Engagement with investee companies on climate information
It’s important to have a good understanding of the scope and robustness of net zero pledges made by our investee companies and to encourage better public disclosure of those pledges. We contacted all companies within our portfolios that had made a greenhouse gas reduction pledge. This involved contacting more than 100 companies across our portfolios, following up in written correspondence with three of these and participating in 33 conference calls with individual investee companies throughout 2021. As Figures 1 shows, we found that companies domiciled in Continental Europe and the UK demonstrated a greater willingness to engage in person with investors on their GHG reduction targets. We also found a similar link between companies setting targets and their willingness to engage in person, as Figure 2 shows. Positive themes identified. As a result of these calls, several consistent themes became apparent:
- The issue of GHG emissions has become one of the most important concerns for shareholders, with company representatives reporting a surge in investor queries on this topic over the past two years.
- Executive pay is increasingly linked to reductions in GHG emissions.
- Companies are increasingly setting targets based on the Science Based Target Initiative (SBTI).
The most encouraging trend is the increasing willingness of corporates to influence either clients or suppliers, prompting them to follow the GHG reduction paths they themselves are following. Whether it’s banks that will apply a negative credit score to clients asking for loans but show no sign of improving the sustainability of their activities, utility or chemical companies making it mandatory for suppliers to disclose their GHG data, or manufacturing companies insisting that major suppliers should set their own SBTI targets, the growing willingness of major corporates to engage to influence the wider economy is an encouraging sign.
Concerns identified:
- The proportion of executive pay that was earned by achieving GHG reduction targets was limited.
- Targets varied in quality, with some only impacting a marginal proportion of a company’s overall emissions footprint.
- There was limited action on scope 3 emissions, which may often form the bulk of a company’s emissions.
- There were weaknesses in the way companies measured scope 3 emissions.
This thematic campaign, alongside activities of other investors, is having an impact. Time and again, the companies we talked to mentioned rising investor interest in GHG emission reduction targets in particular and other ESG topics in general. The rapid increase in companies making net zero commitments suggests that such shareholder interest and pressure is making a difference and companies, along with investors, understand the value of environmental protection. As a result of our findings, we will be contacting many of the same companies in 2022 in our thematic engagement. We plan to look at how corporate incentive packages can best be structured to meet the net zero goals that companies have set themselves.