At least a fifth of the world’s 2,000 largest public companies have committed to net zero targets, including 52 percent of the high-emitting companies engaged through the Climate Action 100+ initiative. The lack of standardisation in commitments made to date poses a challenge for investors, who are increasingly looking to align their overall portfolios with net zero objectives, through initiatives such as Net Zero Asset Managers and the Paris Aligned Investment Initiative. In order to achieve this, investors need to ensure that targets set by companies are robust and properly implemented, and that action can be taken where this is not the case. Otherwise, investors are more exposed to climate risk and efforts to transition to a net zero emissions future could be undermined.

In the statement published today, investors are calling on companies to: i) disclose a net zero transition plan, ii) identify the director responsible for the plan and iii) provide a means for investors to vote annually on progress against the plan.

“In order for investors to do their job as stewards of capital, companies must establish effective mechanisms to demonstrate their net zero transition plans to shareholders and outline how they will be achieved,” explains Stephanie Pfeifer, Chief Executive, IIGCC. “It is clear that shareholder voting and director oversight is needed to hold companies to account on their commitments to achieving a net zero future.”

Publication of investors’ expectations is intended to mainstream new corporate governance standards on ‘net zero alignment’. A clear precedent for wider adoption is already in place. As the outcome of investor engagement by IIGCC members, more than 10 companies - including Shell, Unilever, Nestle, Glencore, Iberdrola and TotalEnergies, among others - have already implemented measures outlined in the statement.

Key highlights of the expectations of companies set out by investors include:

Disclose a Net Zero Transition Plan: This should be provided within overarching Taskforce on Climate Related Financial Disclosures (TCFD) climate reporting and use the recent Climate Action 100+ Net-Zero Company Benchmark indicators as core metrics to demonstrate progress towards net zero alignment. Comprehensive net zero planning disclosures are laid out in the annex within the statement.

Identify the directors responsible for Net Zero Transition Planning: This enables investors to determine which Board directors, in addition to the Chair, should be engaged with and potentially (as a last resort) voted against when a plan has not been provided or implementation is insufficient.
Provide a routine advisory vote on the implementation of the Net Zero Transition Plan: In jurisdictions with strong governance conventions and where permissible in local law. Alternatively, where advisory votes are not permissible, investors might consider reflecting their opinion on the implementation of the transition plan in their voting behaviour on other agenda items, such as the election of board members.

The full ‘Investor Position Statement’ is published by IIGCC, the European membership body for investor collaboration on climate change and has been developed with a number of leading global investors and IIGCC members. Investors supporting the statement include BT Pension Scheme Management, the Church of England Pension Board, GAM Investments, JP Morgan Asset Management and Ethos, among notable others.

“Investors are increasingly setting net zero goals to address climate change but to be successful, the companies in which they invest have to be aligned. Growing numbers of companies are developing net zero plans recognising that climate change is a core consideration. But we need more urgent action and more consistent disclosure. This statement emphasises that investors want to see net zero strategies, they want to have the right to vote on them and they want clear accountability, metrics and targets.” explains Victoria Barron, Head of Sustainable Investment, BT Pension Scheme Management.

“Transparency and accountability are critical to the effective delivery of net zero commitments. Putting corporate net zero alignment plans to the vote will allow shareholders to send a clear message to the Board on the scale and pace of implementation.” adds Stephanie Maier, Global Head of Sustainable and Impact Investment, GAM Investments.

“Time is against us and if a company is to carry the confidence of their shareholders they need credible transition plans with clear short, medium and long-term targets covering all material emissions. Directors will be voted out if the plans are not credible, do not provide a clear basis to deliver targets or if companies are not delivering against them.” adds Adam Matthews, Chief Responsible Investment Officer, Church of England Pensions Board.

“If we stand any chance of closing the gap between current carbon emissions and meeting the goals of the Paris Agreement, the transition to net zero has to be scientifically credible. Responsibility, accountability and delivery of a credible net zero transition plan, coupled with the provision of good quality data, must therefore be implemented by the Board of investee companies. And there’s no time to waste. In partnership with our investment analysts and portfolio managers, actively engaging on how companies are managing the risks of climate change and greenhouse gas emissions remains a major focus of our stewardship efforts, as we seek to play our part in helping to close the current gap.” adds Yo Takatsuki, EMEA Head of Investment Stewardship, J.P. Morgan Asset Management.

Investors involved in European investor engagement through Climate Action 100+ will be putting the expectations into practice through related company engagements. IIGCC is one of the five founding Investor Networks behind Climate Action 100+2. This will build on existing process already underway and will help to scale this practice across markets. The expectations also place the topic firmly on the corporate governance agenda for 2022 company AGM season, ahead of which companies will be asked to demonstrate alignment with the asks of investors.

Signatories of the statement also acknowledge the critical role that proxy advisors and data providers will play in assessing the quality of net zero transition plans, and the progress of their implementation to-date, and are committed to working with those parties to ensure effective systems are in place.

Overall, the process represents a drive to a secure a step change in corporate governance on climate risk. This complements and helps strengthen existing activity already underway through ‘Say on Climate’, which has also achieved significant results alongside the outcomes of parallel corporate engagement taking place via IIGCC members.