June 2024
State of Play: Effective Stewardship and Reaching Net Zero
This summary explains recent developments in the transition to net zero, how investors can constructively engage with companies, stewardship megatrends and questions the industry should be asking companies but aren’t (yet).
Vishal Hindocha
Global Head of Sustainability Strategy
Franziska Jahn-Madell
Director of Global Stewardship
The journey towards achieving net zero carbon emission is a multi-decade transition. Despite the challenges, we see reasons to be optimistic about the progress made so far. OECD emissions have fallen for a decade, renewable technologies are advancing and companies are increasingly committing to science-based targets. Cost curves for new technology are steadily falling, which will enable many industries to decarbonize their scope three emissions. As a result, companies are more open to talking about their scope three emissions than they were just two years ago. This is reflected in the growing number of companies signing up to the Science-Based Target initiative and committing to net zero targets.
Our experience has taught us the importance of evaluating the credibility of corporate transition plans due to the nuances across sectors and companies. We have developed a framework to help assess how credibly companies can deliver on the targets they have set. It’s not merely about setting ambitious targets, but also considering the company’s capacity to execute on those plans. Asking questions about management setup, financial credibility, technological feasibility and stakeholder considerations are crucial to assessing the viability of transition plans.
We believe in taking a constructivist approach to stewardship by having thoughtful and authentic conversations with management. We have found companies often value guidance more than being set specific timelines and execution points. Striking a balance between positive feedback and constructive feedback that is intentional and considerate increases trust and builds a strong relationship so you can have the more difficult conversations when needed.
We are fortunate to have a large global research platform with over 300 full-time investors engaging with companies. In some stewardship-based meetings with companies we can have between 5 and 25 analysts and portfolio managers present, depending on the size of our position and the number of strategies holding it. However, team size does not necessarily lead to effective stewardship. To be effective, we believe, also requires strategic collaboration across sectors as developments in one sector can have a material impact on other sectors. For example, advancements in green products developed by the chemicals industry will be used by companies in the food and cosmetic industries.
We welcome the opportunity to discuss key sustainability themes with you. Please contact allangles@mfs.com and we will be happy to help.
MFS may incorporate environmental, social, or governance (ESG) factors into its investment decision making, fundamental investment analysis and engagement activities when communicating with issuers. The statements or examples provided above illustrate certain ways that MFS has historically incorporated ESG factors when analyzing or engaging with certain issuers but they are not intended to imply that favorable investment, ESG outcomes or engagement outcomes are guaranteed in all situations or in any individual situation. Engagements typically consist of a series of communications that are ongoing and often protracted, and may not necessarily result in changes to any issuer’s ESG-related practices. Issuer outcomes are based on many factors and favorable investment or engagement outcomes, including those described above, may be unrelated to MFS analysis or activities. The degree to which MFS incorporates ESG factors into its investment decision making, investment analysis and/or engagement activities will vary by strategy, product, and asset class, and may also vary over time, and will generally be determined based on MFS’ opinion of the relevance and materiality of the specific ESG factors (which may differ from judgements or opinions of third-parties, including investors). Any examples above may not be representative of ESG factors used in the management of any investor’s portfolio. Any ESG assessments or incorporation of ESG factors by MFS may be reliant on data received from third-parties (including investee companies and ESG data vendors), which may be inaccurate, incomplete, inconsistent, out-of-date or estimated, or only consider certain ESG aspects (rather than looking at the entire sustainability profile and actions of an investment or its value chain), and as such, may adversely impact MFS’ analysis of the ESG factors relevant to an investment. The information included above, as well as individual companies and/or securities mentioned, should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any MFS product.
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