Investor engagement

More influential than regulation in 2021

Authors: Valeria Piani, Sustainable and Impact Investing, UBS Asset Management
Gillian Dexter, Sustainable and Impact Investing, UBS Asset Management
Bruno Bertocci, Sustainable Equities, UBS Asset Management
Huw van Steenis, Chair, Sustainable Finance Committee, UBS Group

Many companies have made significant progress with voluntary reporting and setting energy transition targets, but we still see stragglers and inconsistencies. Comparing one company’s ambitions with those of another remains a challenge. Our own conversations with asset owners confirm that while better disclosure on factors such as climate footprint and diversity remain a priority, they want to go further and see actual strategy change, including quantifiable net zero targets and compensation tied to outcomes.

Sending a message

Changemakers

Late in 2020, the eight leading Canadian pension funds – with a total of USD 1.6 trillion in assets under management – called for the adoption of Task Force on Climate related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) disclosure standards. These Canadian funds, like many state plans, have a legal mandate for fiduciary responsibility. Their argument is that if they don’t have the right data to help better manage portfolios, they’re not honoring that responsibility. Meanwhile, CalSTRS, which controls assets worth USD 254 billion, has said it will accelerate its green investment strategy, pointing to a lag in US regulations and climate disclosure requirements under the previous US administration.

Actions such as these are underpinning an accelerated engagement response from investment managers. This isn’t pressure from an activist minority: it’s long term shareholders acting in collaboration to tackle current sustainability challenges. And one way of doing this is presenting corporations with a very clear playbook of expectations upon which the allocation of capital will depend.

We see this through the work of ClimateAction 100+, a coalition of 545 investors representing USD 52 trillion of assets under management. It combines effective, collaborative engagement with a push for better disclosure. The recent launch of its net zero benchmark aims to provide greater levels of comparability amongst focus companies, as do its efforts to provide future standards for net zero ambitions for the oil and gas, and mining sectors.

Environmental and social shareholder resolutions winning majority and 30% support globally

At the corporate level, this translates into nearly half (43%) of CA100+ focus companies having an ambition for net zero by 2050, more than half (51%) defining a short term (i.e. by 2025) emissions reduction target, and just under half (38%) having a medium term target (2026 to 2035), showing that companies are taking action.7 However, most of these targets do not explicitly cover the companies’ most material scope 3 emissions and 194 of the new oil and gas projects sanctioned in 2020 are considered misaligned with a below -2°C climate scenario.

In 2021, we expect CA100+ signatories to support further escalation strategies for companies not showing enough progress including, shareholder resolutions, public letters, AGM statements and votes against management. Beyond engagement, we see a growing willingness by investors to exercise their shareholder rights and use proxy voting to drive their message home. In 2020, 35% of shareholder proposals related to environmental and social issues (E&S) received more than the critical level of 30% of supporting votes, up from 29% in 2019 and 23% in 2018. We expect even greater support in 2021, which companies will need to take into consideration.

In 2020, UBS Asset Management voted on 667 environmental, social and governance (ESG) related share holder resolutions, supporting 72% of proposals focused on E&S issues.

Where next?

Following the announcement of net zero targets by Japan, Korea and China, we’ve seen a distinct shift in conversations, both with Asian asset owners and companies which are interested in the implications of greater disclosures and targets. The outcome of the US election looks also to be a catalyst.

The biggest risk we see is that regulators are sometimes too slow to engage and their reluctance to act slows the extra disclosures which the market demands. Alternatively, they risk being overly precise and setting strict codes and standards in legislation before those become useful.

In the meantime, we expect some leading investors to lean in: they will be critical in determining whether data is sufficiently robust to inform their investment decisions. That will set the pace of progress, not just in sustainability reporting, but in achieving real world sustainability outcomes.