Commentary

ICYMI, Proxy Season is Shaping up to be Litmus Test for Finance Sector

‘Say on Climate’ votes could pitch asset managers against bankers.

It’s long been apparent that the asset management arms of financial institutions are, relatively speaking, greater supporters of action against climate change than colleagues in banking or capital markets, partly due to the differing time horizons of their respective client bases, i.e. pension fund trustees and CEOs.

But it became clearer this week that these latent tensions could soon ignite as asset managers stiffen their proxy voting policies, potentially inflicting AGM defeats on parent groups’ directors for indulging the toxic relationships (and revenues) of their banking brethren.

A new InfluenceMap report on the climate alignment of the 30 largest financial institutions notes asset management arms are often more supportive of sustainability and climate policy than their parents, which often retain links to anti-climate lobbying. Further, the US$222 billion collective fossil fuel shareholdings of the major institutions’ asset managers (5% of AUM) is overshadowed by the US$740 billion in primary financing recently facilitated by bankers to the sector, partly reflecting permeable exclusion policies.

Managers have some way to go of course, with their climate-focused solutions criticised this week for not following appropriate benchmarks. And InfluenceMap chides some asset managers for failing on stewardship, despite membership of Climate Action 100+.

But is the sector turning a corner, reflecting the increased willingness of asset owner clients to divest if engagement does not yield results? Goldman Sachs Asset Management, for example, said this week it would vote against directors that do not disclose material GHG emissions data, while also setting expectations for science-based transition plans.

With other major groups including BlackRock already having toughened their 2022 voting policies, the upcoming ‘say on climate’ proposals of institutions such as Barclays and NatWest will face intense scrutiny. In the US, where Citi among others face shareholder resolutions on fossil fuel finance, investor attention on climate will have been further intensified this week by proposed climate disclosure rules, which include “material” Scope 3 GHG emissions.

Environmental risks beyond climate will also be raised at AGMs, from sector-specific issues such as mining tailings, to requests for biodiversity-related disclosures, as appreciation of the financial and macro-economic implications of nature-related risks increases. As will social and governance issues, with Goldman’s updated voting guidelines – which warn against violation of UN Global Compact principles – serving as a reminder of the potential human rights risks of continuing to operate in Russia.

For many investors the energy and food security issues of Russia’s invasion of Ukraine will be a major priority, with the latter increasingly recognised by European politicians as a severe risk if the crisis lengthens. More contentious are the implications for renewable energy transition, with Shell reportedly renewing its interest in North Sea drilling and UN Secretary General Antonio Guterres warning that short-term increases in fossil fuel consumption might “close the window” on Paris climate goals.

We will know next week whether the UK government will heed the advice of Sir John Armitt, Chair of its National Infrastructure Commission, that there are “no quick ways” to reduce energy bills, despite growing political pressures, with urgent progress needed instead on detailed proposals for energy efficiency and renewable infrastructure.

Investors are demonstrating their appetite, while Europe is already accelerating its renewables transition, including by removing some of the barriers to increased solar capacity. With these projects increasingly factoring in biodiversity implications, to allow crops to grow underneath solar panels, they even offer a win-win to investors hoping to address both energy and food security risks.

 

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