Green Dream with Redwheel’s Teahan: Understanding companies’ net-zero limitations

The UK fund manager says it is important to understand what is achievable for companies in current landscape

In this Green Dream video interview, John Teahan, lead portfolio manager of the Redwheel UK Climate Engagement Strategy, discusses the nuances of engagement including being respectful of the sectors companies are operating in and not making demands before divestment.

He explains how the team’s research looks into the “pathways” that are achievable in each company’s sector, how advisers need to look out for engagement washing and why there are no “simple answers” engagement.

Watch the full video interview above and read the transcript below.

NK: Hello and welcome to a big Green Dream video series. I am Natalie Kenway, global head ESG insights at ESG Clarity. And today I am delighted to be joined by Jon Teahan, lead portfolio manager of the Redwheel UK Climate Engagement Strategy. Thanks so much for coming in today.

As the name suggests, the fund is focused on active ownership and engagement. Can you talk us through how you would engage with, let’s say, with some of the heavy polluters in the industry? Let’s talk about the most difficult ones to start with? Where do you draw the line and divest?

JT: Well, it’s a complicated subject. If you just take a step back and think about why we launched this fund, because I think it’s useful to think about that context before we think about what we do in terms of engaging with individual companies.

It really is a development from the work we’ve been doing, but also a reflection or acknowledgment that the traditional mandate doesn’t have the flexibility that we want to reflect that are now client preferences and also the changing regulatory landscape. If we think about clients, they’re much more aware. Take retail clients, they’re much more aware of climate warming, and they want to look at what they’re doing in their day-to-day lives and in their investment portfolios and see what impact they’re having. We have to reflect those changing preferences. It’s the same with institutional investors; if you think about GFANZ [Glasgow Financial Alliance for Net Zero], and the commitments underneath that, whether it’s the Net Zero Asset Managers’ and/or the Net Zero Asset Owners’ commitments that is reflected in institutions, local authorities, etc, looking to have an aim within their investments to align with the Paris Agreement to reduce emissions.

And therefore, as value managers, as managers who have a lot of exposure to carbon-intensive sectors over time, this is an acknowledgment that we have to respond to that demand, to that changing landscape. And for us, it’s about trying to change the companies we’re investing in, and the route to do that is through engagement.

NK: Can you explain a bit more about what you’re trying to achieve with the fund?

JT: Sure, so what we’ve added to the fund that is a development on the traditional mandate, is a climate aim. We’re trying to, and the purpose is, to push companies towards alignment with the Paris Agreement. That means trying to get companies to reduce their emissions, to set out clearly their strategy to net zero and through that transition period.

That means we’re actually focused on real world decarbonisation. It’s very simple to decarbonise a portfolio – you can just sell carbon-intensive companies, but because we’re selling shares in the secondary market, that doesn’t have that real world impact. I think that’s why it’s much more important to go that step further and think about are my actions having that real world impact, and that’s what we’re trying to do.

NK: So how do you engage with those heavy polluters and where do you draw the line on not going any further with investment?

JT: The first thing we have to do is inform ourselves. We have to be respectful to the companies we’re invested in. They know their businesses very well, so it’s not for us just to turn up and make demands. We have to understand the context that they’re operating in. We have to understand the limitations in terms of what they can do, where they can move. There are different things we have to think about before we make demands and before we ever get to the point of saying we should divest from these companies.

If you just step back again and think about the context we’re operating in, this is a transition. It would be nice if we could flip the switch on fossil fuels overnight and suddenly stop climate warming. But the fact is, we’ve been building this carbon economy, this carbon society, for a couple of centuries, and now we want to unwind it, and it’s going to take a couple of decades, two to three decades if we’re lucky. So we have to also see that this is a transition. And therefore, looking at it in that context, we’re looking to see companies making progress over the next 10 years. 2030 is a milestone and from there to 2050, trying to get them to net zero.

So first, educating ourselves on what that pathway might look like, what the companies are now doing and how we need to move them to get further onto that pathway once that’s achievable within their sector.

NK: We’ve run some pieces recently on engagement washing and perhaps fund managers hiding behind engagement to hold some of those heavy polluters that, let’s be honest, have done really well in terms of share pricing increase recently. What would you say to that? And also, is there a point on education that needs to be emphasised within the industry because we may have some end-clients that have a climate fund but not really expecting to therefore hold an oil and gas position within that fund?

JT: Absolutely. There are lots of really, really important points you’ve raised there.

Let’s take the last one – clients, the end-client. I think what the FCA [Financial Conduct Authority] is trying to achieve through the SDR [Sustainability Disclosure Requirement}, the regulation that would come out this summer, is to make sure that labelling is clear. As you said, we do not want clients to invest in a strategy or in a fund where they think they’re getting something very different. And that’s what labelling is about.

Within the proposed SDR that we’ve seen, we’ve got a ‘sustainable’ label with ‘improvers’. Clearly, there’s improvement to be made [with those companies in the fund] and that hopefully then leads on to through marketing documents and different communications with that clients understand that this particular strategy, under that category, is about improving the companies, not investing in already ‘very green’ or ‘very sustainable’ companies.

You then talked about engagement washing. I think it’s up to the advisors that are choosing the funds to understand whether the fund house, the portfolio managers that are proposing this strategy, really are doing the work that’s required to engage with companies. What I mean by that is deeply understanding the companies themselves, understanding how they’re on a path to alignment, where the hurdles are….that’s the function of deep research.

Beyond that, there’s the engagements with the companies. You can see how regularly we, as portfolio managers, engage with companies, whether we collaborate with other investors, and then there’s obviously the voting record.

But what we have to be a little bit careful of, is that if we’re looking for very-easy-to-measure metrics like voting, that could be misleading because then you’re just going to get portfolio managers voting to demonstrate their credentials. So again, it takes a bit more work.

This is a really difficult transition. I would like to give you simple answers, and we could have simple metrics, but we don’t have simple metrics because engagement is much more nuanced; it takes patience, it’s about detail. I would say in terms of voting yes, voting is part of it, but just a part of it, it can’t be the sole metric.

NK: It sounds like there’s lots of different factors at play there in terms of the engagement and how you’re carrying out. I also wanted to just ask you about disclosure as that must be an important part of your work. The ISSB [International Sustainability Standards Board] has announced that it will be rolling out its standards next year. We don’t yet fully know what they will be. But do you think any sort of improvement in sustainability disclosure by corporates will help you in your research?

JT: I think for all of us, in sustainability, if they just reduce the number of acronyms, that would be a great start!

[ISSB] is a combination of five different standard setters, so that is great to begin with.

It also means that not only for us as investors that we have got a standard set of disclosures across companies and across geographies. But imagine what it’s like for the companies, for the corporates that have to try and disclose under these different standards. That’s really challenging. It’s one thing for a large mega-cap company, a global company, to do it, but when you look down through the cap scale, it becomes much more difficult and much more of a draw on resources for mid-cap companies, small-cap companies.

I think the combination of all these different standards into a simpler, unified standard is really useful both for corporates and for us as investors.

NK: Okay, great. I think the ISSB said there would be phased implementation for the smaller companies and those in emerging economies and so hopefully that will make things a lot easier.

So, we always end the Green Dream with this question, what is your favourite sustainable drink or snack?

JT: Well, the drink that sustains me is coffee. So I would go with a Fairtrade coffee that I get from one of the local cafes in Fulham.

NK: Great, thank you so much for coming in today.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...