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Long-Term Matters: The lost decades

Evidence is emerging that the oil and gas sector knew about the risks of climate change for 40 years and buried this information. Had the world started decarbonising earlier, we could have done more to protect biodiversity and human life. Instead the industry did its best to rubbish science and the scientists it could not silence.

I find it hard to understand why any investor would reward obfuscation and reckless management. Yet 60% supported management at ExxonMobil and Chevron by voting against stress tests of company assets against a 2°C global warming scenario. Many of these had earlier supported the same measure at BP, Shell, Statoil and Suncor.

This inconsistent stewardship is impossible to understand, especially when these managers claim to be long-horizon investors that put their beneficiaries first. Managers typically give three reasons for voting inconsistently. None of these holds water, and, in italics, I explain why.

• We are influenced by what management says. If it recommends voting against a resolution, then we will support it, while engaging behind the scenes for change. 

The disconnect between what oil and gas companies say and scientific reality is longstanding. Asset managers should have developed greater independence by now. It is hard to take seriously the idea that the 40% of fund managers that supported stress test resolutions have suddenly ceased to have impact.

• Voting at AGMs is not what is needed for dealing with a systemic risk such as climate change. We raise this issue with the thousands we engage with and we seek to shift norms at the regulatory level.  

Acknowledging the systemic nature of climate risk rings hollow when advisers do not manage that risk. BlackRock’s AUM is the equivalent of Japan’s GDP, Vanguard’s AUM matches the UK’s GDP, and BNY Mellon’s AUM approximates Canada’s economy. These systemically important financial companies have a responsibility to act accordingly. What is unacceptable is for fund managers to say they are waiting for governments to act but sit idly whilst their investee companies do their best to impede regulators.

• We vote against proposals we believe have no link to increasing shareholder value. There is no evidence that stress test resolutions will increase shareholder value. 

Such a backward looking explanation shows that the managers have learned nothing from the global financial crisis. The issue is not increasing shareholder value. It is preventing destruction of value. Ask a coal investor. 

This inconsistent voting behaviour needs to change in time for the 2017 AGM season. Many actors have a role to play. Asset managers are profit-making corporations. They need to hear from their clients that the systemic nature of climate risk necessitates a consistent global voting strategy. Any asset owner that thinks of itself as responsible but has not sent such a message should do some thinking about why. 

Investment consultants could begin comparing fund managers on stewardship behaviour. Today there are large index managers (eg, LGIM, HSBC) and active managers (eg, Alliance Bernstein, SSGA, AXA IM, Schroders) that vote consistently. Investment consultants have a duty to make weak stewardship behaviour as clear as they would poor performance or weak compliance, as Mercer has started to do.  

If climate-aware clients and their consultants refuse to rise to this challenge and regulators are sitting on the fence, perhaps NGOs need to turn their attention from corporate laggards to investor laggards. That may mean switching some resources from divestment campaigning. But, if this allows us to bend the curve of greenhouse gasses in time, wouldn’t it be worth it? 

Dr Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University

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