As asset managers and stewardship professionals strive to achieve net zero targets and drive real-world results, engaging with portfolio companies becomes paramount. In this blog, we’ll explore the importance of asking hard-hitting questions to drive sustainability and urge asset managers to employ advanced tools for effective engagement. By posing these questions, asset managers can foster a deeper understanding of ESG issues, encourage responsible practices, and ultimately contribute to a more sustainable future.
One crucial question asset managers should ask portfolio companies is, “How do you assess and manage climate-related risks, in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)?” The TCFD framework provides a comprehensive and internationally-recognised approach to assessing and disclosing climate-related risks and opportunities. It goes beyond simply relying on data points by encouraging companies to adopt a strategic perspective on climate risk exposure. By integrating the TCFD framework into their risk assessment processes, asset managers can ensure that portfolio companies are considering a wide range of climate scenarios, engaging in scenario analysis, and developing robust strategies to navigate climate-related risks and capitalise on emerging opportunities. This approach enables asset managers to drive meaningful action towards climate resilience and align investments with the transition to a low-carbon economy.
It’s essential to frame this question (among others) in a way that goes beyond simply asking for data points. By prompting companies to consider their approach to assessing climate risk exposure, asset managers encourage deeper strategic thinking. This approach ensures that portfolio companies are not just providing numbers but are actively considering the broader implications and developing robust strategies to address risk.
To align with net zero goals, asset managers should ask, “Have you set science-based emissions reduction targets?” Science-based targets provide a clear framework for companies to measure their progress in reducing greenhouse gas emissions. By encouraging portfolio companies to adopt such targets, asset managers can ensure their investments are aligned with the necessary trajectory to limit global warming to 1.5 degrees Celsius above pre-industrial levels.
Asset managers must ask portfolio companies, “How are you integrating ESG factors into your business strategies?” Embedding ESG considerations into core business practices demonstrates a company’s commitment to sustainability and responsible governance. By encouraging the incorporation of ESG factors at the strategic level, asset managers can help portfolio companies identify opportunities for innovation, risk mitigation, and long-term value creation.
To promote responsible supply chain management, asset managers should ask, “How are you ensuring transparency and responsible practices throughout your supply chain, including Scope 3 emissions?” Understanding the environmental and social impact of a company’s supply chain is crucial for identifying potential risks and opportunities. Scope 3 emissions often represent a significant portion of its overall carbon footprint. By encouraging portfolio companies to address Scope 3 emissions, asset managers can help drive positive change throughout the entire value chain, fostering sustainability and responsibility at every level.
A critical question asset managers should pose is, “How are you ensuring board diversity and climate competence?” Diverse boards bring a range of perspectives and expertise, enabling better decision-making and enhanced risk management. By advocating for diverse boards and ensuring climate competence among board members, asset managers can foster a culture of sustainability and resilience within their portfolio companies.
Asset managers must ask portfolio companies, “How are you measuring and reporting progress towards your ESG goals?” Transparent reporting is essential for stakeholders to assess a company’s ESG performance and progress towards net zero targets. By encouraging robust reporting practices, asset managers can drive accountability and provide investors with the necessary information to make informed decisions.
Engagement across ESG funds is vital for asset managers and stewardship professionals aiming to hit net zero targets and achieve real-world results. By asking hard-hitting questions that encompass climate risk, science-based targets, ESG integration, supply chain responsibility, board diversity, and transparent reporting, asset managers can drive meaningful change within their portfolio companies. Employing advanced tools like SI Engage can further enhance the effectiveness of these engagements. By utilising SI Engage, asset managers can streamline their stewardship activities, transform complex data into meaningful insights, and unlock new possibilities in their journey towards a more sustainable future.
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