Podcast: Why active ownership matters in a warming world
Carol Storey, Climate Engagement Lead, and Jonathan Fletcher, Emerging Market Fund Manager and Head of EM Sustainability Research, explain why investors care about climate transition plans – and how they influence companies over them.
Companies claim they’ll reach net zero but what does that mean in practice? How do we know they’re doing enough to meet their goals? And how should investors approach businesses that have no net zero plan at all?
Carol Storey, our climate engagement lead, and Jonathan Fletcher, an Emerging Markets fund manager, discuss how investors tackle the issue with holdings.
This is a transcript from The Investor Download podcast. You can subscribe via Podbean or use
Vicki Owen: “There’s no shortage of news reports and warnings about the impacts of climate change. Many news sites have sections dedicated to this topic alone and companies do too. The flow of information quickly gets overwhelming.
“With so much climate noise, how can so much still be unclear? Today we’re going to bring this topic back to basics before touching on some unintended consequences and more nuanced debates that are coming up for our specialists. With me today is Carol Storey…”
Carol Storey: “I’m Carol Storey, I’m the climate engagement lead and I work with investors and other sustainability experts around the firm to help companies transition to net zero.”
VO: “… and Jonathan Fletcher…”
Jonathan Fletcher: “Hi, I’m Jonathan Fletcher and I’m a portfolio manager on the Emerging Markets team.”
VO: “What do we mean when we talk about net zero? Is there such a thing as an acceptable level of emissions? Can sectors like mining even deliver on net zero at all? Lots to discuss, but in the first part of the show we’re going to talk net zero: why it’s important and the plans companies are making to get there.”
02:02 Part 1 – Why net zero plans are important and what companies are doing to get there
VO: “I thought we’d start with quite a basic question. What is a net zero plan, Carol? I’m sure you’ve seen quite a lot of these so you’re the perfect person to explain to us what these are and what you might be looking for in one.”
CS: “A net zero or transition plan is a plan that outlines how a company is intending to reduce its emissions and meet the climate targets that it’s set. It’s really a blueprint for how they intend to meet the challenges faced by their business because of climate change. They’ve only really been around for two or so years and we’re actually seeing more and more of these plans as companies make net zero commitments.
“When we look at transition plans we’re actually trying to get a grasp on the who, the what, the where, the when, the how and the why. And we’re using this information to try and identify companies that are well-placed to outperform in a net zero world and those that may struggle.
“There are a number of really detailed guides out there in the public domain including one that is out for consultation by the Transition Plan Taskforce, which was formed by the UK government last year.
“But to boil it down, a credible transition plan will help us understand the company’s ambition.
“And what I mean by that is the speed and the scale of emission reduction targets and other climate goals. It will set out the governance and decision-making processes in place to support those climate goals. It will also, and crucially, outline steps being taken to meet climate goals and why this course of action is being taken.
“It should also cover the expected impacts of the company’s climate strategy, and I mean the impacts on the planet, on people and also on its financials, and of course an update on emission reduction so far.”
VO: “Why should investors care about climate transition plans?”
CS: “Well, put simply, how company responds to the challenges of climate change could actually be key to its bottom line, and that’s really why it matters to us. Traditional business models are being disrupted by regulation, by pressure from customers and clients and by new lower-carbon technologies.
“So as well as reducing emissions, a smart climate strategy could mean more resilient businesses, new areas of growth, hopefully bigger profits. And actually a poor plan, one that is not well thought out, could bring future problems and poorer returns. And climate change itself is really not a force to be reckoned with. If it’s not curbed, everything becomes more risky, including investment activities.”
VO: “Great. That’s really helpful to understand, because it’s not just about trying to save the planet, it’s very much a core investment topic for you.”
VO: “We’re three years into the UN’s “Decade of Action” and eight years on from the Paris Agreement being adopted. Obviously questions are being asked about whether companies are acting fast enough on climate change. How could companies move faster? Could they move faster?”
CS: “Well, it’s actually really mixed. If I look at our own data on company targets, just under a third of the companies we hold have a 2 degree or below emission reduction target.
“Now that might be a short-term target, a medium-term target or a long-term target, and it might not cover all scopes that are necessary. But actually there are around 60% that have still set nothing at all. And that’s quite concerning.
“So, to your question, could companies be moving faster, well some companies could be moving faster. And I think this really starts with strong climate leadership at the top of any business plus a really good understanding of climate change or how the transition itself towards net zero could impact their company.”
VO: “What sort of risks might companies face? Obviously, if they don't act fast enough, what could the consequences be? What message are you trying to get across to companies there in your conversations, or what are they asking you?”
CS: “Well, in some cases they may not be competitive at all. So if their competitors have low emissions and their clients are demanding low emission products, they are not well-placed in that market anymore. In some cases, it could be a step change because of regulation. So actually they are not able to compete and keep up with the rules of business within the economies in which they operate.”
VO: “How have you engaged with management teams in the past year?”
CS: “Okay in 2022 we kicked off the largest engagement program we have undertaken as a firm. We engaged over 700 companies on climate issues. And actually, we expect to grow this and continue that dialogue into 2023 and beyond. And it wasn't just the Sustainable Investment team in a corner engaging these companies. It's a firm-wide engagement program which involved over 170 of our analysts and PMs. So people actually managing money and making investment decisions.”
VO: “And would you say it's more encouraging companies? Is it more carrot? Is it kind of threat or coaching them along?”
CS: “I like to think our approach is mainly carrot. We really do want to support companies and we are very aware of some of the challenges that they face. But there is some stick. For example, last year we voted against individual directors at a number of companies because we felt they were not doing enough to address the climate-related risks faced by their businesses.”
VO: “Can you tell us a bit about how it works in practice?”
CS: “When we're engaging with companies we're actually doing three things. Firstly, we're trying to learn as much as possible about the company's climate strategy and their views on the challenges and opportunities that they face because of climate change. Actually listening to companies and what they have to say for me is the most important part of any engagement.
“Secondly, we're scrutinising the climate transition plans or their net zero plans and highlighting areas where there may be gaps or opportunities to develop their approach and adopt good practice. And finally related to that, we're communicating what we'd like the company to be working towards in the short term, whether that is more disclosure, a more ambitious target, or a more realistic assumption or assumptions behind its plans.”
VO: “Thanks, Carol. Lots to think about there. In the next part of the show we're putting this activity into the context of today's complex and changing world. We talked about climate engagement in 2023 and some current trends.”
09:20 Part 2 – Engagement in 2023 and current trends
VO: “So, part two. Let's talk about some of those pressing issues and what our experts are focused on in 2023. Jonathan, we'll talk more about this later, but what are some of the global events to keep in mind here rather than thinking simply about reduction of emissions?”
JF: “I mean, the recent pandemic and the recent war in Ukraine have had huge social costs for them. And part of that effect has been borne through in terms of inflation of basic necessities, which has disproportionately affected those on lower incomes, increased inequality.
“The transition to a net zero world remains a key priority, but these events really led to an increased appreciation that that's not the only issue. And the social impacts are an important area to consider as we make that transition to a net zero world.”
VO: “That's a really good point, actually. It's not just about reducing emissions, is it? You’re both interested very much in the social side of this picture as well.”
CS: “I think what the supply shock following the invasion of Ukraine did was highlight just how much we still rely on fossil fuels in our economies and the need to accelerate away from them where this is possible.
“And the pandemic itself was interesting because we saw a drop in emissions and also in economic activity. And this highlights that while the relationship between greenhouse gas emissions and economic growth may have loosened, high emissions are still very much a result of what we understand as a healthy economy.”
VO: “What else has changed in terms of your engagements leading into 2023?”
CS: “In 2023 I think there'll be a lot more focus on the ability and the probability of a company reaching the targets that it has set. So there's this tension between ambition, between setting ambitious targets and actually the reality of meeting them. So just because you've set a target as a company doesn't always mean that you're in a position to meet it. I think we need to really focus our scrutiny on what companies may fail.
“The other really important theme that came out of 2022 and that we need to focus on in 2023 is a theme around idiosyncrasies. So actually, some companies are finding it harder to transition, and it's not because they are not committed that they don't have ambition, but they are simply placed in different political and geographical situations.
“So if you have a high emitting assets in an area of the world that does not have easy access to renewables, it's going to be much harder to decarbonise that asset. And actually, our role as investors is to support that company, to help it do everything it can to decarbonise that asset rather than simply ask it to divest, which has no real world impacts.”
VO: “Yeah, obviously your engagements must vary wildly depending on the sector and the type of company that you're dealing with. I also wondered, how do you weigh up the impacts on different stakeholders? It's obviously not as simple as just focusing on emissions as we touched on earlier, particularly today. But what about prices? Employees, shareholders, local communities, nature? It feels like the list is endless in terms of stakeholders. How would you weigh all of that up?”
CS: “You're absolutely right that climate change is not just about emission reductions, but I think it's a false dichotomy to frame the issue as climate versus people or climate versus shareholders. Climate change is important because it impacts prices, employees, shareholders, local communities and nature.
“For me, we really should be reframing climate as a socio-environmental issue rather than just an environmental one with greater emphasis on developing a sustainable, stable, affordable and secure energy system and also on the just transition. And as for nature itself, nature and climate are essentially two different ways of looking at the same problem. Sustainable land use and forestry are key to limiting climate change.”
VO: “And the just transition is a term that we're hearing talked about more. What does that mean to you, how might you engage on that?”
CS: “Well, there are a few different ways of thinking about the just transition, but it is essentially a transition to net zero that treats people fairly. It means supporting people and communities working in polluting industries whose jobs and local economies are being disrupted by the shift to a more sustainable global economy. It means considering the human rights of people who are mining metals and minerals that are important for low-carbon technologies or whose land is being acquired to meet demand for carbon offsets.
“And it also means making sure the energy needs of the world's poorest populations are not forgotten and that energy remains affordable for people. And, of course, the just transition overlaps with these wider concepts of climate justice, which highlights that people who are being most negatively impacted by climate change actually live in countries that did very little to contribute to it.”
VO: “How might you engage on the just transition then?”
CS: “In terms of our engagements on the just transition, there were three key priorities this year. There isn't much disclosure at the moment from companies about this issue. So actually our first priority is to understand how companies are thinking about the just transition and how they're acting on it. We also need to encourage more companies to report on the just transition issues in their net zero plans.
“And finally, we want to share good practice with companies, whether that's from our own research and discussions with companies, but also from organisations that have been looking at this in a lot of detail, like the World Benchmarking Alliance and the London School of Economics.”
VO: “Is it coming up in your conversations, too, Jonathan?”
JF: “Yeah, we're certainly beginning to see it come up and particularly given many people in emerging markets are negatively affected by it. So it is an important topic as we think about inequalities on a global scale.”
VO: “Not every company is able to achieve what sustainable investors might perceive as a just transition, certainly straightaway. Carol, what areas of the market are there that you see, where the transition from dirty to cleaner production processes is more opaque?”
CS: “The metals and mining industry is one that springs to mind. If you think about a company that is involved in making aluminium, well, actually it's involved in a really high energy-intensive process. It uses an awful lot of energy, but there are opportunities to decarbonise and electrify some of those processes.
“But actually, if your asset is based in a country, maybe South Africa, maybe somewhere else, which doesn't yet have much renewable energy on its grid, or where perhaps the asset is quite remote and opportunities for electrification aren't available, you have few opportunities to decarbonise.
“However, aluminium itself is a really, really important metal. It's highly recyclable. It's essential for if we want to have a circular economy. Now, if we were simply to engage that company asking it to wind down its operations or sell its operations, a) we've probably lost something that is quite valuable in the world that has a place and b) there will be an awful lot of negative impacts on the local community and on jobs.
“The best thing we can do is really try to support that company. One thing might be for the company to actually work with partners, including the government, to include greater access to renewables on the grid.
VO: “Interesting. Thank you both for these insights from your engagements. Coming up in part three, we'll be going into more detail on the challenges of the transition to net zero, but with a particular focus on emerging markets, Jonathan's area of expertise.”
17:29 Part 3 – The challenges of the transition and emerging markets
VO: “Obviously many emerging markets are already facing the impacts of climate change, from extreme heat to droughts and water scarcity. And they're at risk of suffering disproportionately from the effects, as Carol said earlier. What are the biggest climate-related issues and opportunities you're seeing as an emerging markets investor, Jonathan?”
JF: “Yes, undoubtedly, there's this huge challenges faced in emerging markets. For example, the top 10 cities most vulnerable to climate change, 9 out of 10 of those are in emerging markets. But there's also opportunities. We see a number of leading companies that are emerging market companies. For example, if we think about solutions to address climate change, whether that's solar panels and a shift to renewable energy or a shift to electric vehicles, actually, many of the leading companies globally are within emerging markets.
“And also, we see consumers changing quickly. Already in China last year, we saw five times the number of electric vehicle sales compared to the US. So that shift is quickly occurring in many emerging markets.
“And the other major opportunity we have as investors is through the engagement we're having with companies. Companies in emerging markets are often at a relatively early stage in having net zero plans in place or even in terms of measuring the emissions they have.
“And the opportunity is there for us to have an impact as investors, as we encourage them to put those plans in place, to think about those targets for Scope 1, 2 and 3 emissions, and to have that transition plan in place.”
VO: “Interesting. So are they quite receptive generally to your conversations and sort of probing for information?”
JF: “Yeah, so it's really interesting, we certainly have a number of companies responding positively and putting net zero plans in place as we've engaged them over the last year. And we've even had some companies come to us to ask us what best practice looks like in the dairy industry, for example. And we were able to share best practice from other companies that they've then implemented and put in place for their net zero plan.”
VO: “And how does it work in practice? What would prompt an engagement and how do you kind of monitor developments?”
JF: “Yeah, so over the last year, we've had a real program across Schroders looking at, you know, a number of companies within emerging markets that we own with those kind of four key asks of the companies, having a net zero target in place long, medium and short term targets for their emissions, that detailed transition plan and to be publishing how they're doing and performing on that and that progress annually.
“So through our conversations with companies, through formal requests to them, we've been seeing that engagement happening over the last year.”
VO: “You mentioned dairy earlier. Are there any other examples of sectors where you've been engaging in particular on climate change or what types of companies?”
JF: “Yeah, we've been looking across all sorts of different sectors. I think I would just point to one example where we've been engaging with a company in the e-commerce industry. And actually, you know, when we first spoke to them, they didn't have a net zero target in place. But we have followed up with them six months later and they actually mentioned that it had been a game-changer for them in terms of putting a net zero plan in place from the conversations they'd had with us and also with other investors to make that transition to net zero and have those targets in place.”
VO: “How would you escalate engagements and at what point would you?”
JF: “Yeah, I think if we see limited progress over time on a kind of three to five year view, we would look to escalate in terms of, you know, formally voting against the company. But for the moment, it's really that focus on continually checking in with the companies on every six or 12 months to see the progress they're making and see those plans being put in place, but also progress in terms of the emissions coming down over time.”
CS: “So there are several ways we can escalate or accelerate engagements that perhaps aren't being effective as we would like them to be. One is actually to increase the intensity of our engagement activity. So that might mean more meetings or meetings with more senior people at the organisation.
“Another way which we use quite effectively for a few companies is to collaborate with other investors. Actually sometimes we hold quite a lot of a company, but when we don't it can be very useful to get other asset managers or asset owners in the same room or on the same call and speak to the company about our concerns. We, of course, vote against directors where necessary. We support shareholder resolutions. We can choose not to support a company's Say on Climate plan. And, of course, investors themselves take all of this information in terms of how they are valuing companies, and whether they choose to invest or not or increase their exposure or not to those companies.”
VO: “You mentioned Say on Climate votes, what are those and are you involved in many of those?”
CS: “A Say on Climate vote is simply a vote on a company's net zero plan or transition plan or climate targets that has been put forward by management themselves. You may have heard of shareholder resolutions. These come from shareholders. But Say on Climate votes actually come from management themselves.”
VO: “And are you involved in voting at all, Jonathan? Would you be involved in things like Say on Climate votes?”
JF: “Yeah, so within emerging markets, certainly we've had much more limited number of Say on Climate votes. We're absolutely involved in voting in various different areas. But given how early stage many of the companies are, we've not yet reached that point. But we do expect to do so.
VO: “What's the biggest challenge for you there? Any tricky questions niggling at you areas where there's more research needed for you to make an informed decision?”
JF: “Yeah, I think some of the biggest challenges are where it's very difficult for companies through where they're operating. So I think about a South African retailer that relies very much on the grid and power generation in South Africa, that is very much based on coal-based power and the difficulty they have in being able to transition to net zero. They have huge ambition there, but there is real challenge in terms of how they might do that.
VO: “What do you think is the solution is in those situations where there's not a clear consensus on the best, what the best approach is, what you do there?”
JF: “I think it's just continuing those conversations with companies escalating over time and just continuing that pressure and conversations we have with the companies.”
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