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6 September 2021

Investors set the pace on corporate climate action

Concerned investors are starting to make corporate laggards take real action on climate change, but for some investors, they are not moving fast enough.

By Mark Nicholls

Investors around the world, are quietly – and sometimes not so quietly – engaging with companies in which they invest to persuade them to take faster action on climate change. These investors sometimes work closely with companies to craft energy transition strategies. Sometimes, they find themselves forced to flex their muscles. With both approaches they are getting results.

Children take part in an action organised by the NGO Avaaz, to promote 100% clean energy during the COP21 summit in Le Bourget, on the outskirts of Paris, in December 2015. (Photo by Tomas Samson/AFP via Getty Images)

Announcements have come thick and fast in recent months. A record-breaking 98% of investors in General Electric backed a climate-related resolution. Chemicals company BASF has set a net-zero target following engagement with concerned shareholders. Chevron’s shareholders forced the US oil major to set tougher emissions goals, and, in a stunning David and Goliath upset, tiny activist investor Engine No. 1 won three seats on the board of ExxonMobil to push the oil giant – and climate laggard – to create “a credible strategy to create value in a decarbonising world”.

Ben Pincombe, head of stewardship at the Principles for Responsible Investment (PRI), says “there is a growing collective weight of institutional investors who understand the problem of climate change… and that we are not going fast enough”. PRI counts investors managing more than $121trn in assets as signatories. These investors increasingly recognise that stewardship – exercising their rights as owners of companies to have a say in how they are run – is an important part of their obligations as responsible investors, he says.

All this has added up to unprecedented success for shareholders pushing for action on climate. Proxy Preview, an initiative that tracks ESG resolutions at US-listed companies, describes 2021 as a “record-breaking year”. It saw 34 majority votes for disclosure or action on ESG issues, up from last year’s record of 21. More than 17 votes garnered more than 70% investor support. This compared with just two last year, with six supported by more than 90% of investors.

A change in pace

Neither engagement with companies on ESG issues, nor filing shareholder resolutions to try to force reluctant management to act, are new, but two specific factors are now at play. As far as engagement is concerned, considerable credit needs to go to the Climate Action 100+ initiative. It has brought together an unprecedented coalition of investors in a well-organised engagement campaign.

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Meanwhile, the big US fund managers – BlackRock, Fidelity, Vanguard and State Street – have, in response to pressure from their clients, become much more vocal on climate change, and more willing to use their votes to support shareholder resolutions on the issue. Since these four managers hold large proportions of the stock of US-listed companies, this has helped a number of climate resolutions win majority support.

“They have so much influence with companies that, historically, they wouldn’t feel the need to publicly vote on resolutions”, preferring closed-door meetings with company management, says Morgan LaManna, who helps run the investor engagement programme at Boston, Massachusetts-based investor coalition Ceres. “Now they have signed on to climate action, they have to show that publicly by using their votes.”

Taking collective action

Shareholders have been working together to pressure companies for some years, but the creation, in 2017, of Climate Action 100+ has transformed the landscape. It comprises 615 investors, managing $55trn in assets. They are engaging with 167 of the most significant industrial emitters around the world, collectively responsible for more than 80% of global industrial emissions.

The investors’ requests are clear: for targeted companies to set up strong governance frameworks for climate issues; to reduce emissions across their value chain; to move towards net-zero emissions by 2050 at the latest; and to provide enhanced disclosure.

“It is the first time you have seen a mobilisation of that number of investors around a common set of goals,” says Adam Matthews, chief responsible investment officer for the Church of England Pensions Board, which manages £3bn in pension assets. “When a company is being engaged by CA-100, you know about it – it is a significant engagement you can’t ignore.”

The initiative also represents a step forward in its focus on measurable outcomes as well as process. The benchmarking progress made by the companies involved enables peer comparison across ten metrics. Earlier this year, the CA-100+ published the first results of this exercise. It found that, while half of the companies have made commitments to reach net-zero emissions by 2050, many of these commitments lacked interim targets, or failed to capture value chain emissions, where their most material climate impacts are felt.

A work in progress

“We are just past the midway point”, of the engagement process, says Matthews. “I would say the glass is half full rather than half empty.” In addition to the spate of net-zero commitments it has prompted, he points to reviews by companies of their lobbying activities, and their departures from trade associations that have fought against effective climate policy. He also highlights considerable progress on climate-related corporate disclosure.

“I would say it has been tremendously successful – but it is not finished,” he adds.

CA-100+ is far from the only player in town when it comes to engagement. A recent report from PRI lists eight initiatives through which investors are collaborating on climate change. Most of them involve some form of engagement.

UK-based NGO ShareAction, for example, is running its Investor Decarbonisation Initiative (IDI), through which almost 120 investors managing $2.8trn in assets encourage companies to accelerate decarbonisation plans. Its members are engaging with companies involved in chemicals and road transport.

Helen Wiggs, ShareAction’s head of climate change, believes the level of expertise and understanding of a company’s business required to successfully engage on climate change is rising rapidly. “There needs to be a good level of expertise at the fund manager level to understand what net zero means [for a specific company]. What do its short-term climate targets look like? What does it mean in terms of capital expenditure? I am not always convinced that expertise is always there, because everything has moved so quickly.”

Collaborations like the CA-100+ and the IDI enable investors to pool resources and expertise. This is important given the complexity involved in understanding what “Paris alignment” might mean for the near-term plans of a company such as Shell. Matthews says he is in contact with the company “on a weekly basis, sometimes two or three times a week. Sometimes it is very intense”.

Quick wins

Despite the complexity of the issues involved, some engagements can yield rapid results. Wiggs recounts a successful engagement with UK retail chain Dixons. An activist attended its 2019 AGM, on behalf of ShareAction, and asked the company to consider electrifying its vehicle fleet, in line with the 'EV-100' campaign led by non-profit The Climate Group. Dixon’s sustainability manager was at the AGM, approached the activist, and began a dialogue that, within a little over 12 months, led to the retailer committing to transition its fleet to electric vehicles by 2030.

Much engagement with companies takes place behind closed doors, with “tea and biscuits” meetings, as Wiggs puts it. Certainly, investors favour working with companies in a spirit of collaboration.

Inevitably, though, there are times when management is not responsive, or is not moving as fast as investors would like. In those cases, shareholders can escalate to filing a shareholder resolution to be voted on at the company’s AGM.

Meanwhile, in the US, the regulatory and corporate culture means such resolutions are often resorted to much earlier in the process, says Danielle Fugere, president of As You Sow, a shareholder advocacy group based in Berkeley, California. In the past, resolutions on ESG issues were usually opposed by management, but this is changing as companies increasingly acknowledge the low-carbon transition, she says. Shareholder resolutions can empower individuals within companies that are pushing for change.

Empowering agents of change

Fugere cites the example of industrial giant General Electric (GE). In May, 98% of investors voted for a resolution, filed by As You Sow and supported by company management, that called on GE to report on whether and how it plans to achieve net-zero emissions across its businesses and products by 2050. “There can be components in the company that wants to do these things, but management might have different priorities or they may not have a champion on the board,” she says. “Our raising the question and those concerns helped drive change within the company.”

The biggest victory for climate-concerned shareholders this year was the ExxonMobil vote. That, says LaManna at Ceres, was the result of, “over many years, large investors being frustrated that Exxon wasn’t engaging constructively”. Cynthia McHale, who heads Ceres's work implementing the CA-100+, predicts it will help ratchet up the level of ambition demanded by investors. “That was really a breakthrough,” she says. “The Exxon vote has resonated across boards around the world.”

The AGM votes in the US have provided a “strong talking point” in the engagement effort under way in Asia-Pacific, says Rebecca Mikula-Wright, CEO of the Asia Investor Group on Climate Change (AIGCC). The group is one of the investor groupings participating in the Climate Action 100+ initiative, engaging with 33 target companies in Asia. It has also launched its own engagement campaign aimed at utilities in the region.

Asia embraces engagement

Historically, Asia-based companies have not been amenable to ESG engagement by international investors, but this is changing as climate rises up the agenda, says Jane Ho at the AIGCC. Key to successful engagement in the region is the ability to bring together the experiences of international investors with domestic shareholders who tend to enjoy closer relationships with the companies involved.

“Where we couldn’t even get meetings, we are now sitting down at the table and having really detailed discussions about the strategic direction of the business and how they are transitioning,” Mikula-Wright says.

For example, in July, South Korean oil refiner and chemicals company SK Innovation pledged to reach net-zero emissions by 2050, alongside other environmental commitments, following engagement by Climate Action 100+, and led by the PRI.

However, in Asia, compared with Europe and North America, investors need to simultaneously work with regulators and policymakers to try and ensure the regulatory environments in the region enable climate action, adds Mikula-Wright. “The engagement there is to make sure regulators understand what global investors are asking of the companies in their markets.”

The case for walking away

Divestment is an alternative approach for investors concerned about the ability or willingness of companies to successfully navigate the low-carbon transition. The Go Fossil Free campaign – which began on student campuses, mirroring the anti-apartheid divestment effort of the 1980s – now counts 1,333 institutional investors, with some $15trn of assets, who have partially or fully divested from companies that earn revenues from fossil fuels. That movement argues there is a moral imperative not to invest in fossil fuel companies, and a financial one, given the risk that tightening climate regulation could leave investors in the sector nursing substantial losses.

Among institutional investors, few take such a hard line. Norway’s Storebrand Asset Management is one firm that has been more outspoken than most. Last year it announced it was divesting from Exxon, Chevron, Rio Tinto and BASF over their climate lobbying.

However, even here, the company characterises divestment as a last resort. “We never want to exclude anyone,” says Bärd Bringedal, its chief investment officer. “Where we cannot see our engagement helping the case, or if the company is unwilling to have a meaningful dialogue… we keep our options open to exclude companies from our investible universe.”

While Bringedal describes Storebrand as “turning up the notch” on climate with its exclusions, it remains invested in companies such as BP and Shell, highlighting their net-zero pledges. “It’s a process,” he says. “We are willing to stay invested as long as they keep working on the climate issue.”

A middle way

Some investors are taking a middle way, flexing investment up or down in response to a company’s climate performance. For example, the Church of England has invested £600m in the FTSE Transition Pathway Initiative Climate Transition Index. The index underweights companies that perform poorly against five carbon performance metrics – such as emissions, fossil fuel reserves and their emission reduction pathways – while overweighting those that perform well. “For us, this is a very effective way of reinforcing engagement,” says Matthews.

The Church of England Pension Board does divest from companies that fail to make progress. In December, it announced it had “restricted investment” in 12 companies due to their failure to meet its climate standards. However, in common with most investors pursuing engagement, the process is about working with companies to help them adapt.

“This is a deeply complicated transition,” says Matthews. “We are talking about changing companies over a 30-year period as society’s energy demands change.”

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