Fund management is a pretty opaque profession, and no aspect more so than the way investors hold the management of investee companies accountable – variously called engagement, active ownership or stewardship.
Climate Action 100+ (CA100+), the engagement focused collaboration with the strapline ‘global investors driving business transition’ now numbers 323 investors and appears to be hitting its stride. In its second year it has delivered:
• An agreement with Shell, also the focus of an active Dutch campaign (Follow This), to reduce Scope 3 emissions intensity with actual targets plus leadership on US methane regulation;
• A management-backed resolution at BP to align business strategy with Paris goals which, strangely, didn’t include Scope 3;
• A promise by Glencore to cap coal production (but not necessarily to halt investment in new projects);
• An unusually assertive letter from EU investors to EU energy utility companies requesting transition plans.
These developments are a notable departure from ‘tea and biscuits’ engagement. Of course, much depends on how they are followed through and, if companies backslide, how investors will escalate their actions. But these twin successes – securing behavioural change at some major companies and growing the combined AUM to $32trn (€28trn) – is a good reason to widen the focus in a targeted and strategic way.
The original 100 companies were chosen using just emissions data. Some of us challenged this quant-driven strategy as too narrow. Some 61 additional companies, including several energy utility companies, were added in July 2018 based on new criteria: being “material” to investment portfolios; having “a significant opportunity to drive the clean energy transition”; or “exposed to climate-related financial risks, including risks to physical assets, that are not captured solely by emissions data”.
Few would question that banks and insurance companies should be included under these revised criteria. Whether the energy transition happens in time depends heavily on the finance sector – going off the cliff slowly is still bad news for portfolios and fund members. Yet the list of 161 includes no major financial companies.
Particularly problematic is the US, where major insurers continue to lag EU peers, and banks have gone silent on climate since President Trump’s election, contrasting with their earlier support for the Paris agreement.
Much focus today is given to a company’s carbon footprint but arguably more important is the company’s lobbying footprint”
Thankfully, a few global banks have made welcome moves in the past year to rule out financing some fossil fuels – most notably project-lending to coal mining/plants and some tar sands/pipeline projects. Yet the sector continues to funnel billions of dollars to fossil fuel companies, in direct conflict with the Paris goals. Greenpeace Switzerland found that in 2017 alone, Credit Suisse and UBS financed 93.9m tonnes of CO2 equivalent emissions, double the level of Switzerland’s annual emissions. Barclays, a founder member of the Principles for Responsible Banking, made a commitment to align business strategy with Paris. Yet its January 2019 Energy Policy offered only undefined “enhanced due diligence” measures on funding for tar sands and related pipelines and “engagement” with coal companies to whom it provides general corporate finance.
There are a few individual and collaborative-investor engagements with banks – such as the engagement with HSBC coordinated by Shareaction and involving Hermes EOS and Schroders. But this work shouldn’t be left to small NGOs to organise. Inclusion of the financial sector by CA100+ would give it the scale needed; there is little value in moving coal lending from a EU bank to a US or Asian competitor. As Louise Rouse, an independent adviser to NGOs says: “Given its continued role in financing fossil fuel expansion, its systemic importance, and the fact that we are facing a climate emergency, the total exclusion of the finance sector from the largest collaborative investor-engagement initiative on climate change is jarring.”
What else does CA100+ need to do to really meet its goal of “driving business transition”?
Much focus today is given to a company’s carbon footprint but arguably more important is the company’s lobbying footprint. The US is a clear example of how vested interests have captured politicians (the majority of the Republican Party and more than a few Democrats) and regulators like the SEC. With current levels of corporate capture, companies can tie investors up in never-ending and technically complex discussions whilst ensuring they delay any action on transition through recourse to their political and regulatory friends.
The good news is that AP7 and Church of England Pensions Board are leading action on this in the EU, while many SRI managers and some pension funds are active in North America. But in Australia, investors seem much more reluctant to raise this issue.
For CA100+ to do what is really needed it must become more than a rebadging of previous regional initiatives with each node (IIGCC, Ceres, IGCC) retaining full control over what happens. There needs to be a race to the top, which means we need ways to compare regional activity and stimulate competition. Accountability to informed civil society players is also key to overcoming conflicts of interest and incrementalism.
Investors need to think strategically about how they can best prevent or mitigate the climate emergency, which may well mean focusing on other markets. Brazil is now a good test case for European investors who consider themselves climate aware: if the Amazon is decimated, it’s climate game over. CA100+ must help to stop this.
Because size matters, much depends on what the mega investment managers decide. PIMCO aside, the biggest three US firms have so far not joined. Given the ability of large members to weaken collaborative action, perhaps it is best they don’t join. Instead, they should say in public that they share CA100’s three objectives: implement a strong governance framework; take action to reduce greenhouse gas emissions in line with the “well below 2°C goal” of Paris; and provide enhanced corporate disclosure. “Supporting members” should also have a policy of voting with CA100+ resolutions which now go beyond just asking for disclosure. We are in a climate emergency and the time is for action, not just disclosure.
For mega-managers to vote against (or even abstain) from CA100+ proposals calling for risk reporting, targets, lobbying and compensation aligned with Paris goals is deeply problematic and indicates they are voting less like fiduciaries and more as friends of management, despite this being other people’s money.
Investors, and especially the mega managers, also need to step up on the issue of climate-competent boards. Where companies fail to make and then disclose transition plans, what is the rationale for returning board members into office? The same goes for auditors who, for example, sign off amortisation at 60 years for coal plants.
To resource this extra activity, many more – ideally all – of the investors who have signed to CA100+ need to be truly active and public disclosure of activity would disincentivise free riding. Greater c-suite leadership at funds and managers is needed to make all this happen and the clock is ticking.
Raj Thamotheram is founder and chair of Preventable Surprises