Martin Wright explains why the Climate Action 100+ group of investors are prioritising carrot over stick as they seek to push the world’s biggest greenhouse gas emitters to address climate risk

It sounds appealingly simple. Cut off the flow of funds to the bad boys – the coal companies, say, or the tar sands extractors – and watch them collapse from capital starvation, then lie back on your halo.

Cue some rather extravagant claims around divestment (or disinvestment – to all intents and purposes the same thing). It makes for good copy, but the truth is more subtle, and in some ways more dramatic. Yes, the stick of divestment is there, but there’s also a hefty carrot. It takes the form of that old, familiar phrase ‘constructive engagement’. Whether it’s divest, or engage, or (more commonly both), it’s clear that, driven by a healthy mix of ethics and self-interest, investors, lenders and insurers are getting stuck in as never before, and coal is the first casualty.

 

Glencore, Australia's biggest coal miner, cited engagement with Climate Action 100+ in its recent decision to cap production

In the last year or so, a clutch of banks and investors, including Lloyds, RBS, Standard Chartered and HSBC, announced they will no longer finance new coal plants. Miners and utilities appear to be reading the writing on the wall. Rio Tinto agreed a deal to sell its last coal mine in March 2018, and last month Glencore, Australia’s biggest coal miner, announced it will cap production at no more than present levels. That may not sound much, but for a company that until recently was happy to promote the supposed sustainable virtues of coal, it’s a massive shift. Its statement announcing the new policy pretty much sums up the business case for changing gear. “We must invest in assets that will be resilient to regulatory, physical and operational risks related to climate change”, it said. And it specifically cited engagement by investors – including Climate Action 100+ [see below] as a motivating factor.

Some of the sharpest pressure is coming from insurers – unsurprisingly, perhaps, given their increasing exposure to climate risk. According to a report from Unfriend Coal, a coalition of NGOs active on climate, 19 major insurers with more than $6trn in assets representing 20% of the global market have divested from coal, an increase of 50% over the year. Among them are Lloyd’s, Groupama, AXA, Allianz and Munich Re.

Insurers may be at the sharp end, but it’s increasingly apparent that anyone investing for the long term is vulnerable to climate disruption. Aviva’s Climate Change Stocktake (2018) report sums it up: “If we do not take urgent action to limit global temperature increases, the impacts upon the economy, society and our business will be nothing short of devastating. Aviva is determined to make its own contribution to tackling climate change. This is not at odds with business or investment. In fact, it is a business imperative.”

To which its chief responsible investment officer, Steve Waygood, simply adds: “This is an existential crisis to our sector.”

And the sector is starting to respond with unprecedented collaborative clout. Enter Climate Action 100+, an alliance of 300 investors with a cool $32trn in assets under management. Set up in December 2017 by an alliance of concerned investor groups along with US NGO Ceres and the Principles for Responsible Investment, it targets a rogue’s gallery of 100 or so companies responsible for around two-thirds of global industrial emissions, a spread that takes it well beyond coal.

The list includes such greenhouse giants as Anglo American, BP, the China Petroleum & Chemical Corporation, EDF, Exxon Mobile, GM, Nestlé, PepsiCo, Shell, Proctor & Gamble and Volkswagen.

We’re seeing more and more data which says ‘these are companies who are not going to produce long-term value'

The message to investors is simple, explains Kirsten Spalding, senior director for investor programmes at Ceres. “We’re seeing more and more data which says, ‘these are companies who are not going to produce long-term value’. And that means [continued exposure to them] is a risk to your portfolio.”

It’s not just risk that motivates; reward plays a part, too. The collapse in the cost of renewable energies like wind and solar, making them directly competitive with fossil fuels in some markets, has strengthened the business case dramatically.

So much for steely-eyed self-interest: do ethics get a look in? For sure, says Spalding. Many asset managers have among their clients a significant swathe of “family money, wealthy individuals, endowment foundations, and they’re increasingly asking managers to address climate issues. They’re saying, ‘we expect you to produce [investment] products that have a direct, measurable impact’.”

It’s a trend set to grow, Waygood adds, thanks to impending regulatory changes in both the UK and Europe. In effect, this should mean that individuals who once had no say, and little clue, as to how their pension fund and other savings are being managed will now get to express a preference as to where the money being invested on their behalf ends up.

Given increasing public concern about climate change, it’s inevitable that this will lead to a further wave of pressure on investors. When the school kids who went on the climate strike in February take up jobs with pension plans in a few years’ time, it’s hard to imagine they’ll not seize that opportunity. (See Companies are protecting their stakeholders on climate risk. What about their employees)

Ethics were certainly to the fore last July, when the Church of England’s General Synod voted overwhelmingly in support of a motion to divest from fossil fuel companies that had not aligned their activities with the Paris climate accord by 2023. It was the latest in a series of commitments by the church to use its investing power for good. Their implementation is led by Adam Matthews, who as well as having a key responsibility for how the church’s own funds are deployed, is also co-founder of the Transition Pathway Initiative, and as such, at the heart of the latest thinking on how best to use investor pressure to shift corporate behaviour.

Divestment might bring a rush of principled vindication, but once you're out you lose your say over the company's future

The CofE approach is very much a “carrot and stick” one, including both direct divestment from companies with significant dependence on revenue from thermal coal and tar sands, but also sustained engagement with others, particularly in energy-intensive sectors. Matthews makes clear that straight divestment is rarely a first preference, and that’s the overwhelming majority view, held by everyone from campaigners, like ShareAction’s CEO Catherine Howarth, to corporate figures like Waygood.

Why? Because divestment is a card that, once played, can’t be used again. It might bring a rush of principled vindication, but once you’re out, you lose your say over the company’s future – literally, in the case of a shareholder with voting rights at an AGM. And if there’s money to be made out of a business, however filthy, then someone will buy the shares you’re selling. Someone with a lot less scruples, a lot less concern over long-term impact, than you, the principled investor.

As Waygood puts it: “Divestment isn’t a badge of honour; it’s a failure of the engagement process.” Robust engagement can be a lot more effective. “Imagine you’re running a listed coal firm. You’re concerned about your re-election at the AGM, concerned about your pay packet, concerned about keeping your job … And if large institutional investors are coming to you and saying ‘you are not doing your job in relation to climate change, so we are going to withhold support, table a resolution at the AGM, vote against you, against your pay package' – these are much harder problems to deal with than someone just divesting.”

That said, disinvestment remains a necessary threat – and one that has to be wielded on occasion to keep it real. Aviva has, says Waygood, “reluctantly walked away” from 17 companies whose continued activities in coal earned them a place on its ultimate “stop list”.

Waygood adds a cautionary note over excessive reliance on investors as influencers, as it can enable politicians to say “oh look, they’re doing stuff, so we don’t need to worry” – and hence they neglect their vital role in shaping market fundamentals by, for example, setting a robust carbon price.

None of which detracts from the need for sustained, patient engagement – and that is where conscious investors are putting in the hard yards. The Church of England is closely involved in discussions with the likes of Anglo American, Occidental¸ Shell and ExxonMobil and is one of the prime movers behind the shareholder resolution on emissions targets to be tabled at Exxon’s forthcoming AGM. (BP has announced that it will accept a similar resolution at its AGM in May.)

My message to investors is 'keep going, it's working', and to companies like Shell 'it's not far enough'

Matthews readily acknowledges that “in some cases, it will be a multi-decadal transition”. That’s the sort of timeline that even major emitting companies should be able to plan for. Shell has taken a step along the road with its commitment to halve the net carbon footprint of its energy products by 2050, with a series of interim targets along the way.

Matthews sees this as a “hugely significant step”, with welcome clarity around metrics and a strong commitment to disclosure, but with room to ramp up ambition as the science demands it. “Do I want to see them go further in due course? Yes, and we need to continue engagement on that.”

Shell’s plan to link executive remuneration to achieving the carbon target, which will be put to a forthcoming AGM, drew particular praise from campaigners, even those who questioned the extent of the company’s ambition. Ceres’s Spalding gave it two cheers: “It’s a good example of significant movement as a result of deep engagement,and of why investors should continue to collaborate … So my message to them is: ‘Keep going – it’s working!’, and my message to the companies [like Shell] is: ‘It’s not far enough, not fast enough, not deep enough – you have more to do’.”

All across the piece, the pressure to go further, faster, is accelerating. “There’s been a real shift in the last year or so in terms of investors having a much more robust strategy,” says ShareAction's Howarth. “I’m particularly proud of developments in the banking sector, where we’ve been pushing them to have really tough policies on coal in particular.”

Progress doesn’t come without some hiccoughs along the way. HSBC’s announcement that it would pull out of financing new coal plants drew widespread plaudits, which became somewhat muted when the bank qualified the commitment by excluding Bangladesh, Indonesia and Vietnam. Instead, it said, “a targeted and time-limited exception will apply in order to appropriately balance local humanitarian needs with the need to transition to a low-carbon economy”.

Campaigners including Christian Aid were sceptical. They pointed to one of the bank’s own research papers, which cited all three countries as among the 20 most vulnerable to climate change, and suggested it was failing to demonstrate sufficient commitment on the issue. (HSBC did not respond to repeated requests for comment for this article.)

In the last 18 months, this stuff has caught fire. Every single tender document for our large institutional clients now has ESG questions for us

Overall, though, there’s no doubting the degree to which the needle is moving. Aviva has felt the pressure, says Waygood. “In the last 18 months or so, this stuff has just caught fire. Every single one of our tender documents for our large institutional clients now has ESG questions for us”, many of them relating to climate change. “In virtually every case, if we hadn’t been able to say that my [responsible investment] team exists, and explain what it does, then we wouldn’t have won the business. So this is an absolutely seismic shift.”

Matthews cautions that “we still have a long way to go: I’m not naïve about the degree of change we need to see”, but points to a combination of factors that is building the momentum for change, notably “the falling cost of renewables, government moves against fossil fuels, and investors becoming clearer in their expectations and beginning to really use the stewardship tools they have to drive change.”

“We’re certainly moving in the right direction, put it like that.”

Martin Wright (@martinfutures) is a writer, adviser and public speaker specialising in environmental solutions and sustainable futures. He is a former Director of Forum for the Future.

ShareAction CEO Catherine Howarth, Leigh Smyth, sustainable transformation and inclusion director of Lloyds Banking Group, and Jon Wright, sustainable finance reporting manager at HSBC, will be speaking at the 18th annual Responsible Business Summit Europe 10-12 June in London.

Main picture credit: idphoto/Shutterstock

ethical investing  divestment  aviva  Church of England  ShareAction  Shell  fossil fuels