Net zero-committed asset managers still investing in laggard oil and gas majors, as pressure to stop financing new fossil fuel production builds.
Asset owners have been urged to “scrutinise” the investment practices of their managers, following new research highlighting that asset managers committed to net zero have billions invested in oil and gas companies failing to align with the goals of the Paris Agreement.
Financial think tank Carbon Tracker identified the 20 largest shareholders (by percentage of outstanding shares held) of 15 of the world’s largest listed oil and gas companies, such as ExxonMobil, Chevron and TotalEnergies. This universe is made up of 90 asset managers, including 25 members of the Net Zero Asset Managers (NZAM) initiative, that have collectively invested US$417 billion into these companies.
None of these oil and gas majors are fully aligned with a 1.5°C temperature pathway, the report noted.
“We would encourage asset owners to scrutinise the investment practices of their asset managers,” Maeve O’Connor, Carbon Tracker’s Associate Analyst of Oil, Gas and Mining and report author, told ESG Investor.
“If your asset manager has made public climate commitments, challenge them to explain how investments in unaligned fossil fuel companies are compatible with those commitments; examine managers’ proxy voting policies and histories to ensure that they are voting in line with your preferences.
“We would call on asset managers to ensure that their investment practices reflect their stated climate commitments.”
Shares in the 15 oil and gas companies made up 2.3% of total assets under management (AuM) for State Street by the end of 2022, the report noted, as well as 2% at Capital Group, 1.7% at Northern Trust and 1.3% at BlackRock.
Some of NZAM’s members – including BlackRock, Fidelity and Capital Group – have “significant holdings” in the oil and gas majors, further increasing their positions in 2022 compared to 2021, Carbon Tracker said.
The world’s largest asset managerBlackRock had an average share position size across all 15 companies of 6% in 2021, which increased to 6.6% in 2022, with the market value of those shares growing from US$72 billion to US$116 billion. DWS, abrdn and Schroders, also members of NZAM, have “more limited exposures”, which remained largely unchanged between 2021 and 2022.
BlackRock, which manages many equity holdings on behalf of clients in index strategies tracking third-party indices, told ESG Investor that it does not make commitments that “constrain” its ability to invest clients’ assets in line with their objectives and, as a fiduciary, aims to provide choice in products to help clients meet investment goals, including sustainable funds across both index and active strategies.
Additionally, the World Benchmarking Alliance’s 2022 update to its Financial System Benchmark, which assesses 400 of the world’s most influential financial institutions on their progress supporting a just transition, highlighted that the financial system is “a long way off from global expectations on climate change”.
The whole financial system scored poorly on its approach to fossil fuels, with only pension funds scoring above zero, the report said. Only 1.3% of assessed financial institutions disclosed the amount of financing activities linked to fossil fuels and none of them had publicly disclosed a commitment to stop all financial services to new fossil fuel projects.
Assessed financial institutions often had exclusion criteria in place for coal investments, but there was “very limited evidence found on oil and gas exclusion”, the WBA added.
A new report published by the Institute for Energy Economics and Financial Analysis (IEEFA) said that over 200 “globally significant” financial institutions have now established coal exclusion policies, with Europe accounting for 114 of these institutions.
Of the 36 asset managers and owners with formal coal divestment policies, half have implemented or improved their policies in the last two years, IEEFA said.
Pushing for change
Asset managers with climate commitments that are invested in these oil and gas companies must utilise their influence as stewards to ensure their holdings are transitioning to more sustainable practices and implementing Paris-aligned decarbonisation targets, said O’Connor.
“If investors wish for their portfolio to be Paris-aligned in the near term, then it is difficult to see how that can be achieved while maintaining investments in unaligned companies,” she said.
“On the other hand, if an investor is pursuing Paris alignment more gradually, then there may be an argument for a ‘hold and manage’ approach, whereby the investor uses their shareholding to influence company behaviour.”
O’Connor said that investors should be ensuring that oil and gas companies are transparent and compliant in their climate transition planning, production and sanctioning decisions, emissions reductions targets, climate risk disclosures, and remuneration policies.
Investors are willing to engage with oil and gas majors on climate-related themes. TotalEnergies, ExxonMobil, and Chevron are subject to collaborative investor engagements through Climate Action 100+ (CA100+), which is made up of 700 global investors responsible for more than US$68 trillion in AuM across 33 markets.
In January, UK-based NGO ShareAction published a report mapping the voting behaviours of 68 of the world’s largest asset managers across 252 shareholder resolutions in 2022.
While votes for environmental and social resolutions increased from 60% in 2021 to 66% in 2022, support from asset managers in the US and UK remains “stagnant” compared to Europe, the report said, adding that members of NZAM and CA100+ failed to back a third of climate resolutions on average.
A line in the sand
Multi-stakeholders are also increasingly holding financial institutions to account on their climate-related commitments and progress.
UK-based bank Standard Chartered recently announced that it will not finance the US$5 billion East African Crude Oil Pipeline (EACOP) project, following mounting pressure from the StopEACOP campaign. EACOP still needs a US$2-3 billion project finance loan to proceed.
The campaign group is concerned that the project, led by TotalEnergies, will have a negative impact on the environment surrounding the pipeline’s path, as well as the associated carbon emissions.
The group of investors, which included Brunel Pension Partnership and AkademikerPension, also asked Barclays questions on fracking and climate lobbying.
“The energy transition from fossil fuels to clean technologies is well underway and is likely to gather pace as the damaging impacts of climate change drive bolder government policies,” said Mike Coffin, Head of Oil, Gas and Mining at Carbon Tracker.
“Growing numbers of investors want to support this transition, and are seeking to align their portfolios with 1.5°C. It’s hard to see how they can do this with credibility if they own financial interests in oil and gas companies that are not themselves aligned with the Paris target.”