What is your approach to responsible investment?

Our focus for 2020 is policy outreach centred on climate change in the lead-up to COP26. Climate change poses material risks to our investments, and the scientific evidence shows that the materiality of this risk is growing. We are calling for five market actors to make pledges to align their activities with the Paris climate agreement.

1. Accounting standard setter (IASB): to ensure accounting standards make clear where capital is at risk as we transition to net zero.
2. Auditors: to call out where accounting risks exist in alignment with the Paris accord.
3. Proxy voting advisory firms (ISS and Glass Lewis): to ensure they are not supporting directors that are pursuing strategies that run contrary to the Paris goals.
4. Large asset managers: to vote only for directors that have confirmed Paris alignment.
5. Credit rating agencies (S&P, Fitch and Moody): to incorporate climate risks in credit ratings.

We are promoting this as a package of measures at the forthcoming climate negotiations in Glasgow in November (COP26). The aim is not to draw attention away from the imperative for governments to act, eg through a global carbon tax, but to offer some practical actions that we can move forward with and, in so doing, help increase the momentum for political action.

How can charities align with the Paris Climate Accord?

Charities should mandate their investment managers to identify companies that are aligning themselves with the Paris goals. In our Climate Pledge, published in January 2019, we made a public commitment to align our business with the Paris goals. Through our stewardship, we will ensure that the companies our clients invest in are Paris-aligned by:

• Proactive engagement – We initiate and support dialogue with boards for companies to publish Paris-aligned strategies, including measurable mid-term targets.
• Voting – We oppose director appointments where individuals are blocking the implementation of a Paris-aligned strategy and vote against auditors where we believe the annual report and accounts fail to report material climate risks.
• Divestment – We sell a company’s shares where we believe our clients’ capital is at risk and leadership is failing to respond appropriately.

We also commit to promote policy reforms through:

• Policy outreach – We engage with regulators and policy makers wherever we believe we can accelerate or improve action to combat climate change.
• Public statements – We speak out publicly, and build/ support coalitions of like-minded investors and thought leaders to drive change where we believe this will be effective.

How do you see stewardship evolving?

Effective stewardship is resource intensive and by no means begins and ends with climate issues. As stewardship principles are adopted and embedded within investment analysis, we would hope to see an increase in thoughtful voting and engagement across all types of shareholders. The costs will have to be borne by asset owners, even where their savings are managed passively.

Asset managers have an incentive to limit authentic stewardship activities in favour of cheaper, but token, oversight. This may occur even where the benefits of stewardship to the ultimate owners far outweigh the costs. This poses a critical challenge for the investment industry: how to cement responsible long-term investing and stewardship as an enduring reality rather than a transitory phase.

One of the three aims of the 2015 Paris Agreement was a commitment to make financial flows consistent with achieving a pathway towards low greenhouse emissions and climate-resilient development. This is as crucial as the other two aims (to limit the global average temperature rise and to increase the ability to adapt to climate change) but not as well understood. We are likely to see an increase in initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) as well as a response from policymakers and regulators calling for more action related to financial flows.

How can charities identify effective stewardship?

With attention on Environmental, Social and Governance (ESG) increasing, there has been a proliferation of funds and strategies that claim to focus on these issues. But there is a danger of “greenwashing”. The rise of this “greenwashing” highlights the need for standardisation and verification, allowing investors to understand clearly the ESG credentials of their investment. Here are some things to look out for when assessing a fund manager:

• Is the fund manager a signatory to the UN PRI?
• Do they integrate ESG into fundamental analysis? How do they evidence this? Are ESG factors incorporated into stock notes and valuation models?
• Can they provide examples of where ESG factors led to buy or sell decisions?
• Have they published a UK Stewardship Code Statement, with details on how it is being implemented?
• Can the fund manager evidence that they use voting actively across all their assets to encourage improvement in corporate behaviour?
• How often do they vote against management?
• Does the fund manager publish all their votes regularly (at least semi-annually)?
• Does the fund manager conduct active discussions with company management teams, and report on the impacts of these engagements?  

Alexander True and Tania McLuckie are Specialist charity managers – Sarasin & Partners

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