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Are Investors Prepared to Rock the Boat on Climate?

Many asset owners and managers are still reluctant to publicly oppose climate laggards.

Investors are increasingly using their influence to change climate-related policies at investee companies, leading to real reductions in greenhouse gas emissions. This influence is often exerted through votes on resolutions at AGMs, which have both symbolic and actual power.

Shareholders in US oil and gas giant ExxonMobil elected three climate-conscious candidates to the company’s 12-member board of directors at the end of May. Candidates were nominated by impact investment group Engine No. 1 in a bid to kick-start the company’s transition to supplying clean energy.

It was hailed as a ‘day of reckoning’ for oil and gas majors in the US, as investors made clear their views on continued failures to factor climate risks into business models.

A shareholder resolution – a proposal submitted by an investor, third-party NGO, or activist group – is one of the most public tools investors can wield, and is being increasingly used to secure action on urgent issues such as climate change. It is often an escalation of previous engagement efforts.

Are shareholders using this tool too much or too little? Investors need to indicate that they are increasingly willing to publicly oppose corporates that show little or no sign of progress in the mitigation of climate risk, experts say.

To date, many shareholders have been reluctant to support climate-related votes at AGMs, still choosing to give management the benefit of the doubt instead of backing resolutions challenging the corporate’s climate strategy.

Worn-out excuses

Why might shareholders draw back from voting against recalcitrant boards? Investors who vote against climate resolutions may argue that it interferes with ongoing private engagement efforts or that the resolution asks for too much too soon, according to Wolfgang Kuhn, Director of Financial Sector Strategies at activist non-profit ShareAction.

He also notes that investors are in the habit of exercising too much patience.

“There’s this notion from investors that, if a company does marginally better than they have in the past, then that needs to be rewarded and supported. We disagree. Just doing better doesn’t solve [climate change]. We need to go at a much faster pace if we’re to halve emissions by the end of this decade,” Kuhn says.

This stance was taken by the Church of England (CoE) Pensions Board (£3 billion AUM) when voting for European oil and gas major Shell’s energy transition plan, despite concerns elsewhere that it didn’t sufficiently outline how absolute carbon emissions would be reduced in line with the Paris Agreement. The Pensions Board acknowledged that the plan wasn’t perfect, “but it is the first phase of Shell’s transition over this crucial decade”.

The CoE and asset manager Robeco co-led engagement efforts with Shell as part of their Climate Action 100+ (CA100+) membership. CA100+ is made up of over 450 investors led by the Institutional Investors Group on Climate Change (IIGCC), with more than US$40 trillion in AUM, all of whom have committed to engaging European corporates on their climate-related performance.

However, Doug McMurdo, Chair of the UK’s Local Authority Pension Fund Forum (LAPFF), argues that “Shell’s strategy more resembled a PR strategy than a transformational business plan fit for the purpose of achieving Paris goals and ensuring survival.” The forum, which represents the majority of the UK’s local government pension scheme funds (£300 billion in AUM), recommended voting in favour of the unsuccessful counter-resolution put forward by shareholder activist organisation Follow This.

Despite securing a majority for its transition plan, a Dutch Court ruling in May means Shell must formally change its climate policy, shifting its commitment from a 20% reduction in emissions intensity by 2030 to over 45%. If future shareholder votes go against climate resolutions, it’s likely activist groups will increasingly enlist legal support.

The filing of a climate resolution typically indicates that the corporate in question hasn’t been responding to private engagement. “There isn’t enough time to keep giving corporates another year [to address climate],” Kuhn says.

There are instances where an investor may not agree with everything listed in the resolution and instead choose to abstain, says Michael Herskovich, Global Head of Stewardship at BNP Paribas Asset Management.

Investors may support the sentiment behind the climate resolution, but still believe it isn’t the most effective plan to improve corporate performance, he explains.

“You need to look at where company is on its journey. If it’s already making improvements and going in the right direction then a resolution isn’t needed to push them,” Herskovich says.

Climate resolutions are necessary to “ensure management is moving faster”, Kuhn counters.

Through thick and thin

As responsible, long-term investors in a business, asset owners and managers like to maintain good relationships with corporate management, which entails a degree of loyalty.

“You could say that, by praising a company for doing something, you can then praise your own efforts of engaging with the company. If you criticise it, you can’t at the same time claim that you had effective engagement,” ShareAction’s Kuhn says.

Voting against corporates may be awkward or inflammatory as a result.

However, LAPFF’s McMurdo says that “more work needs to be done understanding the resolutions rather than being reliant on the position of companies’ investor relations departments”.

Recently the California Public Employees Retirement System (CalPERS), which has US444 billion AUM, came under fire for voting against a climate resolution filed by Follow This at BP’s AGM. Norges Bank Investment Management, which oversees the world’s largest sovereign wealth fund, and asset manager Federated Hermes also voted against the resolution, whereas BlackRock voted for it.

Supporters of BP’s climate transition plan said that the oil and gas major had already made a commitment to its shareholders to continue developing its climate strategy so the resolution wasn’t necessary.

As investors are increasingly under scrutiny themselves to commit to net zero, more asset owners and managers are accepting that the current rate of progress isn’t enough, says Kuhn.

Although only 20.6% of shareholders supported the Follow This resolution against BP this year, it is enough to worry directors. The climate resolution filed at BP’s 2019 AGM only won 8.4% of the vote. The stronger the discontent, the argument goes, the more likely the board will take notice.

Some pension funds are choosing to cut their losses and divest rather than continuing to fight a losing battle, according to a report by Danish NGO AnsvarligFremtid. The survey of 16 Danish pension funds assessed how they voted at the AGMs of 10 banks and global oil and gas majors. The majority of these funds have now divested from US oil and gas companies, with only Danica Pension (€66.7 billion AUM) and Velliv (€29 billion AUM) holding shares in ExxonMobil.

Funds maintaining shares in these companies “don’t consistently vote for independent climate resolutions”, the report noted, adding that Danica Pension and PensionDanmark (€36 billion AUM) voted against climate resolutions filed with Equinor, BP and Shell.

Investors ultimately want companies to remain competitive, says Steven Heim, Managing Director of Boston Common Asset Management (US$5.3 billion AUM).

The asset manager previously supported two resolutions filed against Statoil in 2015, now known as Equinor. The first, supported by the Statoil board, asked the company to “expand on its climate reporting and assess the resilience of its portfolios against various climate scenarios post 2035,” he says.

The second resolution, proposed by WWF Norway and Greenpeace Norway, asked the company to assess the resilience of its ‘high risk’ assets and publish its strategy to divest from stranded assets.

“Statoil opposed the second resolution saying it implied revealing confidential business information, asserting also that strategy is the responsibility of the board and should not be based on a single factor such as climate. We can understand how some investors would have that perspective of agreeing with management,” Heim says. “It’s a question of weighing business over climate sometimes.”

Public versus private

In an ideal world, concerns around corporate commitments to climate would be resolved in the course of ongoing engagement activities before investors or third-parties felt it necessary to publicly file resolutions.

BlackRock has previously argued that keeping the details of engagements private allows for trust to build between the company and investor, enabling more constructive conversations that then lead to change.

Boston Common’s Heim says that private engagements allow investors and corporates to develop a “common language” when discussing climate-related issues. In March 2019, the asset manager hosted over 20 oil and gas companies for an off-the-record discussion about carbon asset risk and climate change.

“Those discussions were very helpful in helping advance investor progress for understanding the company’s perspective and vice versa.”

However, Kuhn says that, without visibility or proof of those private engagements, it’s hard to say whether they’re having an impact at all.

“Private engagement isn’t quite cutting it. Even with collaborative engagement efforts, such as Climate Action 100+, it’s still more private than transparent, so you can’t tell whether, and how, engagement has worked,” he says. If private engagement was working, companies’ climate strategies would likely “be in better shape at this stage”, he adds.

Meanwhile, public pressure is beginning to force results.

For example, earlier this year, global bank HSBC was asked by ShareAction to provide more clarity on plans to reduce its emissions and scale back its financing of the fossil fuel industry.

UK-based auto-enrolment workplace pension scheme Nest (£10 billion AUM) was in private talks with HBSC on this issue before ShareAction’s resolution was formally filed, but it wasn’t until the resolution was published that the bank entered into talks with the NGO and its co-filers, resulting in an updated transition plan.

Avoiding confrontation

A large number of asset managers are not voting against corporate management across both climate and social resolutions, according to ShareAction’s ‘Voting Matters 2020’ report.

The report highlighted that just six European asset managers voted for 95% or more social and climate resolutions, whereas five asset managers voted for less than 20%.

Of the asset managers assessed, 37 are members of the CA100+ initiative. On average, they had better voting records, supporting 69% of climate resolutions compared to 39% for non-members. Nonetheless, five CA100+ members – Nordea Investment Management, BlackRock, Lyxor Asset Management, Ninety One and Credit Suisse Asset Management – voted for 50% or less of climate resolutions, the report said.

“We consider asset owners our allies when encouraging asset managers to vote for more climate resolutions. They have the power to influence asset managers and so that’s what they need to do,” Kuhn says.

All parties recognise it requires a considerable reserve of resources to consider every climate resolution in-depth, let alone attend AGMs to cast a vote.

“It takes more time, money and effort to table resolutions than simply defaulting to voting for company resolutions,” McMurdo says. But this is time, money and effort that asset managers need to invest, he notes.

Initiatives have been working to address this.

The UN-convened Net Zero Asset Owner Alliance published guidance advising asset owners on how to assess managers’ processes around voting on climate issues at corporate AGMs.

As well as this, Say on Climate has outlined three key targets every supporting corporate, asset manager and asset owner should be looking for and providing: annual disclosure of emissions; plan to manage those emissions; and votes where shareholders deem it appropriate.

Standardising minimum climate requirements in this way will eventually “trigger best practices, more disclosure and accountability on a company’s climate plans”, wrote Masja Zandbergen, Robeco’s Head of ESG Integration and Michiel van Esch, Engagement Specialist, in a recent blog post.

However, they note that Say on Climate votes may mean shareholders can become liable for climate change if they approve these plans. As well as this, corporate management may be prevented from making further changes on climate change that don’t fall under the Say on Climate remit, Zandbergen and van Esch said.

“It is important for management to clarify what a shareholder is voting for. If the intention is to gauge their shareholders’ approval of their climate plans, an advisory vote based on a climate report is more practical. Management proposals also sometimes compete against shareholders’ own proposals on climate. It is then up to the investor to decide which ones to approve,” they noted.

Climate on the agenda 

Asset managers are also developing in-house solutions to improve their engagement with climate-related performance from investee corporates.

Legal and General Investment Management (LGIM), as part of its Climate Action Pledge, has developed a data-driven system which both outlines their minimum standards for investee corporates to consult and alerts the asset manager when a corporate is failing to meet these requirements.

“If we believe companies aren’t making sufficient progress on these issues, then we will either vote against the chair of the board or potentially divest. The point here is that we’re targeting individual directors, which forces climate onto their agendas,” says Iancu Daramus, Senior Sustainability Analyst at LGIM.

In the background, there is continued pressure from asset owners for asset managers to prove they are engaging with corporates on climate-related issues and voting accordingly, notes Herskovich.

“We are challenged by our clients for an explanation for why we voted to support or not support climate resolutions. It keeps us accountable, which is a good thing,” he says.

Ultimately, short-term financial benefits simply cannot outweigh the importance of addressing climate change. It cannot continue to win out when it comes down to the vote, says McMurdo.

“We applaud those asset managers and investors who have separated short-term decision-making processes from the very important longer-term issues such as climate change, which clearly have financial materiality considerations to account for,” he says.

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