As the urgency of the climate crisis escalates, investors are under pressure to divest rather than engage with the oil and gas sector.
Patience is running out for some investors on the ‘divest or engage’ debate over fossil fuel companies, with claims that not enough change is happening at the pace required to reach net zero greenhouse gas (GHG) emissions by 2050.
Between 2015 and 2020 there was a rise in the number of charities in the UK excluding fossil fuels from their portfolios from just over 4% to 33%, according to research from Cazenove Capital.
ABP, the Dutch pension fund for civil servants and teachers, recently said that it would no longer invest in producers of oil, gas and coal, and that it would dispense with its current investments in those sectors by the first quarter of 2023.
Asset owners and managers have long wrestled with the question of how best to use their influence to drive low-carbon transition at the oil and gas firms they own. This struggle has intensified in the run-up to COP26, due to a combination of popular protest, scientific evidence and foot-dragging by fossil fuel firms.
“Generally speaking, having a seat at the table is the more effective means to affect change than divestment. Exercising influence with management and the board of directors is more impactful,” says Dr Michael Viehs, Head of ESG Integration at the international business of Federated Hermes. Viehs’ firm is among those which typically push for further engagement and think investors should stick with fossil fuel exposures to be able to wield pressure from within to accelerate moves toward cleaner energies.
Opinions on the two strategies can seem miles apart. Many still think engagement, for now, is key but with heavy caveats. “Divesting doesn’t provide any good on the real-world outcomes. We need oil and gas companies to use their cash to invest in green initiatives. They have money and knowledge,” says Caroline le Meaux, Global Head of ESG Research, Engagement and Voting at Amundi.
“Oil and gas companies have very deep pockets, so we need them to be at the table,” she adds.
Amundi has adopted an engagement policy, having acknowledged the need for oil and gas companies’ expertise to attain their goals.
“The companies know how to deal with projects, such as carbon capture,” le Meaux says, adding that pushing oil and gas companies toward transition and encouraging them to invest heavily in green energies is important to their strategy.
Dragging their feet
In the past week, Royal Dutch Shell set out a target to halve its emissions by the end of the decade as it revealed worse-than-expected profits for the third quarter of 2021 despite a surge in crude oil prices.
Shell has previously been called out on its low-carbon transition policy and was ordered to accelerate it by a Dutch court.
This, coupled with actions like those of ABP, could show a market that is losing patience with slow movements from fossil fuel producers.
Colin Baines, Investment Engagement Manager at UK-based charity Friends Provident Foundation, says that there has been public knowledge on the climate impact of fossil fuels for several decades. As such he feels there is little justification when companies – and funds – drag their feet on transitioning away from fossil fuels. “We found the way certain funds are managed day-to-day was very poor. We would hear that ‘We’ve signed up to the Principles for Responsible Investment and Climate Action 100+’, implying boxes had been ticked,” he says. Headline grabbing announcements still cut swathes, but are often no more than greenwashing, he adds.
Further evidence came this week with the release by the Net Zero Asset Managers initiative of interim targets for 43 of its members, which showed 65% of total assets not covered by climate-related targets.
In a response, Lara Cuvelier, Sustainable Investments Campaigner, at Paris-based NGO Reclaim Finance, called the interim targets “a dangerous distraction from the key issue of ending financial support for companies expanding fossil fuel production.”
Reclaim Finance has also argued that asset owners should take a tougher stance. The UN-backed Net Zero Asset Owners Alliance responded robustly on its policies around fossil fuel divestment and carbon offsets and removals after the NGO criticised its progress in a recent report titled ‘It’s Not What You Say, It’s What you Do’.
“Engagement alone without divestment is not effective,” Cuvelier tells ESG Investor. “[Using] divestment is moving the debate, and I think I can speak for NGOs when I say this – we don’t think engagement is ineffective. We push for both strategies.”
Plans for how to stop companies dragging their feet, however, are in motion.
Red line on greenwashing
Beyond systematically excluded fossil fuel firms, Friends Provident chooses to engage in other sectors, but is rigorous in its expectations of investee companies and asset managers. Friends Provident uses a ‘comply-or-explain’ policy – i.e. if it sees evidence of asset managers’ voting against measures in line with ESG-related goals and measures at AGM meetings, Baines asks for explanations.
“I always ask asset managers for a file of holdings and the voting records because that gives you a helpful tool of how they vote at AGMs.”
Often there are perfectly valid reasons for singular anomalies but it’s an easy way, says Baines, of identifying ‘greenwashing’.
“With comply-or-explain, we might start to see change,” Baines says. “It would improve the effectiveness of ESG investing and change company behaviour.”
A common problem, says Baines, is the over-supply of information around climate-related action, which can obscure the reality for investors and other stakeholders.
Cuvelier emphasises that carefully separating actual results from corporate press releases and marketing material is a key element in discovering whether a firm is being serious about transition. Its value to information gathering makes the resources dedicated to engagement worthwhile, she says, but only if ‘red lines’ are clearly drawn and observed.
The red lines include actions such as switching to divestment if certain target dates for transitions are not met, or if new carbon-based projects are undertaken despite promises on green energy. Cuvelier uses French oil major Total as an example.
The multinational has seen positive headlines due to switching several of its mainland France crude oil refineries to biofuels facilities at a huge cost. This, Total said, showed it the company was putting its money where its mouth was in terms of transitioning to clean energy. However, Cuvelier says, away from fierce scrutiny in Europe, the company continues to finance new oil wells and exploratory operations.
Cuvelier says that, with red lines in place, more investors could have held Total to account.
Changing the narrative
At Amundi, Le Meaux is positive that engagement has to be accompanied by the threat of divestment, but for different reasons. “When you’re a pension fund, you have to take into account the opinion of the beneficiaries, such as economic value of doing good in real life. Part of good governance is doing what your beneficiaries want.”
But the timing of divestment can backfire, as in the recent example of activist investors being elected to the board of a US oil major. “If you look at Exxon, three out of the four people put forward by activist investors made it to the board, the reason the fourth person was not elected was a pension fund divested. Its voice couldn’t be heard,” she says. With more engagement, not less, responsible investors could have had more influence.
Le Meaux says exchanges of views on divestment are important to the broader debate on how investors can drive emissions reductions, but believes engagement is more effective. “If you’re divesting you can’t vote against. You don’t have influence over the board. Yes, you might impact the value of the company and its share price at the beginning – but at the end of the day, if only the non-ESG investors are left then who is going to push the agenda?
“We are in a position to meet the CEOs of all these oil and gas companies because we are exposed. And if not, we would only have the people interested in the financial part,” she adds.
Cuvelier agrees on the importance of investor voices being heard at the AGM level. She gives the example of French public sector pension scheme Ircantec, which fired a warning shot last week announcing that from 2022 it will divest from companies that have significant revenue from unconventional oil and gas projects. Cuvelier says this shows the power of staying on boards, but also that the red lines are key. Too many funds simply accept face value answers rather than pushing, she adds.
For Baines, engagement has to be a structured activity, with clearly understood consequences and escalation procedures.
“Engagement is going to have to get a lot more forceful. Investors are going to have to push points of difference,” says Baines. “More resolutions. More shake-up of boards. More robust engagement. This ‘tea and biscuits’ approach has failed miserably,” he says. “They’re going to have to ramp it up.”
Viehs suggests that investors should accept that not every relationship will lead to the desired outcome. “Engagements can fail for various reasons, even after engaging with investee companies for several years. In these circumstances, investors should decide if they are still able to invest in these companies.”
Among much of the market, the position, for now, is that engagement is still key, but that it has been too cautious and allowed for too much leeway. More stringent measures must be put in place to ensure that engagement nets results.
“There will be more public pressure and more divestment. There is a role for engagement, but it needs to push more,” he says.