Long-Term Matters: Call to voting advisers
For Sir Mark Moody-Stuart, former chairman of Shell and Anglo American, the hopeful thing about climate change today is that big investors are getting engaged.
But the narrative that investors can allocate capital efficiently and so promote social progress lacks credibility. The Kay review of UK equity markets and long-term decision-making highlighted that intra-firm capital allocation is more important. The role most needed of investors today is not capital allocation but stewardship.
Most investors are bad at stewardship. But what if fund managers were given a cheap and easy way to be catalysts for good stewardship, an invitation they could not refuse? That has already happened with BP, Shell and Statoil. At their 2015 annual general meetings (AGMs) the boards recommended a resolution put forward by the ‘Aiming for A’ investor network which essentially tells these companies to start preparing for a low-carbon world.
There are some caveats. It is primarily a disclosure request rather than an instruction to switch business models and the boards supported it. Over 98% of investors voted in favour and the three companies are taking it seriously. Shortly after this vote, European oil and gas majors called for a carbon price. This is not new and no target price was mentioned but they were prepared to break ranks with the US majors, none of which supported the initiative.
So perhaps stewardship, rather than investment (and ESG integration), will help save human civilisation. In particular, ‘forceful stewardship’ – the willingness to vote for resolutions which address systemic risk while protecting long-term shareholder value – will be crucial. To be clear, this is not about doing good. Rather, it is about discharging fiduciary duty, given the new understanding of a major systemic risk.
If there are more resolutions to effect constructive change then voting advisers become critical information intermediaries. Most investors do not have in-house resources to analyse all AGM resolutions independently. With the possible exception of boutique active investors, advisers are key players, especially for large investors and index funds. Even where there is an ESG team, voting agencies provide first-point-of-call recommendations.
What is interesting about the BP vote is that the main European voting advisers approached the question differently. Only one provided a detailed analysis explaining the rationale behind voting ‘yes’. This firm, Glass Lewis, also recognised the latest Intergovernmental Panel on Climate Change report, as well as relevant articles in the financial press.
The quality of analysis by two advisers was not high. There was little scientific rationale: the emphasis was on the board’s support and how the resolution was good for BP’s brand.
We cannot generalise from one resolution. But clearly there is a strategic question about how advisers see voting on low-carbon business plans to mitigate climate disruption. If they see it as just another campaign to be managed or, at best, seen through a ‘values’ lens, this would be a grave error. In the long run, investors may pay a steep price and voting advisers will suffer reputational costs.
Informed investors need to persuade voting advisers that managing systemic climate risk – that is, a rapid transition to a low-carbon economy to significantly reduce economic and social risk induced by climate change – is a core business challenge for corporations as well as investors. It applies to the short term as well as the long term. The leadership of these agencies needs to show they are on top of climate science, as well as the economic and social damage that may come with climate disruption.
Voting agencies need to move beyond a governance-only perspective and consider sustainability not as a bolt-on agenda but rather as core. Until they can, investors have to accept responsibility for aligning their voting activity, and the voting advisers they choose, with their investment beliefs.
Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University. Helen Wildsmith is stewardship director for climate change at CCLA