Jeanne Martin from ShareAction gives an update on the progress of climate-related investor initiatives, and argues that divestment and engagement should be seen as complementary tools in the ESG toolbox.
Much of this success is due to the fossil fuel divestment movement, which has mushroomed from a small student-led campaign to a global movement involving citizens, civil society, faith organisations, the endowments of educational and philanthropic organisations, and most recently UK pension funds.
In only six years, 837 institutions and more than 58,000 individuals with more than $6tn (£4.3tn) of assets have made a fossil fuel divestment commitment of some sort, often focused on coal as the highest carbon and thus most damaging of the fossil fuels.
If credible risk reduction isn’t achieved, institutional investors ultimately should divest their assets
Here in the UK, Southwark and Waltham Forest pension funds have made public commitments to divest from all fossil fuels, while Haringey, Hackney and South Yorkshire have made coal-related commitments to divest.
Divesters’ motivations have been partly financial, driven by concerns about asset stranding in the sector, and partly driven by a desire to stimulate public debate and thus create space for more ambitious public policies on climate change.
Divestment threat has enabled enagagement
The result of this action, and the publicity generated, has been to put the risks of climate change and the issue of stranded assets firmly on the agenda of the world’s largest institutional investors.
Investors have responded at different speeds and in different ways. Rather than jump into full-scale divestment, some have instead sought to engage with their holdings.
Corporate engagement with high carbon companies is particularly important for index funds that are technically unable to divest, not least because traditional equity indices are heavily tilted towards high-carbon sectors such as oil and gas, utilities, mining and industrials. BP and Shell constituted 15.6 per cent of the FTSE 100 in January.
The divestment movement, which has undoubtedly put pressure on both fossil fuel companies and their major investors, has opened the space for more ambitious and forceful investor engagement with companies about their approach to climate risks.
In 2015, UK pension funds played a leading role in pioneering shareholder resolutions on climate risk disclosure at Shell and BP. Sensing the high level of investor support the resolutions would attract, Shell and BP ended up recommending shareholders vote for them.
Both resolutions passed with more than 98 per cent of the vote in favour. These paved the way for similar shareholder resolutions at BHP Billiton, Rio Tinto and Exxon Mobil, among others.
Engagement has its limitations
Yet, the disclosure of climate-related financial risks, though valuable, is clearly just a stepping stone to the action required to decarbonise the global energy system in line with the Paris Climate Agreement.
Fossil fuel companies, including the oil majors, must undergo profound transformation of their core business models if we are to succeed in keeping global temperatures below two degrees of warming – let alone the 1.5 degrees many still hope for.
Investor engagement is going to need teeth, and part of this is a question of scale. Recent investor initiatives, such as the Climate Action 100’s global network of 256 institutional investors – responsible for an eye-opening $28tn (£20tn) of assets under management, aim to achieve just that.
These investors have committed to work collaboratively to engage with the 100 highest carbon emitters to curb their emissions.
The Principles for Responsible Investment has launched a new investor working group to monitor oil companies’ capital expenditure and to press for sustained capital discipline in an increasingly uncertain energy sector.
The test for engagement
2018’s AGM season will test these investor-led initiatives and their ability to influence businesses. Companies such as Shell will see investors voteon a resolution asking the company to set and publish greenhouse intensity targets for its carbon emissions, in line with the Paris Agreement.
Investor engagement with companies in any sector, and especially in the oil sector at this highly challenging transition point, needs clear milestones and appropriate escalation strategies.
If credible risk reduction isn’t achieved, institutional investors ultimately should divest their assets to protect their clients’ best interests.
Jeanne Martin is senior campaigns officer at ShareAction
