As stewards of our clients’ money, we actively seek client feedback to ensure we can reflect their views on the sustainability issues that are important to them.
It gives us all sorts of useful information, providing insight into emerging trends and highlighting environmental or social concerns that are likely to be shared by the broader client base. We value this client input; it can help to shape our company engagement and, as this article outlines, it can inform our approach to voting.
Responding to the Asset Owner Climate Expectations
Last year, we received a letter from one of our clients. The letter asked us to:
1) Halt direct financing for fossil fuel expansion.
2) Vote in favour of pro-climate shareholder resolutions.
3) Escalate engagement with companies – specifically in the insurance and banking sectors – facilitating new fossil fuel projects by voting against their directors.
The request came as part of a co-ordinated communication to asset managers from the signatories to the Asset Owner Climate Expectations. Signatories include charitable organisations and universities. All in all, the group represents £4.5bn in assets.
The first two requests in the list above were fairly straightforward for us. Firstly, we don’t hold any bonds associated with fossil fuel expansion projects or any bonds issued by companies involved in constructing new fossil fuel infrastructure. And we would always look to vote in favour of climate-related shareholder resolutions, which covers off the second point.
But the third request presented a good opportunity to revitalise our voting policy on climate. For the past few years, we had been voting against any annual report and accounts that did not make reference to climate risk, as we deemed that to be an oversight by the auditor. However, new regulatory requirements within the UK and Europe mean that incorporating climate commentary has become standard practice within corporate reporting. So, we were ready to look for other ways to incorporate climate considerations into our approach to voting.
Amending our voting guidelines
Although we have limited exposure to the banking and insurance sector, we know these industries play a key role in facilitating the continued use of fossil fuels. Working with our internal stewardship committee and with oversight from our external advisory committee, we developed a new approach to voting for these sectors and have been testing it out in recent months.
First, we approached the relevant companies ahead of their respective AGMs and asked about their support (ie finance or insurance) for new fossil fuel projects. We gave them advance notice that if they had provided backing for new fossil fuel projects, we would take the following approach in our AGM voting:
• Year 1: Vote against the chairperson of the audit or ESG committee
• Year 2: If no improvement, escalate and vote against all audit/ESG committee members
• Year 3: Escalate further and vote against the report & accounts
Trialling our revised approach
We received reasonable responses from the three relevant companies in our equity funds. As the firms are held in our sustainable funds, they all have progressive policies on lending to, or providing insurance for, fossil fuel extraction. In addition, they have a good track record in supporting the development of the green economy.
That said, none of the three companies were able to say definitively that they hadn’t helped to facilitate new projects in the past year. This was backed up by research from Banking on Climate Chaos, particularly its company-by-company analysis of fossil fuel funding within the banking sector.
The analysis and the engagement output led us to voting against a director at one bank and to abstain on the annual report and accounts at another. We had to deviate from our proposed approach somewhat as the banks are listed outside the UK, in European markets where it is not standard practice to re-elect each director annually. It’s this kind of learning from the trial that we can use to tweak our approach next year.
Final thoughts
The exercise has been a useful one and demonstrates how valuable asset owner input can be. It’s certainly fair to say the original client request spurred us onto take a more progressive approach to voting, and this is to be welcomed. Of course, all such requests need to be considered on a case-by-case basis and issues that pose material risk will always be the top priority for engagement.
But as the range of sustainability topics becomes ever broader, sustainable investment firms need ways to prioritise their engagement activity. When clients contact us with thoughtful suggestions we know will resonate with our wider client base, we’re likely to take action.
