Can shareholders influence companies post-Covid?
Covid-19 has exacerbated inequalities both within and between countries. As shareholders, we have a responsibility to press for responsible long-term behaviour that is aligned with societal interests. We have a voice, backed up by voting powers, that gives us a say in who leads these companies. Having signed the ICCR Covid investor statement, we are engaging investee companies in five core areas:
- Ensuring fair treatment of staff – While companies need to ensure their financial strength, they should do so responsibly and fairly.
- Companies need to pay their fair share of tax – Taxation is vital to ensure governments can invest in critical infrastructure and public services.
- Executive pay reductions – Shareholders need to make it clear to boards that the pain must be shared.
- Dividends need to be sustainable – Dividends, like bonuses, are only appropriate where they are underpinned by a sustainable business.
- Building a more equitable society – By investing in their people, being responsible taxpayers, avoiding egregious executive pay-outs and playing fair in the marketplace, executives will build more resilient businesses. Only then can shareholders know their capital is being used to deliver a sustainable business
What has changed since the Paris Climate Accord?
Global emissions have risen four out of the last five years and we still need deep decarbonisation to align with the Paris Agreement. However, the last 12 months have given us cause for cautious optimism as global commitments to net zero have accelerated. President Biden’s win in the US has placed climate mitigation at the centre of its administration’s policy; the EU has ratcheted up its 2030 emission reduction targets; and China has announced a net-zero 2060 target, which was followed by Japan and South Korea announcing 2050 targets.
The tone is changing. While it was previously seen as detrimental to shareholders to embark on more radical emissions reduction strategies, we have seen a real appreciation around the economic rationale for these deep decarbonisation pathways and how important it is to all stakeholders to make the transition. The rate of adoption of science-based climate commitments among corporates doubled in 2020 versus 2015-19.
We take a holistic view as to the threats and opportunities of climate change; it is not just about divesting. Stakeholders can play a powerful role in changing the capital allocation frameworks of companies through the process of engagement. We have seen progress at BP, Shell and Repsol, which have started to shift capital allocation away from fossil fuel extraction – a move catalysed by the investor community.
How does the net-zero target impact investing?
In a decarbonising world, a net-zero business model is not a nice-to-have – it’s essential for remaining viable. Carbon taxes, investor scrutiny, regulation and more conscious consumption are just a few examples of the increasing pressures businesses face in a net-zero world.
To achieve net-zero outcomes, in excess of $2.5tn still has to be spent annually and it is our view that capital markets in some sectors are not adequately pricing the scale and scope of some of these changes. This presents a huge opportunity.
We have a thematic approach to investing that helps us to identify opportunity sets that should benefit from long-term structural factors. Climate change is one of our five core themes and was a top performing theme within portfolios last year. We split this into two elements. The first is mitigation, which considers how we decarbonise, and presents investment opportunities in low-carbon transport and power, and resource efficiency. The second element is adaptation. The pathway to net-zero is multifaceted and straddles a whole host of industries. One needs to consider the decarbonisation of agriculture, industrial processes, buildings and transport and how urban environments will have to adapt to climate change. In these relatively ignored vectors of decarbonisation, there are attractive investment opportunities.
What are the main areas of focus for 2021?
Our approach to engagement seeks to be supportive of positive action but challenging to inaction. Over the course of 2021, we intend to prioritise:
- Climate change – We will continue to press investee companies to make a public commitment to Paris alignment and set out a clear and compelling strategy with medium-term milestones.
- Accounting and audit to underpin long-term stewardship – We expect directors and auditors to explicitly review and adjust accounting assumptions to reflect the transition to a 2050 net-zero pathway.
- Responsible actions with respect to the pandemic – We will continue to press companies to take tangible steps to protect customers and staff, and ensure fair treatment within their supply chains. Where they do not we will vote against directors and/or remuneration.
- Diversity throughout the workforce – Diverse perspectives help to avoid group think and bias, which will in turn foster a challenging company culture that helps drive long-term value.
- Responsible technology – 2020 saw Big Tech under fire over perceived anti-competitive behaviour, tax, content management and privacy. Investors have been relatively silent on these trends; this needs to change.
What we do
Sarasin & Partners LLP is a London-based asset manager that manages £18bn* on behalf of charities, institutions, intermediaries, pension funds and private clients, from the UK and around the world.
Our goal is to grow and protect our clients’ capital in a way that secures tomorrow. We take a global, long-term, thematic approach to investing – with responsible investment at its core. We identify powerful trends that will shape the investment landscape for years to come, and embed stewardship into our investment process.
- Sarasin manages £7.8bn for 450 charities and not-for-profit clients
- Charities represent nearly 50% of total business
- The Climate Active Endowments Strategy has been adopted by c£900m of charity assets, over £400m reside in the Sarasin Climate Active Endowment CAIF
*All figures as at 31 March 2021
Tania McLuckie is specialist charity manager at Sarasin & Partners
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