Stewardship and responsible investment report

When things get hard – try harder

Global energy systems and economies were severely stressed in 2022. The bounce-back from the pandemic restarted the demand for fossil fuels on an unexpected scale. In addition, Russia’s invasion of Ukraine caused a supply shock.

2022 has been a sharp reminder to policymakers of the importance of energy security and affordability. The response has been to double down on the climate agenda, pushing forward delayed investments and policies on energy efficiency, clean energy, and electrification, as the long-term solutions for our energy needs. But at the same time, pressure is mounting on governments to ensure people can heat their homes and demand for fossil fuels is on the rise after the lows of the pandemic.

At Royal London Asset Management we have expanded our engagement on climate change, extending the scope and depth of our work. We have also been actively engaging with more companies, asking for better disclosure to help us understand company-specific climate risk. We are targeting more sectors and companies on the ‘just transition’ and have sharpened our expectations and ways of assessing progress on companies’ net zero plans.

Following the COP27 climate conference, there is more attention on ‘loss and damage’, and financing for adaptation to climate impacts. At Royal London Asset Management, we are encouraging companies to plan for climate adaptation.

Building on success – social impact of climate becomes mainstream

For a number of years, we have been advocating for a ‘just transition’ which asks companies and governments to consider the social implications of moving to a low‑carbon economy. It is an inclusive approach which will help avoid exacerbating existing injustices or creating new ones.

We have engaged on just transition since 2019, in collaboration with the Friends Provident Foundation (FPF). The just transition is integrated into our net zero engagements and assessments and will form part of our own climate transition plans. We also use our networks to support policy and advocacy efforts on the just transition. We are delighted that this concept, first mentioned in the Paris Agreement, is now becoming mainstream for companies and investors. 

The energy and cost of living crisis faced by much of the world this past winter shows how important and interlinked the issue of climate change is with issues of social justice, inequality and poverty. That is why we continue to take a holistic approach to climate change, aiming to understand its linkages to nature and society issues.

In 2022, we have focused our just transition engagements on three sectors: energy utilities, social housing and banks.

This year our cybersecurity engagement programme targeted 12 companies that could face higher risks from cyberattacks due to their exposure to threat, technology dependency, and service criticality. In addition, this year we:

• Used our new investor expectations to better understand cyber resilience.
• Assessed leadership and resources in governance and risk management, corporate culture, and systems.
• Explored supply chains and corporate actions (M&A) as areas of greater risk.

Hybrid working has increased corporate reliance on technology. Alongside increasing geopolitical tensions and the Russia/Ukraine war, this has amplified potential cybersecurity risk. Engagement with our investee companies has been key to furthering our understanding, given the confidentiality of policies and general lack of public disclosure in this area.

We found that companies are reticent about disclosing information as regulation is limited and many breaches do not require disclosure. The U.S. Securities and Exchange Commission (SEC) proposed a new rule this year which would enhance and standardise cybersecurity disclosure by public companies. This includes timely disclosure of material incidents and other areas covered in our investor expectations, such as the board of directors’ oversight of cybersecurity risk. We co-signed a response to the SEC supporting the proposal and highlighting the alignment between our observations and experience talking to companies about cyber threats, and the SEC’s proposal.

We have contacted 49 companies across the three phases of this project, with a 69% response rate. In phase three of this project, we found that regulators in sectors such as financial services, infrastructure, and healthcare have increased scrutiny and have demonstrated enhanced risk oversight. In order to drive further outcomes, in 2023 we plan to move away from these highly regulated sectors onto companies that have a history of poorer cybersecurity performance.

Executive pay is a high profile and often divisive topic, and one of our most active areas of engagement historically. We do not advocate for a specific approach to pay. Nor do we have set asks or requirements. Each company is unique, and we approach them that way. We incorporate current and historic engagement, voting, financial performance, market best practice, ESG concerns and any other unique circumstances into our conversations with companies about pay. This bespoke approach is implemented in collaboration with our investment teams and reflects our active investment process.

SSE, National Grid, Centrica, EDF, EON, Eversource Energy

We were one of the first investors to start working on the just transition in the energy utilities sector. In 2022, Royal London Asset Management’s work was recognised in best practice guidance published for financial institutions. In addition, US and European investors have used our ‘expectations’ on a just transition for energy utilities and adapted them for their markets.

Centrica was the first energy utility to incorporate just transition into their climate transition plan and put this to a shareholder vote. In 2022 their emphasis has been on affordability and advocacy with the UK government, focusing on regulatory changes for the retail energy providers market and direct support for customers.

Read more in our full report

We led an engagement programme with five other investors as part of our membership of the 30% Club Investor Group, targeting nine companies and advocating for greater gender diversity. Our formal ask is 30% gender diversity at board level, but we also encourage companies to set targets throughout the workforce. We believe that the 30% level is appropriate at this stage, as research has shown this is the point at which minority voices challenge the status quo.

After meeting with all nine companies, we identified the following common themes which were preventing companies from achieving greater diversity faster:

Cultural barriers: As women have only recently started climbing the career ladder in this market, cultural barriers shouldn’t be underestimated. Societal norms are changing, and women are now building longer-term careers; but without conscious effort and encouragement from the top, progress is slow. From our meetings it was clear that diversity is discussed frequently at board level; but companies were not receptive to the idea of using targets and formal policies to help drive progress and provide accountability. We were clear in our preference for formal targets.

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The company approached us with plans to introduce a one-off award for the executives and more than 50 members of the leadership team. There were exceptionally stretching performance targets, with the aim to double the share price within five years. The executives were required to invest some of their own shares in the scheme, there was a lengthy holding period, a commitment to assess any excessive risk taking and an underpin using financial and non-financial factors. The grant was a reasonable multiple of salary; but the cap on the value of awards at the end of the five years was close to 11 times the CEO’s salary. Following our feedback, the proposal was dropped and the company took our advice to increase the maximum allowed by the policy rather than adopting an additional one-off award.

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A food and hospitality business and employer of nearly half a million people, we spoke to the Group Chief People Officer (CPO) in March about their ethnic diversity practices. While already leading in this area, we sought to encourage further improvements as the company is a holding in our Sustainable strategies.

As a recruiter of almost 500,000 employees with operations in 45 countries, the company has a rich pool of diversity to pull from. The board recently established its ‘people commitments’ and identified areas where it could make improvements on diversity – particularly on leadership, teams and diverse talent.

Read more in our full report