Brunswick’s deep dive into the reality of investor engagement on climate delivered some interesting observations in the following five areas:
1. Increased engagement from investors on climate change.
In a new study of roughly half of the world’s 500 largest companies, research by Brunswick found that, more than ever before, these businesses are talking to investors about climate change, and investors are asking more climate-related questions.
Mentions of climate change in quarterly reports are up by a third since 2015, while mentions in annual reports are up nearly 30 percent. Mentions of low-carbon strategy on earnings calls have more than quadrupled since 2014. The issue has become a fixture of investor-investee engagement.
But there are a number of caveats. In earnings calls where climate change was mentioned, only 28 percent of the mentions came during the Q&A section, suggesting either analysts weren’t interested in the topic or, more optimistically, that questions on climate change were already being addressed through other channels, in particular private conversations with the CEO and the board. “Climate risk” was mentioned only five times in all 2018 earnings calls with nearly half of the largest US-listed companies, and only four times as of November 2019.
2. Investor alliances are proliferating—and dominating the conversation.
“Investors concerned about climate change have never been better organized,” The Economist reported in May of 2019. They were pointing to the fact that a number of muscular, new investor alliances have formed to force companies to both enhance quality of climate reporting and to set aggressive carbon reduction targets that align the business with the Paris Climate Agreement’s goal of keeping a global warming increase below 2°C.
Our investigation found a number of different types of alliances. For example, there are regional alliances: such as the Asia Investor Group on Climate Change and the Australia-New Zealand-based Investor Group on Climate Change; or the Institutional Investors Group on Climate Change, which has a largely European membership. Some are asset-owner-led alliances, such as the Transition Pathway Initiative (TPI). However, the most significant collectives on climate change are broad-based global alliances, including Ceres and the UN’s Principles for Responsible Investment (PRI)—global networks of both asset owners and asset managers, as well as businesses and NGOs. Almost 450 companies are UN PRI signatories.
Investor alliances are focused on governments as well as businesses. Some have done the seemingly unthinkable: ask for more regulation. A group called The Investor Agenda—a sort of coalition of coalitions—organized a statement urging governments worldwide to take more action. It was signed by 515 institutional investors managing $35 trillion in assets. Most are directing their attention at companies: for example, 200 institutional investors, with a combined $6.5 trillion in assets under management, recently signed a joint letter calling on US publicly traded corporations to align their climate lobbying with the Paris goals.
A number of other investor alliances are pressuring companies to act:
• Last September a group of the world’s largest pension funds announced a commitment to make their combined $2.2 trillion portfolio zero-carbon within the next 30 years as part of the UN Net Zero Asset Owners Alliance.
• The Carbon Disclosure Project (CDP), a non-profit that works with some of the world’s largest companies to disclose their environmental impact, reports that more than 7,000 companies are disclosing information at the request of 525 institutional investors with $96 trillion in assets.
• Climate Action 100+, a $35 trillion alliance, led efforts to publicly pressure cement producers, an industry responsible for 7 percent of man-made emissions, to be carbon neutral by 2050.
• Ceres, an investor network whose members have more than $26 trillion in combined assets, pressed fast-food companies in 2019 to set tougher greenhouse gas emissions targets.
3. Asset managers face pressure from asset owners.
As asset managers press companies for better disclosure and governance, asset owners are making similar demands of investors. One asset manager we spoke with said they take calls from their asset-owner clients to discuss climate change “almost every day.” In their internal monthly fund manager calls, “half of the time is spent on discussing carbon pricing,” reveals another. Another told us, “There is no conversation possible today with asset owners and pension funds without a clear policy on climate change.”
Part of the pressure is demographic: Younger generations form an increasing percentage of asset owners (and asset managers) and are now “ready to invest as sustainably as they shop,” according to Bloomberg. They are pressing investors to disclose and measure the climate impact of their own portfolios. Another is regulatory: Accounting for climate-related risks is being increasingly considered as part of a company’s fiduciary duties, Mercer reported in 2019.
Combined, these have made climate risk an issue that leaders of investment firms have to take ownership of. More than half of the investors polled by the European Corporate Governance Institute in 2019 said the issue had “C-level responsibility.” As one corporate Investor Relations expert noted, “This is all quite new to the investors as well, so investors are trying to work with the companies that they hold to understand it better themselves.”