In focus

Director Dialogue: how do we tackle climate challenges?

Boards of companies are under increasing pressure to demonstrate how they are going to meet climate targets.

As Schroders’ chief executive Peter Harrison wrote in January last year: “By 2050 we may find the effects of the pandemic will be dwarfed by the consequences of unchecked global warming.” He warned: “The future actions of companies is critical to solving this crisis, yet too little is known of their long-term plans.” 

At that time we wrote to all the UK’s largest companies asking them to publish detailed and fully costed transition plans on climate change. We expanded on this dialogue globally. We are more than one year on now and understanding the detail of those transition plans is more important than ever. Here’s why.

Why is it important to have dialogue with companies over their transition plans?

You will be hard pressed to find examples of companies without a net zero by 2050 goal today. In a nutshell, what we want to know is whether businesses are cutting emissions by as much as possible as soon as possible and being transparent about it.

It is also important to understand if the company is managing the social impacts of a rapid transition on its workers, communities, suppliers and consumers.

Climate scientists have said the world needs to reach net zero by the middle of the century, and according to the United Nations more than 130 countries have set or are considering a net zero by 2050 goal. More than 2,000 businesses and institutions are working with the Science Based Targets initiative, which promotes best practice, to reduce their emissions in line with climate science.

However challenges to understanding the credibility of net zero goals are numerous. They include varying definitions and use of language (think “carbon neutral” vs “carbon-free”), questionable use of offsets and the absence of interim targets. It is crucial we understand the nuance.

This is not only important in the fight against climate change but is also about profits. As an asset management business, our aim is to provide excellent investment performance for our clients by seeking out companies with sustainable and robust business models.

How we invited FTSE 350 NEDs to our HQ to debate climate issues

Kimberley Lewis, Schroders’ Head of Active Ownership, has already shared how our inaugural Director Dialogue event epitomises our approach to sustainability challenges.

In February this year we held our first Director Dialogue event. We invited FTSE 350 non-executive directors, or NEDs, to come together with Schroders’ sustainability specialists and fund managers to discuss some of the most complex sustainability challenges.

We discussed how boards can and should be held to account on climate, how we can get the worker voice into the corporate boardroom and how ESG metrics can feed into executive remuneration.

The idea of Director Dialogue was to deliberately choose topics which are “grey” areas. That is, where there is room for debate on a variety of different approaches companies may take to address these challenges.

On climate change, it is clear that there are disagreements about who should be held to account and which benchmarks and metrics to use.

There are competing factors outside of the control of companies and some expressed frustrations over a perceived lack of understanding from policymakers over what is realistic.

Generally there is acceptance of the importance of transition, and companies are now facing the reality of implementation. However, directors do not yet feel fully equipped to deal with the challenge.

Many are seeking training and we expect board composition to be increasingly impacted by the need for climate change expertise.

Case study: VW lobbying disclosures

An investor group including Schroders challenged VW on lobbying and climate risks this year. Schroders co-filed a shareholder resolution in April urging the German carmaker to explain how its lobbying activities help to address climate risks.

VW does disclose its trade association memberships, however the company lacks a comprehensive disclosure of how those associations’ lobbying goals and activities align with its own climate goals.

It is felt that without that assessment VW risks impeding progress on its climate transition strategy and reputational damage. 

VW rejected the shareholder proposal, which means it did not appear on the ballot at its AGM on Thursday 12 May.

The continued rejection of the investor request is in contrast to many of its peers including Mercedez-Benz and BMW, which have both made recent public commitments to include a review of climate lobbying policies and positions as part of their annual disclosures.

What are Schroders’ own climate targets?

At the end of last year, Schroders published its Climate Transition Action Plan, which details our pathway towards operating as a net zero business.

Schroders’ greenhouse gas emission reduction goals were formally validated by the Science Based Targets initiative (SBTi) in January.

We are among the first 20 financial institutions to be validated and the largest investment manager by assets under management.

Our targets include reducing emissions from our own operations, as well as our “financed emissions”, i.e. the emissions arising from the companies in which we invest.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.