Engagement could be effective in various ways.
Engage with policy makers
Engagement with policy makers can influence policy, thus reducing uncertainty for investors, and build investors’ understanding of the direction of policy, which may impact on investments in future.
Recent investor focus areas include asking policy makers to:
- Provide stable, reliable and economically meaningful carbon pricing that helps redirect investment commensurate with the scale of the climate change challenge;
- Strengthen regulatory support for energy efficiency and renewable energy, where this is needed to facilitate deployment;
- Support innovation in, and deployment of, lowcarbon technologies, including financing clean energy research and development;
- Develop plans to phase out subsidies for fossil fuels;
- Encourage governments to incorporate into their plans how private finance can be attracted where this may be needed, for example in national plans for adapting to a changing climate;
- Consider the effect of unintended constraints from financial regulations on investments in low-carbon technologies and in climate resilience.
Pros: Influence policy outcomes and understand future policy direction, helping to achieve a level playing field.
Cons: Effective policy engagement requires resourcing, board-level support and investor collaboration at a domestic and global level.
Timeframe: Medium- to long-term, although policy responses to COP21 in December 2015 are a key opportunity in the short-term.
Tracking and measuring performance: Performance indicators have tended to focus on the number and execution on engagements, but ultimately only policy outcomes and stability matter.
Asset owners can engage with policy makers for a strong global agreement at COP21 by supporting the following public initiatives:
- Global Investor Statement on Climate Change: investors can sign this to send a clear message to governments that there is strong investor support for a global agreement on climate change.
- CDSB Statement on Fiduciary Duty: this focuses on including climate change-related information in mainstream corporate reporting as a matter of fiduciary duty.
- We Mean Business Coalition: this is a coalition of businesses focused on smart policy frameworks to enable ambitious climate action.
After COP21, other opportunities will arise to engage with policy makers at a domestic and international level through the PRI and global investor groups dedicated to climate change.
Engage with companies
Investors have been engaging companies on climate change for some time, and this has a key role to play in encouraging companies to transition to a low-carbon economy. Clearly defined objectives are essential for effective engagement. Asset owners need to monitor engagement outcomes, focusing on whether companies are providing satisfactory responses to investor concerns. Asset owners need to decide how long engagement dialogue should continue for and what investment decisions which will be taken if companies provide an unsatisfactory response.
Investor-company engagement can consist of:
- Individual/collaborative engagement: asset owners can engage individually (or with/through external managers and service providers) or in collaboration with other asset owners. Organisations coordinating collaborative engagements include the PRI, the Institutional Investors Group on Climate Change, the Investor Group on Climate Change and the Investor Network on Climate Risk, among others.
- A choice of topics: can include corporate strategy and the transition to a low-carbon economy, emissions reduction targets, carbon asset risk, energy efficiency and political lobbying;
- Board-level and/or operational-level focus: effective engagement may require dialogue at both a board- and operational-level;
- Different approaches: letters, phone or in-person meetings, co-filing or voting on shareholder resolutions;
- Public and private elements: investors may see benefits of engagement being public and vocal or discreet and confidential, depending on their objectives.
Recent developments in investor engagement with companies include:
- The Aiming for A Coalition fs shareholder resolution, Strategic Resilience for 2035 and beyond, which received support from company management and over 98% of shareholders at the 2015 Annual General Meetings of BP, Royal Dutch Shell and Statoil.
- The Carbon Asset Risk Initiative26 engagement with fossil fuel companies to use shareholder capital prudently, co-ordinated by Ceres and Carbon Tracker, with support from the Global Investor Coalition on Climate Change.
- The As You Sow and Arjuna Capital 2015 shareholder resolution, supported by 4% of shareholders, calling on Chevron to return dividends in light of spending on high-cost, high-carbon projects;
- Calls for gforceful stewardship h28, whereby investors would press companies to present business plans compliant with a maximum 2 ‹C rise in global temperature and vote for resolutions to change business models;
- The PRI fs corporate climate lobbying engagement, which aims to encourage responsible company practices on climate change-related policy activity, focusing on Australia, Canada, Europe and the USA.
Pros: Influence improvements in high-carbon companies’ strategy, policies and emissions performance.
Cons: Effective engagement needs resourcing, but outcomes can take time and be difficult to attribute specifically to investor engagement.
Timeframe: Commitments to carbon reduction actions can have immediate effect, although more typically it takes time to build a consensus and for companies to take action and make changes.
Tracking and measuring performance: Indicators can focus on the number of companies engaged (directly, collaboratively and via service providers), the number of cases where a company changed its practices or made a commitment to do so following engagement and votes cast on any shareholder resolutions.
In addition to individual engagement, asset owners can join the following collaborative initiatives:
- PRI investor working group on Climate Corporate Lobbying
- Investor Expectations on Corporate Climate Risk Management
- CDP Carbon Action
- Ceres Shareholder Initiative on Climate & Sustainability
Engage with the broader finance community
This could involve dialogue on how challenges can be overcome, such as barriers to green infrastructure investment. It could also include dialogue on company disclosure and reporting requirements with stock exchanges. In addition, it could involve engagement with academic researchers to deepen investor understanding and knowledge on climate change.
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Developing an asset owner climate strategy