Companies that regularly engage with their investors on climate-related matters are associated with better investment returns, says British multinational asset manager Schroders in a new research note.
Where Schroders had engaged at least twice a year, cumulative peer-adjusted returns from these companies were 4% higher than peers after one year of engagement and 12% higher after two years of engagement, says Schroders’ active ownership operations and insights manager Olga Cowings.
That said, there are many reasons why companies may set emissions reduction targets, says Cowings, who is based in London. “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.”
Schroders analysed its 2,744 climate engagements with 1,351 companies between January 2010 and June 2023 to examine the changes seen among companies it engaged with, compared to companies where there has been no, or less intensive, engagement.
According to the resulting eight-page paper, titled “How engagement works — the road to net zero”, 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, only 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.
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It took companies with committed engagement an average of 1.3 years to set brand new Scope 1, 2 or 3 targets after the start of engagement. Where exposure to engagement was “low”, progress was slower at 1.6 years.
The total number of engagements is calculated by year from the starting month of engagement. An average of two or more engagements a year places a company under the “high” engagement segment. At between one and two engagements a year, companies are said to have had “low” engagement with Schroders.
Those with an average of less than one engagement a year are deemed to have had “limited” engagement with Schroders.
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Schroders considers progress on a peer-adjusted basis, tracking their 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,” notes Cowings.
Schroders claims these targets are already translating into actual emissions reductions. Following committed engagement, Schroders says it has recorded 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.
In the race to net-zero emissions, companies around the world are carefully planning their journeys, says Cowings. “For some companies, the journeys are more complicated than for others. They can face uncertain regulatory environments and limited support from [the] government — particularly in the face of high inflation and shifting focus to energy security.”
How companies plan their journey to net zero will also depend on these domestic and geopolitical issues and pressures, Cowings adds. “It helps to have advice for the journey. Investors can be a trusted partner when they understand the opportunities, pressures and risks facing each company and share insights on how businesses can transition more effectively.”
