Investors want to see the climate action fund groups are taking 

The IA's Sarah Woodfield looks at the increased scrutiny on shareholder votes

Three years ago, the Investment Association (IA) called for FTSE-listed companies to report in line with Taskforce for Climate-related Financial Disclosures (TCFD), in advance of regulation requiring them to do so.

At that time, it was rare for some of the UK’s largest companies to even acknowledge that climate change was a critical risk which could have a material impact on the viability of their business model, even rarer for companies to communicate to their shareholders how they were going to manage that risk.

Fast forward three years and you will be hard pressed to find a chief executive of a carbon intensive company that denies the importance of climate change, TCFD reporting has become a regulatory requirement for all actors in the investment chain and investors are starting to see ambitious plans on how companies will be making a net zero transition.

But we mustn’t be complacent. The International Panel on Climate Change has found that without strong, rapid, and sustained emission reductions in the next decade, global temperatures will exceed 2050 targets with catastrophic impacts on the planet, people, and the economy. Investors and companies will need to work closely together to ensure sufficient progress is made over the next decade. Climate stewardship is key.

Today, the IA has sent a letter to FTSE 350 chairs, setting out shareholder priorities ahead of this year’s AGM voting season on climate change, diversity, audit quality and stakeholder engagement. IA members have made clear that they expect companies to take immediate action – climate change and the transition to net zero is not an issue which can be left for future management teams or boards; investors wish to see the actions the current leadership will be taking.  

The IA’s voting research service, the Institutional Voting Information Service (IVIS), provides independent analysis on companies listed in the FTSE All-Share and FTSE Fledgling Indices to help shareholders make informed voting decisions. This year, IVIS will give an amber top to all companies that have not reported in line with TCFD. The amber top alerts shareholders to an area which will require significant judgement when they vote at the company AGM.  We will be looking for evidence of reporting on all four pillars of TCFD – strategy; governance; risk management and how they are setting metrics and targets to ensure the transition to net zero. There is a clear preference for these targets to be aligned with robust methodologies such as the Science Based Target initiative. We are also encouraging companies to publish transition plans in advance of the government making them mandatory.

IVIS will also be heightening its scrutiny on ‘climate accounting’ and asking auditors to step up to the task.  Investors rely on the quality and reliability of the audited information companies report to the market when making investment decisions and holding company management and boards to account. IVIS will monitor whether companies have provided a statement that the directors have considered the relevance of the risks of climate change and transition risks associated with achieving the goals of the Paris Agreement when preparing and signing off the company’s accounts. IVIS will also check whether auditors have highlighted climate change-related risks in their Key Audit Matters.

Climate change is one of the greatest systemic risks that we are now facing – our efforts to address climate risk are therefore among the most important actions the industry can take to act in the best interests of our clients. Shareholders will be carefully watching actions taken by the board and company auditors to manage this risk when considering how to cast their votes.

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...