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Tackling climate change through outcomes-focused stewardship

With the publication by EOS at Federated Hermes of the 2021 Annual Review of engagement and voting highlights, Dr Hans-Christoph Hirt, head of EOS, reflects on the climate crisis and the challenges it will pose for investors in 2022 and beyond.

Fast reading

  • Investors will need to develop a sophisticated, holistic understanding of the ESG challenges at companies if climate change is to be tackled successfully.
  • The pace of the low carbon transition – and ultimately its success or failure – will be driven by companies, investors, policymakers and civil society working together.
  • Investor stewardship must be outcomes-focused, and investors must be ready to escalate engagements with companies when necessary to spur change.

The climate crisis may have been overshadowed by the pandemic in 2020, but in 2021 it dominated the news agenda once again.

The evidence that global heating poses a threat to life on earth is incontrovertible. Yet at COP26 we saw how ambitious plans to decarbonise economies and accelerate the shift to renewables could be jeopardised by opposition from those heavily dependent on fossil fuels.

One of the challenges for investors in 2022 and beyond will be to work with companies and policymakers to ensure a just transition for employees and communities at the sharp end of structural change, to ensure that efforts to keep global heating within 1.5°C are not derailed. Moreover, developed nations must deliver on their promise to mobilise $100bn a year in climate finance for developing countries. Even when this target is met, the transition is likely to proceed at different speeds in different regions.

COP26 demonstrated how climate change, human rights and social inequality are intertwined, just as deforestation, a warming planet and biodiversity loss are linked. Accordingly, investors will need to develop a sophisticated, holistic understanding of the ESG challenges at companies if climate change is to be tackled successfully. We thank our clients for working with us to identify, understand and address these interconnected and complex challenges. With their support we are committed to helping them be active, successful and responsible investors.

Stewardship outcomes

We believe that the pace of the low carbon transition – and ultimately its success or failure – will be driven by companies, investors, policymakers and civil society working together, encouraging each other to go further, faster. To this end, investor stewardship must be outcomes-focused, and investors must be ready to escalate engagements with companies when necessary to spur change. This has long been a subject of discussion with our clients and has informed the way we work, organise and report on their behalf.

In our engagements we set objectives for companies related to the material ESG concerns that we identify. We define engagement strategies to achieve them within a certain timeframe, and systematically track their progress through our proprietary milestone system. We apply this approach to the companies we engage with on climate change. When they implement a strategy or measures to address the concerns we have raised, we document the outcomes internally on our systems as well as through public case studies, articles and other reporting.

We believe that every investor should be able to demonstrate the impact and outcomes of active ownership through such systems, processes and reporting, as required by increasingly demanding regulations and stewardship codes. Our experience suggests that a systematic approach, combined with tried and tested methods of escalation such as collaboration or shareholder meeting interventions, is needed to accelerate change at companies failing to prepare for the low-carbon transition.

In 2022, companies’ climate transition votes, which are becoming more common in certain markets, must be made to count. We will scrutinise companies’ strategies closely and recommend votes against plans that fail to come up to scratch. Where necessary, we will recommend voting against the chair and other relevant directors to escalate concerns at climate change laggards. In this way, shareholders can connect environmental and governance issues.

Integrating stewardship insights

Driving change through engagement is one side of the coin – effective integration of stewardship insights is the other. It is encouraging that the UK’s revised Stewardship Code requires investors to systematically integrate stewardship and investment, including material ESG issues and climate change, and to report on how this informs decisions to divest. This is a key shift in terms of the approach and scope of stewardship, and confirms that ultimately investment and engagement activities go hand in hand.

To balance competing interests and needs in the battle to mitigate and adapt to the climate crisis, investors will need to develop a more holistic understanding of ESG issues and how they intertwine. They must ensure they have the systems and processes in place to deliver impact-generating outcomes, and stewardship insights must be integrated effectively into investment decisions. This is a critical next step, not just in terms of a just transition on climate change, but in the development of responsible investment.

To find out more, read the EOS 2021 Annual Review.

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EOS Client Service and Business Development

Amy D’Eugenio,
Head of Client Service and Business Development, EOS