Commentary

Take Five: Prepare to Engage

A selection of this week’s major stories impacting ESG investors, in five easy pieces.   

Events this week shone a light on the state of net zero transition and investor engagement across key industry sectors.

Shell-shocked? – Investor pressure mounted on oil and gas firms this week, with Shell feeling the brunt ahead of its 23 May AGM. The Church of England Pensions Board and Dutch asset owner PGGM had already declared their support for a Follow This resolution calling for the oil and gas major to align its Scope 3 emissions reduction target with the Paris Agreement. But this week saw UK asset owners Nest, London CIV and the Church Commissioners declare they would vote against the reappointment of directors for failing to meet climate change objectives. Notably, UK proxy advisor PIRC backed the move to oppose directors, while larger peer ISS recommended voting against the Follow This proposal, although accepting the validity of its arguments. Despite the opposition of a similar investor coalition, BP shareholders backed the board and rejected a climate-focused resolution last month. But the fight is likely to continue, with investor networks and NGOs providing more evidence and guidance to asset owners. Speaking at ESG Investor’s Stewardship Summit on Wednesday, Laura Hillis, Director for Climate and Environment at the Church of England Pensions Board, said: “We try to focus on climate change not just as a material risk in our portfolio, but as a systemic risk to our beneficiaries, the economy and the future of our planet and communities.” Perhaps ominously for asset managers, she added: “Asset owners sit at the top of the value chain.”

European banks edge forward – French bank BNP Paribas updated its oil and gas sector policy, ruling out financing for the development of new fields. The new policy, which aligns with the International Energy Agency’s Net Zero by 2050 pathway, follows a commitment in January that 80% of its energy financing would be directed to low-carbon projects by 2030, and is accompanied by new decarbonisation targets for the steel, cement and aluminium sectors. It also follows an investor engagement coordinated by UK non-profit ShareAction, asking five major European banks to restrict fossil fuel financing in line with action already taken by HSBC and ten other major European banks. Both ShareAction and Reclaim Finance flagged loopholes in the new policies, noting that they will allow financing to flow to firms without credible transition strategies in place. But the move piles further pressure on US banks, which are “falling even further behind their global peers”, according to Sierra Club. Climate-related votes at US bank AGMs to date have suggested change will remain glacial, but further resolutions later this May reveal more.

Back of the grid – This week also potentially marked a step change in the engagement between investors and the automobile sector, with Toyota facing a climate-lobbying resolution filed, following “a long period of active engagement”, by Danish pension fund AkademikerPension, in partnership with Storebrand Asset Management and APG Asset Management. With input from InfluenceMap, the investors found a continued lack of alignment between the lobbying activity of the world’s largest car maker (and its trade associations) and the goals of the Paris Agreement. This comes despite signs that Toyota is finally gearing up to address its laggard status in the electric vehicle market (not helped by Japan’s strategic bet on hydrogen), via plans to ramp up its China presence. Not that strategy and lobbying are always in synch. Volkswagen may be ahead of its Japanese rival in the EV race, but across investor relations, climate lobbying and carbon credits the German firm’s net zero strategy still seems to be under development.

End of incrementalism – Unilever CEO Alan Jope has had his fair share of difficulties with shareholders over sustainability-related themes. His imminent departure may well have been sealed, at least in part, by the criticisms of fund managers such as Fundsmith’s Terry Smith, who has persistently criticised the consumer goods firm’s purpose-led strategy. More recently, questions have been raised about Unilever’s continued presence in Russia and its efforts to shield consumers from the worst impacts of rising input prices. This week, like predecessor Paul Polman and fellow casualty of short-termism Emmanuel Faber, Jope remained defiant. “The time for incrementality is long gone,” he told the Forum for the Future. “The problems we’re facing are far too big for an incremental approach.”

Winds of change – As investors continue to push portfolio companies on their climate strategies, there was evidence this week that the transition to renewables is not only picking up pace, but that it is also bringing workers and communities with it. Academic research found that a third of the UK’s electricity came from wind turbines in the first three months of 2023, overtaking gas; while National Grid reported record solar generation in April. Elsewhere, power generator SSE has published a report on how it has measured up to the Just Transition Strategy it set itself in 2020, developed – since you ask – with the support of its institutional investors.

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