Eurizon’s framework to assess Directors’ accountability to Climate Change
Nell’ambito degli impegni assunti in seguito all’adesione alla Net Zero Asset Managers Initiative, Eurizon ritiene che buone pratiche di corporate governance possano favorire il processo di decarbonizzazione delle società nonché il raggiungimento dell’obiettivo di zero emissioni nette entro il 2050 (Net Zero). A tal riguardo, Eurizon si è dotata di una metodologia interna per valutare le eventuali responsabilità degli Amministratori qualora (i) vengano evidenziate carenze nel presidio delle tematiche relative al cambiamento climatico o (ii) le strategie implementate in relazione alla decarbonizzazione delle società non siano considerate sufficientemente ambiziose o solide.
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Eurizon’s framework to assess Directors’ accountability to Climate Change
According to recent studies, the number of natural disasters caused by climate change could rise from around 400 per year in 2015 to 560 by 2030, an expected increase of 40%, on a worldwide basis (1).
For example, the summer of 2023 was the hottest on record globally and wildfires destroyed more than 460,000 hectares of forest (2).
The impacts of risks posed by climate change are systemic, with spillovers and linkages within the real economy and capital markets that will adversely affect long-term and large-scale economic growth: for example, a warming of the planet by more than 3ºC could mean a loss in worldwide GDP of 10% (3) .
The Risk of catastrophic events increases with temperature
Source: World Resources Institute, adapted from IPCC and others. Global Commission on Adaptation (2019) “Adapt now: a global call for leadership on climate resilience.”
The location of a company's assets determines its exposure to climate risks, making some sectors more (or less) vulnerable than others. Based on a Morningstar analysis of more than 12,000 companies and worst-case climate scenarios, the average company could suffer losses of about $0.45 for every $1 of cumulative operating cash flow generated from current operations between now and 2050 (4). However, according to a study by S&P, only 21% of the 6871 companies surveyed reported having an adaptation plan for climate risks (5).
Good governance should inherently include effective oversight of climate risks that could lead to financial risks and opportunities. Indeed, as the Board is responsible to Stakeholders for preserving and enhancing long-term sustainable value in line with the company's purpose and strategy, it should also be responsible to shareholders for overseeing the effective management of climate-related risks and opportunities; this principle is also shared by ICGN, according to which the Board is accountable for the governance of sustainability, ensuring that the management of human capital and natural capital is integrated into strategy, innovation and risk.
Eurizon’s Director Accountability Framework
As a signatory of the Net Zero Asset Managers Initiative, Eurizon believes that good corporate governance practices may support issuers’ decarbonization processes towards the achievement of the net zero emissions by 2050.
In this regard, Eurizon has adopted an internal methodology (Director Accountability Framework) which aims at:
- consistently voting the re-election of directors considering climate change issues;
- embedding the voting activity in Eurizon Stewardship Target (6) by taking a stronger stance on disclosure and net zero commitment;
- adopting a framework that can also serve as an escalation process for companies that do not improve;
- widening the range of companies subject to proxy advisors' vote on directors' climate responsibility.
Specifically, by leveraging the information provided by Climate Action 100+ (CA100+), Transition Pathway Initiative (TPI), Net Zero Tracker, Science Based Targets initiative (SBTi), CDP and MSCI ESG Research, Eurizon’s Director Accountability Framework looks at:
(i) the effective oversight of climate change issues; and
(ii) the credible implementation of decarbonization strategies.
The TCFD recommendations require companies to describe the Board's oversight of climate-related risks and opportunities, focusing on: (i) the processes and frequency with which the board and/or board committees are informed about climate-related issues; (ii) whether the board and/or board committees consider climate-related issues when reviewing and guiding strategy, and finally; (iii) how the board monitors and oversees progress against goals and targets to address climate-related issues.
To this end, the World Economic Forum has developed a set of best practices and standards to support boards of directors in establishing climate governance:
“The board is ultimately accountable to shareholders for the long-term stewardship of the company. Accordingly, the board should be accountable for the company’s long-term resilience with respect to potential shifts in the business landscape that may result from climate change. Failure to do so may constitute a breach of directors’ duties” (7).
In the absence of the requirements related to the oversight of climate-related issues, Eurizon will vote against the renewal of the Board of Directors (8).
Once the board understands the extent to which climate change could create relevant risks and opportunities for its activities and has oversight of the issue, it can begin to integrate climate change considerations into corporate strategy: companies should consider mandatory requirements and voluntary frameworks for climate reporting, such as the TCFD recommendations, and seek third-party certification of their decarbonisation strategy.
In order to assess the effective implementation of the decarbonisation strategy, Eurizon has defined an internal scoring based on two components: the core component uses CA100+ and TPI indicators, the upgrade component takes into account TPI, Net Zero Tracker SBTi, CDP and MSCI ESG Research.
The score is based on the KPIs shown in Figure 1.
Figure 1 - KPIs for Director Accountability Score
Core Component KPIs
• Ambition to Net Zero GHG emissions by 2050 (or earlier)
• Short/medium/long-term GHG emission reduction targets
• Carbon Performance alignment to 2035 and 2050
• Quality of management of GHG emissions and of risks and opportunities related to the low-carbon transition
• Decarbonisation strategy
• Alignment of capital expenditures
• Presence of climate engagement policies
• Presence of TCFD methodology-based disclosure
Upgrade Component KPIs
• Publicly available plans, reporting mechanism and accountability
• Presence of SBTi commitment (Short and/or long term)
• Presence of processes to identify, assess and manage climate-related risks and opportunities
• Presence of a transition plan that aligns with a 1.5 degrees Celsius reduction scenario
• Presence of climate scenario analysis underlying strategy development
• Disclosure of emissions
Figure 2 - Escalation Process for voting the re-election of Board members
Vote cast at the General Meeting
• Vote in favor of the members of the Board of Directors
• Vote against the re-election of the incumbent Chairman of the Sustainability Committee due to shortcomings in the implementation of the decarbonization strategy
• Vote against the re-election of incumbent members of the Sustainability Committee due to severe deficiencies in the implementation of the decarbonization strategy
• Vote against the re-election of the incumbent members of the Sustainability Committee and the Chairman of the Board of Directors due to very severe deficiencies in the implementation of the decarbonization strategy
• Vote against the re-election of board members (including CEO) due to material failures in the implementation of the decarbonization strategy
The framework currently covers companies in 17 sectors, including industrials, materials, oil and gas, utilities, services, consumer goods and consumer discretionary.
Eurizon recognizes that climate change is a systemic risk that must be mitigated through proxy voting, in line with fiduciary duty. We are therefore committed to generally voting against directors of companies that do not meet our climate performance expectations.
(1) UNDRR. (2022). Global Assessment Report on Disaster Risk Reduction. Our World at Risk: Transforming Governance for a Resilient Future.
(2) European Environment Agency. (2024). Extreme weather: floods, droughts and heatwaves.
(3) ETH Zurich. (2024). Substantial global cost of climate inaction
(4) Morningstar Sustainalytics. (2023). Capturing the Direct and Indirect Risks of Physical Climate Change in Investment Portfolios.
(5) S&P. (2024). Risky Business: Companies' Progress On Adapting To Climate Change.
(6) Eurizon aims to implement engagement activities with 48 companies by 2025 (representing 70% of the emissions financed by the “Portfolio in Scope”) and another 107 companies by 2030 (up to 90% of financed emissions).
(7) WEF. (2019). How to Set Up Effective Climate Governance on Corporate Boards Guiding Principles and Questions.
(8) To assess this condition, Eurizon uses the CA100+, TPI, CDP and MSCI ESG Research indicators.
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