Aviva Investors has warned 30 global companies that they expect them to deliver net zero goals by 2050 and will back up its engagement with escalatory actions including divestment.
Aviva Investors announced its Climate Engagement Escalation Programme, which is focused on its investments in 30 'Systemically Important Carbon Emitters'. Aviva Investors will require these companies to deliver net zero scope 3 emissions by 2050 and establish "robust transition roadmaps to demonstrate their commitment to immediate action on climate change as the world's carbon budget diminishes," the firm said.
The programme will run for between one and three years, depending on individual company circumstances, and incorporate clear escalation measures for non-responsive businesses or those that do not act quickly enough.
"We are informed by the science, we have to keep global warming to 1.5 degrees and that means we have to reach net zero by 2050," said Mirza Baig, global head of ESG research and stewardship at Aviva Investors. "Companies must align their businesses with this goal and include their entire footprint within scope.
"There are now nearly 1200 companies that have either committed to or have a validated, science-based target. What we haven't been seeing is how this translates into clear and robust action over the next three to five years."
The engagement programme includes companies from the oil and gas, metals and mining and utilities sectors, which Aviva Investors notes "substantially contribute to total global carbon emissions." The engagement programme asks for the adoption of science-based targets covering the full carbon footprint of the businesses, the reframing of corporate strategies, business plans and capital frameworks, adjustments to management incentives and lobbying activities.
Baig pointed to the example of engaging with oil and gas companies and finding out how net zero commitments are being applied to capex plans.
"Particularly within oil and gas and mining, the capex time horizon and lag before a project becomes fully operational can be 5 to 10 years, so if you're investing in old energy now, there are questions over how serious the company is taking its net zero goals," he said.
This conversation could also be expressed through engagement around corporate culture with board members, Baig noted.
"If you're an upstream-focused company and you want to pivot to new energy and renewables, you can't do it with the same type of staff, so rebalancing and upskilling of the workforce needs to be part of the strategy," he said. "a credible transition story, requires the overarching strategy to be supported by a holistic set of indicators to support delivery that will enable the market to evaluate the direction of travel and the probability of success."
Aviva will measure responsiveness and progress based on a qualitative assessment of progress against Aviva Investors' climate engagement framework and quantitative improvements against the firm's proprietary climate transition risk model.
Progress will be monitored on a six-monthly basis, and Aviva Investors will determine if further steps of escalation are needed.
"We have a formal, six-monthly review process on our specific focus areas, to form a view on who is doing well. There has actually been a number of companies who have made substantive progress over the past 12 months," Baig said. "Our climate program is not intended to give a bleak outlook on the world, but on the other hand, time is not in our hands, and we need to see greater movement."
This information from engagement and other research feeds into a scoring methodology to rank companies on the quality of their long-term targets, the quality of their transition plan, the
cultural alignment within the biz towards achieving those targets and plans, as well as management incentives and the quality of reporting and engagement with public stakeholders
The methodology provides both accountability on tracing progress at the individual company level, as well as comparability across sectors and geographic regions.
Aviva Investors also have an internal governance process that determines how to escalate action against companies that are not progressing towards setting and implementing targets, including voting against directors and filing shareholder proposals or supporting other proposals at AGMs regarding climate action, with divestment as the last resort. This applies to other areas of engagement as well.
"There needs to be an end point for our engagement to be credible," Baig said. "That's not our first point of call, because we do believe engagement is the most important action we can take as active owners."
In addition to climate change, Aviva Investors has also identified diversity and inclusion in their engagement priorities in 2021.
"The issue of ethnic diversity is not a new topic. It did gain greater prominence during 2020, but in the UK, the Parker review began consulting on this issue in 2016, and I know in Australia we've had similar reports for many years, but progress has been stubbornly stagnant."
Baig noted that companies had progressed in terms of gender diversity in the UK and Australia and other jurisdictions, but there hadn't been the same focus on ethnic diversity.
"Nearly 50% of the FTSE 100 don't have ethnic representation on the board, and 90% of directors on the ASX 300 come from Anglo-Celtic backgrounds," Baig said. "We have an understanding of what best practice looks like, and that revolves around better diversity on boards, senior management, building the pipeline, looking at promotions, recruitment, basically taking all the lessons from what works with gender diversity, and seen how we can adapt and make it applicable to ethnic diversity."