According to American author and businessman Stephen Covey, there are three constants in life: change, choice and principles. It's a view that neatly sums up concepts at the very heart of sustainable investment. Sustainable Investment Consulting at Ogier works with clients to navigate and embrace change - and we turn sustainable change into a value creator.
To date 194 countries joined the Paris Agreement, making public obligations to limit the global temperature increase in this century to 2 degrees Celsius with the effort to limit further increase to 1.5 degrees. As of Jan 2023, over USD11 trillion in AUM from 84 institutional investors globally was committed to achieving net-zero emissions by 2050 or sooner. Based on the Intergovernmental Panel on Climate Change's (IPCC) most recent pathways, the Alliance identified emissions reduction requirements for sub-portfolio targets in the range of -22% to -32% by 2025 and -40% to -60% by 2030, which is in alignment with Paris Agreement schedule.
As IPCC continues to issue further guidance on target setting and disclosures, Boards need to be aware of these increasing demands, as well as risks and opportunities for financial market participants. However, change can only be managed effectively when leadership makes a choice to be guided by core principles.
In this article, we provide some practical tips on how it can be done, based on our experience working with clients globally. We also provide some high profile examples of instances when climate risks influenced boards' agendas and shareholders' resolutions.
Clear definitions and communication
Boards need to be very clear as to what ESG, sustainable investment and impact means for the organisation or products that they oversee. This clarity has to be continuously communicated to the organisation to ensure consistency and focus and to prevent disconnection between what the board discusses and what the executives then implement.
Review relevant systems, processes and behaviours
If boards are finding it difficult to decide who should manage oversight of the sustainable investment agenda, and how it should be done, it can be useful to hire external experts to conduct independent evaluation to ensure that optimal corporate governance and structures are in place, prior to adding new demands. An audit committee should then see that recommendations of independent evaluation translate into an action plan that is discussed frequently.
Appoint a lead director for ESG oversight
Once the strategic priorities are determined and an ESG agenda is discussed in the context of such priorities, the boards can decide if a separate ESG committee needs to be formed, or specialised non-executive directors (NED) or staff should be hired, versus engagement with consultants. It can be useful for the same NED to sit on ESG and risk and/or audit committees as well as R&N committees to ensure continuity and consistent communication.
Establish relevant ESG matrix and targets
For instance, if the board agrees on a net-zero strategy and approves the intermediate targets or thresholds, it is then the job of the executive team to execute and report progress to the board. The board can set relevant KPIs to ensure execution of this strategy.
Seek expert advice during implementation
It can be useful to engage an independent expert to support with the execution of such targets in order to have an independent verification and in case the executive team needs further guidance. This way the board will not be involved in operational work but would be freed up to focus on strategic priorities.
Innovation
Invest in innovative products and solutions that would be necessary to deliver net zero strategies and similar pledges.
In summary
These steps minimise the risk of any miscommunication that is one of the reasons for misstatements like greenwashing or greenhushing. With increasing transparency around ESG agendas and execution, it is especially important to avoid such reputational risks.
How climate risks have influenced boards' agendas and shareholders' resolutions
- Ten of the greatest climate disasters in 2022 cost US$3 billion each with Hurricane Ian being the most damaging event costing over US$ 100 billion. On top of this, Climate Action 100+ reported that in 2022 investors filed a record number of 215 climate-related shareholder resolutions. The majority of these resolutions focused on adoption of greenhouse emission reduction targets. As an example, Costco cast 69.9% votes calling for adoption of science-based (SBT) greenhouse gas emission reductions targets to cover its entire value chain. The second most common requirement is for companies to disclose how their climate lobbying and trade associations align with the goals of the Paris Agreement
- According to SBTi, 2,366 companies set SBTs and 1,720 companies made net-zero commitments, with more than 400 large US based companies committing to ambitious emissions reductions by 2030. Such public announcements open companies to reputational risks and boards should be keeping executives responsible to deliver on such strategies, which requires setting intermediate reduction targets with continuous reporting to the boards
- Most recently, a UK asset owner roundtable convened asset managers over proxy voting concerns because asset owners pointed out that when exercising stewardship and voting at general meetings, the majority of oil and gas companies in the EU are focused on short-term interests. Brunel Pension Partnership Limited, Scottish Widows and the Church of England Pension Board were among asset owners that warned that delayed action on climate change comes at the expense of the long-term interest of the pension funds. According to Faith Ward, "following the proxy season, we will be commissioning a leading academic to review the way significant asset managers have interpreted their clients' long-term interests in the exercise of their stewardship duties. We will be particularly focussing on how managers have voted at key AGMs in Europe as proof points for our understanding of their approach and our needs"
As more companies commit to net zero strategies, such resolutions will remain at the top of boards' agendas - evidenced by the fact that already ahead of the 2023 AGM season, investors wrote to chairs of UK listed companies asking to disclose their plans for transitioning to a low carbon economy. Shareholders are asking for a specific "Say on Climate" vote during the next AGMs.
Sustainable Investment Consulting: who we are and what we do
Our mission is to build an integrated approach to connect sustainability to investment strategy and create results. We work with clients globally, offering expert advice regarding sustainable investment strategy and implementation. We are a team of solvers, combining knowledge from our prior investment, corporate and science careers to deliver sustainability expertise for change. Our mission is to build an integrated approach to client deliverables that connects sustainability to your investment strategy - and to results.
When offering our consulting services to boards, we review the overall mission, strategy and organisational structure of each client. This allows us to engage with relevant stakeholders and present ESG risks and opportunities that are material to each organisation and investment strategy. This holistic approach offers the best outcome because it ensures effective communication and execution, preventing any inadvertent misstatements that often arise as a result of communication gaps between the various departments, as well as between the board and management.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
