Investment strategies should prioritise engagement and stewardship as the primary mechanism to drive alignment with the goals of the Paris Agreement, as emphasised by the latest guidance from the Institutional Investors Group on Climate Change (IIGCC).
The Net Zero Voting Guidance is designed to support asset owners and managers in the development of their own net zero voting policies and practices, highlighting voting as a critical lever for investors to help support the decarbonisation of the real economy in line with their fiduciary duties.
Specifically, the guidance outlines three core principles underpinning the concept of net zero voting:
- Aligns with the investor’s own net zero objectives and targets
- Communicates net zero expectations
- Supports net zero stewardship, engagement and investment approaches
“There is no one size fits all approach to voting, and this paper embraces those differences by setting out three principles that will help investors develop bespoke voting policies and actions that effectively support and communicate their net zero objectives and targets to companies,” said Laith Cahill, IIGCC’s senior net zero stewardship specialist.
“While voting is only one tool among many in the stewardship toolkit, utilising the full range of resolutions and options available to shareholders is important for investors seeking to secure real world emissions reductions.”
According to the guidance, investors that have made individual commitments to net zero through the Net Zero Asset Managers and Paris Aligned Asset Owners initiatives are expected to develop stewardship strategies with a clear voting policy, consistent with the ambition for all assets in the portfolio to achieve net zero emissions by 2050 or sooner.
Similarly, under the Net Zero Investment Framework, investors are expected to publish a voting policy that aligns to the net zero objectives of the framework.
In this context, the guidance states that votes “are an invaluable instrument in the stewardship toolkit” and that “the right to vote allows investors to protect the interests of their clients and beneficiaries, and the value of their investments”.
Key principles
Under the ‘Align’ principle, the guidance provides support for asset managers in encouraging companies to move along the alignment maturity scale in line with the investor’s portfolio coverage target.
Investors can start with a baseline voting policy, as recommended by the Net Zero Stewardship toolkit, to ensure all companies deliver on basic features of a climate strategy and, at the very least, meet the ‘committed to aligning’ criteria.
Beyond this baseline, a net zero voting policy should identify heightened voting actions for priority companies, increasing the percentage of assets under management in material sectors that are at least ‘aligned to a net zero pathway’. These may include companies in scope of engagement target, in high impact sectors or sectors with targets set by the Science-based Targets Initiative (SBTi).
Moving on to the ‘Communicate’ principle, the IIGCC recommends that investors publicly publish their net zero voting policy ahead of proxy season and share it with priority companies. Investors, they continue, may also wish to highlight major changes, specific focus areas or campaigns for the year ahead where they believe progress is essential.
In addition, investors are also encouraged to communicate the actions being taken as a result of these policies – both before and after the vote.
Finally, under the ‘Support’ principle, investors should state how voting policy supports the investor’s net zero stewardship, engagement and investment approaches. Where possible, this should also state a potential voting escalation staircase.
Investors should also consider how equities voting decisions can support stewardship in other classes, as well as alternative approaches to utilise votes more effectively.
