IN FOCUS6-8 min read

How engaging on climate can achieve emissions reductions and enhance returns

Our analysis suggests that committed engagement leads to both reductions in harmful emissions and improved investment returns.

04-03-2024
Oil rigs of the UK coastline
Read full reportHow engagement works: The road to net zero
8 pages

Authors

Olga Cowings
Active Ownership Operations and Insights Manager

Climate change poses risks to economies, companies, and investments. It is an important focus for us at Schroders as active owners of assets on behalf of our clients.

Many companies are carefully considering their exposure to climate risk and outlining their decarbonisation ambitions. What role can active ownership play in this, while also protecting and enhancing the value of investments?

We have analysed our 2,744 climate engagements with 1,351 companies since 2010 to examine the changes seen among companies we engaged with, compared to companies where there has been no, or less intensive, engagement.

This analysis shows that 86% of companies engaged by Schroders on climate change have a climate target, with 61% setting a new target or enhancing a target after the start of engagement.

By contrast, 40% of unengaged companies have a climate target, with 12% setting a new target or enhancing a target after the start of engagement of their respective peers.

These figures represent the progress being made across our entire engagement programme, including collaborative and sector-wide engagements (where we engage all companies in the peer group).

Digging deeper, we consider progress on a peer-adjusted basis, where we track our potential influence within groups of comparable businesses. Our analysis shows that 16% of comparable companies where Schroders undertakes “committed engagement”– meaning at least one form of engagement a year – have set new climate commitments or targets after the start of engagement, with no prior history of that target. By contrast, just 4% of unengaged peers in the same region, sector, and size group set new targets over the same timeframe. This is a four-fold difference.

The engagement programme underpinning our transition strategy aimed to result in engaged companies being 10% more likely to establish transition plans than those we did not engage with. Our progress so far surpasses this metric.

What’s more, these targets are translating into genuine emissions reductions. Where there has been committed Schroders engagement on climate change, we have seen a 31% reduction in scope 1 and 2 emissions intensity from the start of engagement, compared to a 7% reduction for the unengaged peer group.

Emissions intensity is measured by tonnes of carbon emitted per million dollars of sales. Scope 1 refers to a company’s direct emissions from its own operations while Scope 2 covers indirect emissions from the production of the energy it uses.

Engagement and financial performance

Early evidence shows that high engagement rates are also associated with better investment returns. Where Schroders had engaged at least twice a year, cumulative peer-adjusted returns were 4% higher than peers after one year of engagement and 12% higher after two years of engagement.

Engagement activities and financial return

This returns analysis is based on the starting month of engagement. Companies with lower intensity engagement have been engaged for longer, therefore we could measure returns for three years compared to two years for higher intensity engagements.

This is a short time frame, and there are many reasons why companies may set emissions reduction targets. We do not claim that our engagements are the sole factor in driving the changes described here.

Even so, the results are encouraging in suggesting a link between engagement on climate targets, actual emissions reductions, and improved investment returns.

Thoughtful approach to stewardship

This demonstrates the importance of a thoughtful approach to stewardship. There is a danger that, in some quarters, voting records are perceived as a measure of good stewardship. But high numbers of votes against boards’ recommendations, or support for independent shareholder resolutions, don’t necessarily imply a serious commitment to delivering sustainable change.

Engaging with companies is often a lengthy process. It takes place behind the scenes, not in the spotlight of an AGM. It is early days, but this analysis of our climate engagements suggests that such committed engagement can bring tangible results.

Read full reportHow engagement works: The road to net zero
8 pages

Subscribe to our Insights

Visit our preference center, where you can choose which Schroders Insights you would like to receive

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Authors

Olga Cowings
Active Ownership Operations and Insights Manager

Topics

Follow us

Please consider a fund's investment objectives, risks, charges and expenses carefully before investing.

The website and the content included is intended for US-based financial intermediaries (and their non-US affiliates) on behalf of those of their clients who are both (a) not “US persons” as that term is defined in Rule 902 under the United States Securities Act of 1933, as amended (the “1933 Act”) and (b) “non-United States persons” as that terms is defined in Rule 4.7(a)(vi) under the Commodity Exchange Act of 1936, as amended. None of the funds described herein is registered as an “investment company” as that term is defined in the United States Investment Company Act of 1940, as amended, and shares of the funds described herein have not been and will not be registered under the 1933 Act or the securities laws of any of the states of the United States. The shares may not be offered, sold or delivered directly or indirectly in the United States or for the account or benefit of any “US person.”

The information contained in this website does not constitute an offer to purchase or sell, advertise, recommend, distribute or solicit a subscription for interests in investment products in any Latin American jurisdiction where such would be unauthorized. The information contained in this website is not intended for distribution to the public in general and must not be reproduced or distributed, entirely or partially to any individuals who are not allowed to receive it according to applicable legislation. The investment products and their distribution may not be registered in Latin America, and therefore may not meet certain requirements and procedures usually observed in public offerings of securities registered in the region, with which investors in the Latin America capital markets may be familiar. For this reason, the access of the investors to certain information regarding the investment products may be restricted. Financial intermediaries and Advisors must ensure the information provided in this website is appropriate and suitable to the receiver’s domicile and jurisdiction and according to the applicable legislation.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security/sector/country.

Issued by Schroder Investment Management (Europe) S.A., 5 (“SIM Europe”), rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799

Schroder Investment Management North America Inc. (“SIMNA”) is an SEC registered investment adviser, CRD Number 105820, providing asset management products and services to clients in the US and registered as a Portfolio Manager with the securities regulatory authorities in Canada.  Schroder Fund Advisors LLC (“SFA”) is a wholly-owned subsidiary of SIMNA Inc. and is registered as a limited purpose broker-dealer with FINRA and as an Exempt Market Dealer with the securities regulatory authorities in Canada.  SFA markets certain investment vehicles for which other Schroders entities are investment advisers.

Schroders Capital is the private markets investment division of Schroders plc.  Schroders Capital Management (US) Inc. (“Schroders Capital US”) is registered as an investment adviser with the US Securities and Exchange Commission (SEC).  It provides asset management products and services to clients in the United States and Canada.  For more information, visit www.schroderscapital.com

SIM (Europe), SIMNA, SFA and Schroders Capital are wholly owned subsidiaries of Schroders plc.