How engaging on climate can achieve emissions reductions and enhance returns

Kondi Nkosi

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

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.

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.