In the week when Donald Trump looked like he might be about to pull the US out of the Paris Climate Agreement the launch report of the Energy Transition Commissions was a welcome injection of common sense. In line with other recent reports, the message is: ‘we can get to WB2 (well below 2°C warming) but it is going to be tough, and a lot of organisations need to change fast to make it happen’.
Generally missing from the discussion is an identification of the incentives that will drive this change.
It has long been suspected that conflicts of interest lie behind the inconsistent voting we highlighted in the Missing60 campaign (aimed at the 60% of US investors who did not support resolutions asking for better disclosure of climate risk). New research from the 50/50 Climate Project shows climate change resolutions are gaining increasing support from the broad mass of investors. At the same time, the investment houses with the biggest income from managing corporate pension plans are the least likely to cast votes against management. Specific examples are BlackRock, BNY Mellon, Vanguard and Wells Fargo.
What this means is that the fiduciary duty to put clients’ interests first is being sidelined or even ignored. Climate change poses systemic risks across a diversified portfolio and particularly in relation to pension plans.
Why are incentives for investors so important? Let’s take the example of energy utility companies. The Energy Transitions Commission rightly points out that this is the easiest sector to decarbonise. The technology exists to get to near 100% clean energy by 2050, renewables are already cost competitive in many situations, and rapidly becoming more so.
If energy production cannot be decarbonised and spread the impact of clean power into transportation and domestic heating, there is no chance of getting to well below 2°C. Accordingly, concerned investors should be backing resolutions asking energy utility companies to produce plans showing how they will transition to 2°C. There are currently
eight of these in the US. The most attention grabbing is at Southern Company, a US gas and energy utility holding company, where for the second year running the firm is being asked to produce a 2°C transition plan. If the votes rise above 50% there is a fighting chance that Southern and companies like it will have to pay serious attention to how they make the transition.
So investors incentivise companies. When this works well – for example, DONG Energy, with its Danish government shareholder – the transition can be fast.
But what incentivises investors to take action? Here are three suggestions:
● Commercial self-interest. It is clear from recent research on the European utility sector that companies are differently positioned in relation to the transition.
● Investors should not risk being left with a holding in a company that is losing out to greener faster-moving competitors.
● Naming and shaming. Missing60 is being used as shorthand everywhere from the Bank of England to the UN-supported Principles for Responsible Investment (PRI) for investors who appear to be conflicted. This year the spotlight will fall particularly on those companies represented on the Task Force on Climate-related Financial Disclosures (TCFD), which made an explicit recommendation that companies produce 2°C scenarios.
● Litigation. At some point the conflicts of interest will be so transparent that investment management firms will face litigation on behalf of those whose assets they are managing. This could happen soon.
Dr Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University. Carolyn Hayman is chair of Preventable Surprises