By providing capital to companies, investors have influence on executive boards. When used wisely, shareholder voting rights and debt negotiations can persuade companies to act outside of their comfort zone.
In my last post, I explained how investors could choose to either exclude or engage with corporates which have less than perfect sustainability characteristics. And I discussed how much more effective it was to have skin in the game by working with rather than walking away from companies.
But while investors can influence executive boards, this is not a straightforward exercise. It requires careful implementation and considerable resource.
Asset owner and managers cannot campaign on every issue – efforts needed to be targeted at changes which will have the biggest impact. When it comes to reducing greenhouse gas emissions, however, the Pareto principle makes this an easier exercise.
According to the investor group Climate Action 100+, 166 companies are responsible for two-thirds of the world’s climate emissions. As many of those companies are public and have large market capitalisations, investors can play an important role.
Climate Action 100+ has managed to persuade four out of 10 companies to adopt net zero targets. But even when investors work together, it takes a lot of effort to achieve this level of change.
Once the key issues have identified, an asset manager needs to start planning its implementation program. This involves monitoring the decisions made by the executive board and deciding on the best way to persuade the company to change behaviour.
Dialogues need to be monitored to ensure conversations don’t become endless with no impact. And asset managers need effective sanctions – such as, voting against corporate remuneration or even divesting the stock – if change doesn’t happen.
Complex and detailed
Carrying out this type of campaigning requires more than a highly motivated sustainable investment team – managers also need analysts who understand the specifics of each company involved.
Each firm will face its own specific issues related to its individual business model as well as having different business cultures. Regional differences are important – actions which are effective in Europe could have a negative impact in Asia, for example.
That means a one-size-fits-all approach cannot be taken. Campaigns have to be tailor made for specific companies.
Providing both a sustainable investment team which can organise and implement the engagement program as well as having a group of analysts with company specific knowledge is a highly resource intensive requiring a large number of expert staff.
Until recently, most asset managers could not see the advantages of investing in these resources – it was a cost with no obvious benefit. Demand from asset owners has changed this and many are building teams.
But the pressure on asset managers will only become intense over time as the focus shifts from getting companies to set net zero targets to achieving those goals because this is an even more complex endeavour. A future post will examine what’s required for asset managers to make eliminating green house gases a reality.