Climate change is increasingly recognised as one of the major threats we face to our ecosystems, our communities and our planet. It is also a material threat to medium- and long-term shareholder value.
Yet, while ‘corporate sustainability’ has never been higher profile, we remain concerned that the world is not acting fast enough to meet the challenges that we face.
Current international policies are expected to limit temperature rises to 2.7–3.1 degrees Celsius above pre-industrial levels.
This is well above the 1.5 degrees required if we are to avoid the worst environmental consequences: extreme weather, geophysical disasters, biodiversity loss, natural resource crises.
In addition to affecting our livelihoods, we are conscious that a failure to act on climate change will lead to market instability and poor outcomes for investors over the long-term.
For this reason, we believe that investors have a fiduciary duty to do three things:
1. Act: push for accelerated climate action
'You must take action. You must do the impossible. Because giving up is never an option.' - Greta Thunberg
All asset managers, particularly those with clients expecting to invest generations into the future, should feel obliged to play their part in accelerating real-world decarbonisation. Asset owners have several levers for change.
First, targeted engagement with investee companies, supported by considered voting activity. Investors play a key role in encouraging businesses to reduce their negative impacts on the environment. By engaging with electrical utilities companies, for instance, we are helping to bring about substantial changes in a high-carbon sector.
Second, work in collaboration with other investors and stakeholders to manage the existential threat posed by climate change. We have an unrivalled track record as a pioneer of positive change within our industry.
In 2012, we launched ‘Aiming for A’, at a time when collaborative engagement was unheard of. In 2017, we began merging the initiative into the Institutional Investors Group on Climate Change. Together, they formed Climate Action 100+, now backed by 545 global investors with more than $52 trillion in assets under management across 33 markets.
Third, working with the government, here and overseas, to support progressive climate legislation. We have been collaborating directly with public policy makers in the UK Canada for a number of years to build the Powering Past Coal Finance Principles.
This year, we continued to work with the UK Government in the run up to the UN Framework Convention on Climate Change’s COP 26 Conference in Glasgow.
2. Assess: take steps to protect portfolios from the financial risks caused by climate change
'Every company, investor, and bank that screens new and existing investments for climate risk is simply being pragmatic.' - Jim Yong Kim, former president of the World Bank
Every company will be impacted by climate change at a different time and to a different extent. The intrinsic value of those with unsustainable business lines are likely to be driven down by an increasingly hostile environment of legislation, regulation and changing consumer preference. These companies will face an uphill battle to achieve in the future the returns that they have achieved in the past.
For governments signed to the Paris Agreement, incoming climate legislation will accelerate progress. For companies involved in the production, refining or extraction of fossil fuels, much of the reserves – upon which the price of its publicly traded equities relies – will need to be left in the ground (‘stranded’). As the guardians of our clients’ assets, we therefore have a duty to increase the climate resilience of our portfolios.
We determine which companies will be impacted by changing climate legislation. We avoid investing in those that do the most harm to the environment. We divest from those who, despite repeated engagement, prove unwilling or unable to adapt to the low carbon economy.
On the positive side, change will bring new opportunities too. The OECD estimates that over $6.9 trillion in investment is needed to move the world towards net-zero emissions. Well-managed ‘impact’ assets can play a useful role, not only in diversifying portfolios, but also in the positive contribution that they can make in tackling climate change.
Importantly, we are working towards real-world decarbonisation. In our view, therefore, purchasing ‘impact funds’ that already exist on the secondary market is of little value. While they may be good investments from a financial point of view, it makes no difference to the planet whether we own them in our portfolios or not.
Whilst challenging, we prefer to identify assets on the primary market. It is here that capital is specifically and most efficiently directed at enabling ‘new change’. One example is our partnership with the government to launch the Clean Growth Fund. This is providing much needed venture capital to early-stage green businesses across the UK.
3. Align: with the requirement for urgent action
'The biggest ESG risk is failure to address systemic challenges. Working for better achieves much more than only investing in best.' - Dr James Corah, CCLA
As a founding member of the Net Zero Asset Managers initiative, CCLA has committed to seek to achieve net-zero emissions portfolios for all our assets under management no later than 2050.
For many trustees, avoiding holdings in the most carbon-intensive businesses is an important part of the alignment process.
The recent Butler-Sloss judgement in the High Court for England & Wales confirmed that where certain investments could potentially conflict with the charity’s objects, the trustees have discretion to decide whether to exclude these investments.
However, simply selling or avoiding carbon-intensive businesses will not reduce the amount of greenhouse gases being released into the environment.
Therefore, we have chosen to set our decarbonisation targets through a decreasing maximum carbon footprint based upon the MSCI World Index.
This approach ensures that we are not taking on significant short-term regulatory risk, while allowing us freedom to invest in companies and use our active ownership expertise to drive real-world decarbonisation.
We believe that this approach will ensure the best term outcome for our clients, the planet, and our communities.
Net-zero portfolios – what are the options?
Real world impact
Build a low carbon portfolio by selling/divesting from high carbon businesses
YES – the portfolio will have increased resilience to changing legislation and regulation
NO – carbon-intensive assets continue to exist, regardless of who owns them
Invest and engage
NO – most engagement does not directly impact a company’s share price
YES – sustained engagement can significantly alter a company’s environmental performance
Listed equity ‘solutions portfolio’, e.g. wind/solar farms
YES – performance may benefit from exposure to environmental trends.
NO – the approach only transfers ownership, resulting in no change to environmental capacity
Primary capital to environmental projects, i.e. venture capital model
YES – performance may benefit from exposure to environmental trends
YES - increases environmental capacity
Annual general meetings (AGMs) and proxy voting – incorporating net zero
Managing the risks and opportunities associated with climate change is a key focus of our proxy voting and AGM-related activity.
One recent example is our work with US electricity producer, NextEra Energy. As the latest Transition Pathway Initiative (TPI) Energy Sector Report illustrated, NextEra was scoring well on emissions reductions goals but lagged its peers on climate-related disclosures.
In December 2020, in response to low disclosure scores, we discreetly filed a shareholder resolution for NextEra’s 2021 AGM. This was particularly relevant considering initial signalling from President Biden about what will be expected of the US electrical utility sector this decade.
After consulting with the US Climate Action 100+ (CA100+) lead engager for NextEra, the local Ceres team and one of CA100+’s key philanthropic funders, we collectively agreed to ask NextEra to respond to the Carbon Disclosure Project (CDP) in 2021. We stated that if the company agreed to do so, we would withdraw the resolution.
NextEra spent the next three months assessing the CDP questionnaire, and agreed to respond to it in 2021 allowing the shareholder resolution to be withdrawn. We are proud of this positive step and thank NextEra for their constructive engagement.
On a more routine basis, climate change is a consideration in our AGM voting.
- voting against the re-election of the auditors where climate risk poses a long-term threat to the company’s viability and the audit report does not set out a plan to address this;
- voting against the annual report and accounts, and the re-election of the audit committee chair where accounting assumptions are inconsistent with the company’s climate risk reporting;
- voting against the annual report and accounts where Climate Action 100+ companies do not disclose their climate-related lobbying activity;
- voting against the re-election of the company chair at Climate Action 100+ companies where we have concerns about their approach to climate change;
- supporting votes that give investors an annual ‘Say on Climate’.
In line with our wider approach to voting, we inform and seek to engage with companies about our concerns prior to issuing a dissenting vote and disclose all our voting activity on our website.
In conclusion, working to address systemic factors – climate change is one among others – requires us to go beyond the boundaries of traditional investor engagement.
We place significant focus on working with government to increase the effectiveness of legislation and regulation. By changing the rules, we are able to improve the standards of many more companies than would have been possible through direct engagement.
Despite the ever-growing attention on ESG factors, we do not feel that the investment management industry has truly understood that the only way to manage these risks is to go beyond the make-up of our portfolios and make a lasting real-world impact.
It is beyond time to do this, and CCLA is committed to being a catalyst for this change.
It’s time to ‘get real’ about ESG.
1. Introduction from Richard Sagar, CFG
2. It's time to get real about ESG
3. Building a net zero strategy
4. Funding on a finite planet
5. Understanding energy consumption
6. Net zero and procurement part 1
Part 2: Steps to becoming verified carbon neutral
Part 3: What are scope 3 emissions? Why account for them?
7. Pensions and net zero part 1
Part 2: Risks and opportunities