By Kirsty Ruddock, Managing Lawyer, Safe Climate – Corporate and Clare Saunders, Solicitor, Safe Climate – Corporate.

In August 2022, EDO wrote on behalf of HESTA members, Rod and Sue Campbell-Ross about whether HESTA is misleading members by claiming to be Paris aligned despite continuing to invest in Woodside and Santos. EDO also wrote to UniSuper about similar issues.  

Whilst the EDO welcomes HESTA’s decision to place fossil fuel giants AGL, Origin, Santos and Woodside on a watchlist under its engagement escalation framework as a commendable first step, more action is required from HESTA, UniSuper and other super funds to update their engagement strategies to drive deeper change in the emissions-intensive companies they invest. 

The UN Principles of Responsible Investment Initiative, UN Net Zero Asset Owners Alliance, Paris-aligned Investment Initiative, Institutional Investors Group on Climate Change and the Investment Agenda are authoritative sources setting out what good engagement looks like for investors. 

Good engagement strategies by investors should include: 

  • Identifying a focus list of companies for engagement based on prioritisation criteria such as by highest emissions or by material sectors such as oil and gas 
  • Setting minimum benchmarks, including targets and timeframes, against which each company is evaluated and communicating this to investee companies. Best practice involves setting up  quarterly reviews to discuss progress.  
  • Publishing a voting policy; for example, that it will support shareholder resolutions that call on companies to disclose more information on climate change and will vote against directors where the company’s climate change strategy is inadequate.  
  • Mobilising a range of engagement strategies – from public advocacy, to asking questions at AGMs to nominating new board members, voting against remuneration – if there is a failure to meet the benchmarks set out above  
  • Publishing an escalation policy which sets out the actions that will be taken if engagement is of limited effect, including a policy on divestment.  
  • Taking part in collaborative engagement through initiatives such as Climate Action 100+  
  • Disclosing investment metrics 
  • Engaging with Investment Managers to ensure they are active owners 
  • Publishing specific policies on engagement with high emitting sectors such as oil and gas 

Examples of good engagement by EU and UK pension schemes 

There are a number of good examples of engagement strategies from overseas funds. For example, the National Employment Savings Trust (NEST) in the UK has a number of strategies. It runs an investment committee which conducts quarterly reviews on climate-related risks and detailed  policies1 setting out engagement priority themes and how NEST intends to vote on key topics. For example, NEST will vote against the report and accounts of companies in highly-carbon intensive sectors where climate change is not discussed as a principal risk, and may vote against directors where a company does not have strategies for addressing climate change risks. It states that it will “engage with companies in carbon intensive industries with the goal of having them commit to stop developing new oil and gas fields that do not fall within the International Energy Agency’s net zero by 2050 scenario.” NEST’s escalation policy2 provides that if companies have not made enough progress on climate after a period of engagement, NEST will vote against relevant directors. Following this, NEST may consider filing a shareholder proposal or excluding the company from its fund. 

The public service super fund in France= Establissement de Retraite l’additionelle de la Fonction publique (RAFP) also requires external managers to conduct an initial assessment of 22 companies in its portfolio with the highest greenhouse gas emissions using Climate Action 100+’s analysis grid and to identify priority areas which are used to create engagement plans for each investee company. 

It updates its members on shareholder engagement guidelines annually, setting out how the fund will vote in the coming year. The 2022 Guidelines state that RAFP will support “any resolution presented by a shareholder…that seeks to further the consideration of social and environmental impacts, provided that it is sufficiently detailed, justified and in line with the principles described in its SRI Charter and this document, in particular –control of risks linked to climate change and contribution to the energy transition and control of environmental impacts.”3 

The  SVKK-ASIR pension fund in Switzerland has a publicly available escalation policy4 setting out actions the fund will take if there is limited progress on engagement after a certain amount of time. This escalation policy outlines the steps to be taken in the event of a “conduct-based violation,” such as the failure to meet Paris Agreement requirements. Once a violation is identified, the fund enters into a dialogue with the company, setting up targets to address the violation and three to six-monthly dialogues to track progress. If there is no progress for twelve months or longer, an in-depth review is conducted to consider whether to issue a final letter inviting the company to respond. If the deadline passes without a valid response, the fund will recommend the company for exclusion and divestment.  

The ATP pension fund in Denmark’s escalation principles provide for use of AGM votes as a lever in the event a company fails to engage. The fund will vote against relevant documents and the re-election of key board members who contributed to the poor performance. For example, if the climate transition plan is inadequate, ATP will vote against re-election of the board members on the sustainability committee or the board members responsible for drafting the plan.  

Net Zero Plans 

Good engagement also requires super funds to have a clear understanding of what a good transition or net zero plan looks like.  The UN High Level working group provides also provides significant guidance   on what a credible net zero plans should include:5 There are other useful guides to evaluate net zero plans, such as the Investor Group on Climate Change, and the Corporate Climate Responsibility Monitor. From these guides, eight basic criteria can be used to assess whether a company’s net zero target is robust:6 

  1. Has the company published complete data on its emissions ? 
  2. Does the net zero target cover all of the company’s emissions including scope 3 emissions? 
  3. Does the company have concrete plans to reduce its emissions without using carbon offsets? 
  4. Does the company have interim targets showing their intent to act fast that cut emissions by 50% by 2030? 
  5. Are the net zero and interim targets Paris Agreement aligned? 
  6. Does the company have plans to exit oil, coal, and gas? 
  7. Does the company promote renewables in its energy procurement and ensure its activities avoid deforestation? 
  8. Does their lobbying and advocacy align with the net zero plan and provide for just transition? 

1 see: NEST, February 2022, ‘Nest’s voting and engagement standards –UK’. Available at: https://www.nestpensions.org.uk/schemeweb/dam/nestlibrary/voting-policy.pdf ; NEST, February 2022, ‘Nest’s global voting guidelines’. Available at: https://www.nestpensions.org.uk/schemeweb/dam/nestlibrary/voting-policy.pdf  

2 see NEST’s ‘UK Voting and Engagement Standards Policy’ 

3 Page 43 of the Shareholder Engagement Guidelines 2022. Available at: https://www.rafp.fr/sites/default/files/2022-02/ERAFP-Shareholder-engagement-guidelines-2022.pdf  

4 Engagement and Exclusion Policy. Available at: https://svvk-asir.ch/en/downloads-and-media 

5 UN High Level expert group. Page 13. https://www.un.org/sites/un2.un.org/files/high-level_expert_group_n7b.pdf  

6 Clean Energy Wire, relying on UN High level expert Group, Corporate Climate Responsibility Monitor https://www.cleanenergywire.org/factsheets/how-unpick-company-net-zero-target-7-steps