence companies within their funds?

“An activist approach may be helpful to secure a one-off immediate change,” says Daisy Streatfeild, a sustainability director at Ninety One.

“But a constructive collaboration is probably going to be necessary for the net-zero transition, where a long-term complex set of issues and considerations need to be understood and addressed.”

Streatfeild adds that a challenge for active owners is to demonstrate impact, and to provide evidence that active ownership is delivering outcomes, particularly in a way that is digestible to retail clients.

“Simplistic metrics like numbers of engagements will only serve to drive unnecessary traffic across the desks of companies’ investor relations teams,” she says. “It is not a measure of impact.”

Coysh at Momentum similarly says that an important aspect of engagement is making sure that measurable targets are in place, with a timeline for meeting them.

“A key part of our role as fund analysts is ensuring that fund managers are overseeing each company’s progress, and taking action if necessary.

“This may be in the form of stronger engagement, directing engagement towards other people within the business such as the chair of the board or, if the company is unwilling to truly improve, divestment as a last resort.”

Aela Cozic, associate director, sustainable investing and portfolio manager at Fidelity International, likewise says the provider is “convinced” that regular engagement and dialogue are more efficient than exclusion policies that “simply divert the problem elsewhere”.

“We have announced that we will proactively phase out our thermal coal exposure by 2030 in OECD markets and 2040 globally in line with the International Energy Agency’s 'net zero by 2050' scenario.

“Fidelity favours allocation of capital to climate solutions alongside engagement over divestment in high-emitting sectors to help guide companies to an orderly transition, in a way that leaves no one behind and ensures that staff are retrained to operate in other business areas, not just made redundant.”

Being a signatory to initiatives could also indicate whether and how a manager engages in active ownership.

Cordelia Tahany, an ESG and investment analyst at Unicorn Asset Management, mentions the Principles for Responsible Investment supported by the UN, and the Net Zero Asset Managers initiative as examples of which Unicorn is a signatory.

While active ownership has its role in ESG investing, for some it is also an important contributor to returns.

“Climate change is one of the defining issues of our time,” says Beer. “For investors, we believe it is a financially material risk. As such, LGIM has a responsibility to hold companies to account to protect our clients’ assets as well as safeguarding the planet.

“As well as aligning with our core values, we believe the transition of investee companies [to net zero] is essential to help provide our investors with diversified portfolios that can continue to deliver the needed returns in the years ahead.”

Kunal Desai, emerging markets portfolio manager at GIB Asset Management, likewise says active engagement is evolving as a core driver of long-term sustainable returns. But he adds that investors should be discerning.

“Using engagement merely as a box-ticking exercise can limit the true power of the investment strategy,” Desai says.

“For us, friendly active engagement should remain the central driver of a business’s investment thesis and return profile, rather than being an afterthought once something has gone wrong. It should be deployed across the portfolio, rather than on a case-by-case basis.”

Chloe Cheung is a senior features writer at FTAdviser