In the first part of a two-part interview, CGj talks to Dr Christine Chow, board member, International Corporate Governance Network, and Head of Active Ownership at Credit Suisse Asset Management, about the role that investors and asset managers can play in promoting good governance and sustainable business practices.

What is your view of the role that asset managers can play in the transition to carbon net-zero?

‘Asset managers are often not asset owners. They are asset allocators – their role is to learn from, educate, support and monitor portfolio and target companies, and to be a good steward of assets to create value for investors so that investors can meet their financial obligations and investment goals. These investors come in all shapes and sizes – from an average man in the street, a pensioner, a worker, to the state represented by institutions such as large sovereign wealth funds. 

To clarify asset owner expectations with regards to how asset managers consider net-zero targets, the International Corporate Governance Network (ICGN) recently updated its Model Mandate in partnership with the United Nations–supported Global Investors for Sustainable Development Alliance (GISD). This includes reference to a range of governance, stewardship and sustainability objectives, particularly associated with the United Nations Sustainable Development Goals. 

Asset managers should have constructive dialogue and not micromanage portfolio companies, although this does not mean that they should not use their shareholding power, media tools and industry platforms to exert pressure when there are material concerns. 

Regarding net-zero, asset managers should brainstorm with companies on their business strategy, which should include a net-zero transition element that also takes into consideration other social impacts. The discussions should also address the associated changes in business models, capital expenditure, financing options and governance – not only through board oversight but generally through education, improvement in culture, and a fair distribution of dividend and reinvestment. 

For example, in the auto sector, a shift from internal combustion engines to electric vehicles (EVs) is already seeing the need to shrink the existing workforce in size, requiring different skills in the engineering of products, batteries management, sourcing of raw materials, recycling practices and solutions, and lobbying for EV charging infrastructure, which is more of a location-based discussion. 

All of these require redesigning business processes and workflows. This changes the power balance and dynamics within a company, which a good executive management team should also be aware of and manage accordingly. 

In promoting sustainable business practices, asset managers should take into consideration the track record of companies if there have been specific controversies relating to bribery and corruption, product safety and fines due to violations of environmental regulations. But this is only the baseline. Engaging on backward-looking controversies alone dismissively promotes a tick-box mentality. More effort should be spent on understanding what companies have learnt from past mistakes and what actions are being, or have been, taken to address structural weaknesses in processes and management issues. This might include a review of the incentives system in place that may have encouraged undesirable behaviour creating unintended consequences (see ‘Incentive schemes – beware the unintended consequences’). 

Investors themselves are subject to a host of requirements associated with net-zero, as articulated in ICGN’s Statement of Shared Climate Change Responsibilities to the United Nations Climate Change Conference of the Parties 26(COP26) (held on 20 October 2021). This called for investors to publicly commit to science-based emissions reduction targets (including credible interim targets) on how investment portfolios will achieve net-zero carbon emissions by 2050. 

The statement also called for improvements in the quality of disclosures, including those relating to investment policies, company engagements and proxy voting. It is also expected that investors will comprehensively integrate financial, natural and human capital considerations into stewardship activities across asset classes, investment decision-making, company monitoring, engagement (individually or collectively) and voting. The statement was reinforced and strengthened for COP27, and no doubt we will have further discussion during the ICGN-Hawkamah Dubai Conference just before COP28. 

To share more practical experience as an investor, one of the biggest challenges on our journey to net-zero and the publication of our Climate Action Plan was around calculations of our financed emissions. As my colleague Dr Ece Satar Pfister, who is our climate specialist at Credit Suisse Asset Management, has emphasised, like other industries, Scope 3 emissions of an asset manager are the most significant and the most challenging to calculate. Financed emissions are calculated using financial data with emissions data from third-party data providers. Therefore, acknowledging data gaps and limitations are key to transparent disclosure and understanding progress in our net-zero journey. We aim to lead the way among our peers and encourage our portfolio companies to adopt transparent emissions disclosure practices. Credit Suisse Asset Management and discretionary mandates within Investment Solutions and Sustainability (IS&S), part of Credit Suisse Wealth Management, have reported a decrease in investment-associated emissions in intensity terms and in absolute terms by 27% and 5%, respectively, since 2019 for their in-scope assets (listed equities and corporate bonds). 

To bring it back to the net-zero scenario and sustainable business practices, if the overarching goal is to achieve net-zero emissions, the most important target set should be to reduce absolute emissions and carbon intensity. How this should be achieved should be left to the company to decide. To quote Dr Ece Satar Pfister, Climate Specialist, Credit Suisse Asset Management, “Since we are in the decade of action and are already experiencing the impacts of climate change on society and businesses, targets and commitments to net-zero are not sufficient. The implementation of credible decarbonisation plans linked to short-term accountability of reduction targets should be at the top of the agenda. This expectation should be accompanied by high-quality disclosure (quality not just quantity), robust accounting and sound auditing processes.”’

Corporates have become quite good at making the right noises but is business as usual still the norm?

‘I am not sure that is the case based on the companies I have come across. The large-cap, systemically important or high-risk sector companies that are on the radar of sustainable investors are showing progress. It also depends on leadership, culture and strategy. 

Investors generally find that mid-size companies in the value chain of multinational enterprises often improve their ESG practices because their customers expect them to. They tend to seek data due to a combination of aspiration to best practices (for example following the OECD Guidelines for Multinational Enterprises) and regulations (for example following the 2017 French Duty of Vigilance, the 2015 UK Modern Slavery Act, or the 2022 US Uyghur Forced Labor Prevention Act). Long-standing examples of this process can be found in the garments and footwear, auto and electronics and energy sectors. Increasingly, food and beverage, and real estate and infrastructure are also following this trend. 

Of course, the investor community is diverse, and therefore if the divestment trend goes on, and companies are undervalued, there will be bargain hunters, sometimes taking them private. Incentives such as the US Inflation Reduction Act (IRA) – which creates tax incentives or credits for qualifying renewable energy projects and equipment – changes the business case. 

Intelligent investors should think about the unintended consequences of any policies and incentives in order to anticipate the next scandal when considering the investment opportunities they bring. For example, if we go back to the 1997 Asian financial crisis – what were the causes of the crisis? Macroeconomic problems such as current account deficits, high levels of foreign debt, climbing budget deficits, excessive bank lending, poor debt–service ratios, and imbalanced capital inflows and outflows. 

The crisis led to the build up of foreign exchange reserves in Asian countries to hedge against external shocks. This money needs to generate return in globally stable currencies, such as the US dollar. In the meantime, a combination of policies that encouraged home ownership and disjointed sales-driven incentives caused an explosion of subprime lending in the US. By 2008, the default of subprime mortgage borrowers triggered the collapse of the subprime mortgage market, which in turn caused the credit crunch in the banking sector. 

Since then, an extended period of low interest rate and periods of quantitative easing has mispriced risks. We are only just seeing the normalisation of interest rates. Long-term investors must study these longer-term trends and unintended consequences of policies and incentives systems to better manage forward-looking risks.’

In the context of widespread greenwashing, should investors be insisting on a science-based and outcomes-based approach?

‘If we define a science-based approach as a method in which decisions are made that takes scientific methods and/or results into account, then yes. However, this is different from science-based targets, which expect limited reliance on offsets and focus on near-term emissions reduction. Without offsets, it is almost impossible to achieve net-zero. 

Also, we must acknowledge the role carbon offsets can play in the net-zero transition, especially when we bring nature as an asset class into the discussion and seek to support ecosystem management, forest preservation, sustainable agriculture, marine life preservation and maintaining biodiversity worldwide. Developing countries that have been disadvantaged over centuries need flexibility and offset mechanisms to ensure that their natural resources are adequately priced and protected. 

The outcomes-based approach is advocated in the 2020 UK Stewardship Code. This means that when setting key performance indicators (KPIs), instead of measuring the input factors, such as the number of times engagement meetings have taken place, asset managers are expected to evaluate their own performance based on a positive change in outcomes, such as improvement in product innovation and operational efficiency as a result of constructive dialogue between investors and companies. 

The alternative is activity-based engagement, which falls into the trap of “what gets measured gets managed”. Setting a target for asset managers to engage with 90% of the portfolio is a clear quantifiable target, however, based on my conversations with many key institutional asset owners around the world, they would rather see high-quality examples of engagement that yield systemic and meaningful changes that promote long-term value creation. It would be an undesirable outcome if quality is sacrificed for blanket coverage.’

What is your view of the Sustainability Disclosure Standards that are expected to be published by the International Sustainability Standards Board (ISSB) next month? 

‘Enhanced corporate sustainability reporting will be a game changer on both sides of the Atlantic. In fact in Europe, ICGN’s Global Governance Principles were referred to in Recital 44 of the European Corporate Sustainability Reporting Directive last year as an authoritative global framework of governance information of most relevance to users. First introduced in 2001, this is a highly influential document given that it is used by many ICGN members (who today represent around US$70 trillion in assets under management) in voting policies and company engagements and is often referred to by national standard-setters. 

The ISSB has taken an inclusive approach in its decision-making and in communicating the decisions of the board. The ISSB standards build on existing reporting frameworks that we are familiar with and the ISSB has engaged with key stakeholders in the process. ICGN issued two letters commenting on the two Exposure Drafts of the new Sustainability Disclosure Standards S1 and S2. The effective date of both standards would be for annual reporting periods from 1 January 2024, so information will be needed in 2025 for the 2024 reporting period. 

Scope 3 greenhouse gas (GHG) emissions are going to be challenging for all companies, but companies have embarked on this journey for over 10 years (as mentioned in ICGN’s consultation response to S2). Setting out clear reporting boundaries would be key in addressing green- or sustainability-washing risks. 

At the recent ICGN Stockholm Conference, we were thankful to have ISSB Vice-Chair Sue Lloyd share her insights. Key messages include those outlined below. 

• From an interoperability perspective, ISSB is keen to work with Europe to align with the European Sustainability Reporting Standards, finding common disclosures that meet both sets of objectives. 
• Although the 1 January 2024 target for launching the new ISSB standards is ambitious, there are transition reliefs. For example, a company is not required to provide Scope 3 GHG emissions disclosures in the first year. Companies are encouraged to try including credible estimation methods in the early years. 
• ISSB has identified biodiversity, human capital and human rights as priority topics to consider after climate, and will embark on a project to move forward integrated reporting.’

The draft ISSB standards have not advocated a double materiality approach to sustainability reporting – is this an omission?

‘I do not consider this an omission, but a careful and pragmatic approach to creating a global baseline. At the recent ICGN Stockholm Conference, speakers pointed out that single and double materiality are not polar opposites, but are converging on their impact and outcomes. Take climate change, for example. What is financially material to a company, such as transition or physical impacts on financials, also have broader societal consequences – from impairments to insurance premiums and social licence to operate.’

The main focus of the ESG movement has been on environmental aspects – do you anticipate more of a focus on social KPIs in the future?

‘In the UK, the Financial Conduct Authority (FCA) Discussion Paper 23/1, published in January 2023, showed that regulators are seeking feedback on how regulated financial institutions are dealing with the breadth of sustainability topics, covering environmental and social issues. In particular, there is a strong interest in diversity and inclusion (D&I) data at these firms. 

Some people equate D&I with the number of women on the board or in executive roles, whilst the issues are a lot more nuanced. If we speak to Gen Z, many of them identify themselves as non-binary – which means that they self-identify as outside of the gender binary. If this is the trend, how should we consider gender-based categorisation? Besides, diversity is not just about gender, it is about ethnicity and skin colour, and this is just the visible part of diversity. Neurodiversity, social mobility, disability, LGBTQ+ – there are essentially countless numbers of categorisation and most of the time they overlap because we are people and are multidimensional in the way we categorise ourselves. 

I would say we are only at the beginning of the journey to understand what diversity and inclusion is about, and how they differ. To succeed in embracing D&I, we need to think hard about what makes a company culture inclusive – it is about giving a voice to everyone, irrespective of their jobs, hierarchy and background. It is about being open to ideas, constantly reaching out for synergies and collaboration, being honest about conflicts and differences in views and differences, and embracing them with courage and optimism. 

For social issues related to human rights, we will need an even longer discussion.’ 

Dr Christine Chow was interviewed by CGj Editor Kieran Colvert. 

In addition to her roles at ICGN and Credit Suisse, Ms Chow is Convenor of the Sustainability and Climate Action Task Force set up by the Accounting and Financial Reporting Council (AFRC) in Hong Kong. Until early 2023, she was the global head of Stewardship at HSBC Asset Management and a board member of HSBC Asset Management UK Ltd.