January 27, 2022
Last year’s COP26 summit in Glasgow brought with it a range of sustainability targets announced by global corporations, hoping to be seen as responsible actors in the debate about climate change. However, these pledges met with the inevitable chorus of sceptics, used to seeing bold pledges not matched by actions and accusing the firms of ‘greenwashing’.
Whether or not these corporate green ambitions were genuine, however, companies may not have a choice whether to act, as they come under increasing pressure from their own investors to make ethics and sustainability a key pillar of their business operations. Ethical funds focused on “environmental, social, and governance” (ESG) issues are booming, and activist investors are demanding concrete changes, either in policy, or in the boardroom.
This week, Aviva Investors, a British investment firm which manages £262bn of assets, including savings and pensions, sent its annual letter to 1,500 companies in over 30 countries, stating that its vote at AGMs will only be assured if board members deliver on its “stewardship priorities”, including human rights, biodiversity, climate change, and sustainable executive pay. The letter warned that directors would be held personally accountable “where the pace of change does not reflect the urgency required”, and Aviva, a major shareholder in many large companies, would vote to remove them.
Noting the pledges firms had made at COP26, Aviva’s CEO, Mark Versey, wrote that “companies must now turn their pledges into concrete and measurable plans of delivery. Our letter sets out clear expectations as to how they should do this, and what those plans must address across climate impact, biodiversity and human rights.” These include a commitment to net-zero emissions by 2050, backed by detailed plans, and to various mechanisms of external validation, including the Science-based Targets initiative (SBTi) and the International Sustainability Standards Board, launched at COP26.
Explaining the multiple priorities outlined in the letter, Versey stressed the importance of a holistic approach reflecting the need for action in many areas. “Companies need to adopt an integrated approach for maximum benefit,” he said. “Simply cutting emissions but allowing the destruction of the rain forest to continue will do little to reverse global warming. We want to encourage companies to consider the whole picture of sustainability because this is how they will create the greatest return for shareholders, while helping to build a better future for society.” Where companies “consistently fail to meet its requirements”, he continued, Aviva will eventually divest.
According to the report, Aviva Investors undertook 1,277 “substantive engagements” in 2021 in relation to its stewardship priorities. These included voting against directors at 137 companies in protest at the lack of ethnic diversity on company boards, and at 85 further companies over human rights concerns, including US meat processing giant Tyson Foods, widely accused of mistreating its workers during the Covid-19 crisis. The investor also rejected 33% of executive pay proposals in its UK investments, and 68% in the US, citing concerns over “quantum and structure”. In total, the firm voted against 26% of management proposals at 6,648 shareholder meetings.
The inclusion of due diligence over human rights among Aviva’s priorities was welcomed by activists, as the social aspect of ESG investment “often lags behind a focus on the environment”, according to responsible investment group ShareAction. On the same day as Aviva’s announcement, the European division of BMO Global Asset Management, part of Ameriprise Financial, also announced it would be putting pressure on its investees over human rights, citing the need to “create a more resilient future” in the face of adverse trends in global events.
Ethical shareholder activism is gaining teeth. In June 2021, Axa Investment Managers announced changes in its palm oil investments to divest from companies responsible for biodiversity loss. The previous month, Dutch organisation Follow This, which describes itself as “a group of responsible shareholders in oil and gas companies”, succeeded in passing shareholder proposals calling for emissions cuts at Chevron, ConocoPhillips, and Phillips66. Campaigners are assisted in this by ever-improving tools for climate accounting and other sustainability indicators, such as the Carbon Disclosure Project, the Global Reporting Initiative, and the ET Carbon Rankings, all of which aim to provide transparent benchmarks for measuring corporate sustainability, and help activists hold firms to account.These moves follow a much wider trend, evident in particular since the Paris Agreement in 2015, of investors trying to ‘future-proof’ their portfolios and move capital towards sustainable investments, whether under pressure from public opinion or in anticipation of regulatory changes. Though business and the environment are cast as natural enemies in some quarters, the risk outlook is changing rapidly, and where fear of stranded assets leads, money will follow.
