Los Angeles Times - Attracta Mooney | Patrick Temple-West | Financial Times
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A resolution calling on Chevron to disclose its lobbying on global warming passed this year. (Chevron)
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As 2020 kicked off, Dan Gocher at the Australasian
Center for Corporate Responsibility, a shareholder advocacy
organization, was feeling “pretty optimistic” about its plans to force
big Australian energy companies to tackle climate change.
BlackRock,
the $6.8-trillion asset manager, and other large investors had
proclaimed an urgent need to arrest global warming. With the renewed
focus on climate change following devastating bush fires in Australia,
the ACCR was hopeful several climate-related resolutions filed at oil
and gas producers Santos and Woodside would gain strong shareholder
support at their annual meetings in April.
Then came the COVID-19
pandemic. “Once the virus hit, we said, ‘God, we won’t get anything
done [on climate change] for 18 months,’” Gocher said.
Like many
others, Gocher feared investors would swiftly retreat from recent
climate pledges as markets plummeted. Critics had long argued that the
fund industry’s nascent love affair with environmental, social and
governance investing, or ESG, was in reality a marketing ploy that would
be dumped at the first sign of trouble.
Instead, in spite of the pandemic, 2020 has proved to be a landmark
year for investor action on climate change, with significant resolutions
being passed and investment pouring into sustainable funds. With
regulators and clients increasingly calling for change, asset managers
are broadening their remit beyond energy-intensive industries such as
oil.
Rather than drive investor attention away from climate
change, the pandemic has cemented interest, with many investors fearing
the economic fallout seen during the pandemic could be replicated if the
world fails to halt global warming, said Mirza Baig, global head of
governance at Aviva Investors.
Until the coronavirus outbreak,
“there was still a significant portion of the investor base” that
believed tackling climate change “could wait until tomorrow,” he said.
“That has changed. Companies and investors are starting to look at the
importance of acting now.”
At Santos, 43% of shareholders
supported a resolution to require the energy company to set targets in
line with the Paris agreement to tackle climate change — the first time a
targets-based resolution had received such a high level of support in
any country. More than half of shareholders voted in favor of a similar
motion at Woodside a few weeks later. “We were very much surprised by
the support,” Gocher said.
In Japan, 35% of shareholders
supported the country’s first-ever climate change proposal at Mizuho
Financial, calling on the banking group to disclose a Paris agreement
plan.
In the U.S., a resolution calling on Chevron to disclose its
lobbying on global warming passed, while almost half of shareholders
backed a climate proposal at JPMorgan, the U.S. bank.
The fact
that only a few of these resolutions passed demonstrates that the
arguments within the investment world are far from settled. But pressure
on energy companies from the world’s most powerful investors is rapidly
increasing. Ordinarily for resolutions of this type, 99% of
shareholders vote according to management recommendations, according to
Follow This, a green shareholders’ group that filed resolutions at
European energy companies BP, Royal Dutch Shell and Equinor.
Overall,
in the U.S. and Canada, average investor support for environmental
resolutions during the first six months of 2020 was 32.7%, up from 21.9%
in 2019, according to Proxy Insight, a data provider.
“We have had the most successful [annual general meeting] season ever
[for climate resolutions], but because of COVID it didn’t get much
attention,” said Mark van Baal of Follow This. “One by one, these
investors see that climate change is such a threat to their assets.”
The Greta factor
Since the Paris agreement was drafted in 2015, the $85-trillion asset
management industry has slowly awoken to the growing risks of global
warming.
The enormous publicity surrounding the campaigns of Greta
Thunberg and Extinction Rebellion in 2019 forced even the most skeptical
of big investors to pay attention, said Wolfgang Kuhn, director of
financial sector strategies at ShareAction, a responsible investment
charity.
“You suddenly have every asset manager talking about how
deeply ingrained ESG is in their DNA,” he said. “There is good work
going on, but it is also true that if you are seen to be responding to
this trend and introducing the right products, you can make money from
this.”
European asset managers including Nordea, Legal and General
Investment Management, BNP Paribas Asset Management, Aviva Investors
and Robeco have been at the forefront of this movement.
Investment companies from the U.S. to Australia have been slower to
react. A study by ShareAction found that 38 of the world’s 75 largest
asset managers scored badly on ESG issues, including BlackRock, Vanguard
and State Street. The three firms are hugely influential and control
about a quarter of U.S. markets alone through the popularity of their
passive funds and other investment products, meaning their views drive
change in the corporate boardroom.
After years of criticism over
alleged inaction, BlackRock, the world’s biggest asset manager, in
January revealed plans to put climate change at the center of its
investment process by rolling out new ESG funds, divesting some coal
holdings and taking a tough line on global warming during boardroom
discussions with businesses around the world. At the time, BlackRock
Chief Executive Larry Fink warned that global warming represented a risk
to markets unlike any previous crisis.
This prospect of a
financial hit has galvanized many investors. In an open letter in March,
pension fund executives, including Hiro Mizuno, who was at the time
chief investment officer of Japan’s Government Pension Investment Fund,
the world’s largest, said climate change has the potential to destroy
$69 trillion in global economic wealth by 2100.
Regulators such as
Mark Carney, former head of the Bank of England, have also warned of a
big investment risk from “stranded assets” — where investors have
holdings that become unsellable because of climate change.
For others, their new foray into climate issues has been driven by
demand from clients, including younger investors who want their
investments to do good as well as generate a return. Even as investors
retreated from mainstream funds during the pandemic, ESG products
continued to attract cash. Sustainable funds in Europe pulled in nearly
$35 billion in the first quarter of 2020, compared with outflows of $172
billion across all European-based funds, according to Morningstar, the
data provider.
ESG fund performance has been strong. Research
from BlackRock in May found that sustainable strategies have
outperformed during this year’s period of intense volatility, with 94%
of leading sustainable indices beating their parent benchmarks in the
first quarter.
With a growing business case, more than 450 asset
managers, with $40 trillion in assets, have signed up to an initiative
called Climate Action 100+ to force the world’s biggest carbon emitters
to tackle global warming. BlackRock joined the group in January.
“There
has been a big shift in the past five years: The understanding, the
awareness of climate change has grown enormously, particularly in the
last year,” said Eugenia Unanyants-Jackson, ESG research head at Allianz
Global Investors.
“It is a physical risk to people, it’s a big risk to our investment portfolios, and we need to do something.”
Growth in ESG expertise
With their newfound interest in global warming and other ESG issues,
asset managers have gone on a hiring spree. The number of investment
professionals specializing in holding boards to account on issues such
as climate change and corporate governance almost doubled at the world’s
biggest asset managers over the last three years, according to
Financial Times research, while they have also invested heavily in
building new systems to examine climate risk.
Their interactions
with companies on climate issues are also changing. For years, small
religious organizations or advocacy groups spearheaded climate change
agitation at companies. These lonely crusades, though supported by a
handful of other mainstream investors, failed to rattle most boardrooms.
“A
lot of faith-based investors have been raising these issues for years
and years,” said Kate Monahan at Friends Fiduciary, a nonprofit
investment firm for 400 Quaker communities with more than $500 million
in assets under management in Philadelphia.
These religious investors now have company, with big asset managers
also taking a more active approach at annual meetings. BNP Paribas Asset
Management, for example, filed this year’s environmental lobbying
proposal at Chevron.
Asset managers are also more willing than
ever to use their vote to push for environmental change. “It was almost a
rule that [asset managers] don’t vote for an NGO [climate] resolution.
But it looks like that is changing now,” Van Baal said.
Still,
there is a divide in how big asset managers vote. BlackRock and Vanguard
supported no environmental resolutions in the U.S. in 2015, but those
figures rose to 13.8% and 16.7% respectively in 2019, according to Proxy
Insight. BNP Paribas Asset Management and Allianz Global Investors, in
contrast, backed at least 90% of environmental resolutions in the U.S.
last year.
BlackRock was criticized for failing to support the
climate resolutions at Woodside and Santos. But it supported other
environmental proposals this year, including the lobbying motion at
Chevron. It has also begun voting against the reelection of board
directors over climate concerns, taking this approach at 50 companies
globally this year.
“Because we believe climate risk is investment risk, we are most
focused on companies that face material financial risks in the
transition to a low-carbon economy and, as a result, present the
greatest risks to our clients’ investments,” said Amra Balic, head of
BlackRock investment stewardship for Europe, the Middle East and Africa.
Not
everyone is convinced by BlackRock’s approach. The chief executive of a
rival asset manager, who declined to be named, said targeting directors
over global warming, whether through boardroom discussions or voting at
annual meetings, was a good step, but often it was necessary to join
other investors in sending a big signal to companies through climate
resolutions.
“There are a lot of [asset managers] who say they do
[care about climate change] but can’t prove it,” he said. “There are
people who say they do [factor it into their investments], but look at
the voting record. Look at BlackRock’s voting record.”
Eli
Kasargod-Staub, executive director of Majority Action, a nonprofit
shareholder advocacy organization, added that support from the world’s
largest asset manager could have swung climate-critical resolutions at
Delta Air Lines, Dominion Energy and JPMorgan Chase to majority support.
Increased scrutiny
With public pledges and increased staff, companies now face the
prospect of intense shareholder scrutiny. Small shareholders such as
Monahan at Friends Fiduciary were easy to ignore, but large asset
managers cannot be easily brushed aside.
The jump by large
investment firms into the climate change fight “will send a shiver up
the spine of the companies that have not dealt with this before or are
ignoring the issue,” said Jamie Bonham, director of corporate engagement
at NEI Investments, a small Canadian investment manager with $5.8
billion of assets under management.
“You will see corporate boards
a lot more willing to negotiate with shareholders on avoiding
proposals,” he said. For companies, “they see the writing on the wall.
If they go to the annual general meeting, then it is quite possible they
are going to lose the vote.”
As well as increased scrutiny,
investors are asking tougher questions. The focus previously was getting
companies to disclose the risks they face from climate change, but
shareholders are now increasingly demanding they outline a plan for a
transition to a low-carbon economy.
Rakhi Kumar, head of ESG investments and asset stewardship at State
Street Global Advisors, said: “Four or five years ago, you would
probably debate [with companies] if climate change was a risk or not.
Now you are no longer debating that. Most companies have got the message
that this is a concern for investors.”
It marks a big shift for
companies, many of which have lobbied heavily for a relaxation of tough
climate rules and a reduction in shareholder power.
In response,
some European oil companies such as BP and Shell have outlined so-called
net zero ambitions in response to investor pressure. But in many cases,
this has not been enough to appease all investors — resolutions calling
for several European oil companies to set hard targets on climate
change received more support this year than last, despite the companies’
pledges.
It is not just carbon-intensive companies such as oil,
petrochemicals and mining that are feeling the pressure. Barclays, the
U.K. bank, was forced to unveil a new climate plan this year after
shareholders targeted it. JPMorgan said in May that board member Lee
Raymond, a former chief executive of ExxonMobil, would step down after
intense pressure from activists and shareholders.
“It was part of every conversation in Davos. I’m talking about
climate, in particular,” JPMorgan CEO Jamie Dimon said at his bank’s
investor day in February. “We’re taking it very seriously.”
The
path to greener investment is not assured, with other companies still
shrugging off asset managers’ new threat. “Our companies are not
worried,” said Charles Crain at the National Assn. of Manufacturers,
whose members include ExxonMobil.
In the U.S. there is growing
pushback against investors acting as climate warriors. Asset managers
are gearing up for a fight with the Trump administration over a new
proposal that threatens investors’ ability to incorporate ESG principles
into pension portfolios. At the same time, many well-known asset
managers are still reluctant to vote against management, meaning the
vast majority of climate resolutions do not pass.
Tom Quaadman at
the U.S. Chamber of Commerce said that although there has been more
support for environmental shareholder proposals this year,
behind-the-scenes conversations between companies and investors tend to
resolve climate change concerns before a proxy vote, convincing worried
investors not to vote against management.
“Clearly asset managers are being more vocal,” Quaadman said. “Even
with an uptick this year, the fact that there has been a low level of
those proposals passing indicates that companies are having very serious
discussions with their investors on this.”
Gocher, of the
Australasian Center for Corporate Responsibility, said it remains to be
seen whether companies will listen to shareholders.
“Getting these
votes doesn’t mean companies will change,” he said. “Really the test
comes in the next 12 to 18 months to see if investors demand the things
they voted for.” That will be the test of whether companies “heed that
warning investors have given them.”
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