Investors need to hold all sectors to account on climate change – not just the fossil fuel industry
Sonia Hierzig, Senior Projects Manager, Climate Change, ShareAction
For other companies not inherently high-carbon, many of the solutions needed are still in the research and development process and far from being commercially viable.
Investor engagement with the fossil fuel industry on climate change has become increasingly mainstream. At the BP Annual General Meeting this year 99% of shareholders supported a resolution requiring the company to be more transparent about its emissions, link executive pay to reducing emissions from BP’s operations, and show how future investments meet the Paris Agreement goals.
In 2018, New York’s attorney general sued Exxon Mobil, claiming the company defrauded shareholders by downplaying the expected risks of climate change to its business.
While there is clearly still more work to be done on the fossil fuel industry until that sector actually aligns with the goals of the Paris Agreement, it is also important to note that investor engagement with other industries has been less forthcoming.
This could mean investors are in breach of their fiduciary duty. For instance, the Department for Work and Pensions in the UK has recently issued new regulations making it very clear that pension trustees are expected to consider climate-related risks and opportunities in their investment decisions. To do this in an appropriate manner there needs to be an increased focus on other parts of the economy beyond fossil fuels.
First, the banking sector is a key industry in need of investor engagement on climate change. As financial intermediaries with ties to every industry sector, banks face climate-related risks and opportunities. On the one hand, they are exposed to the physical, transitional and liability risks linked to climate change via the clients they lend to and do business with.
On the other hand, banks are also able to make a positive contribution to tackling climate change by mobilising the capital required for a successful low-carbon transition.
Some action has been taken by investors – and some of this has been coordinated by ShareAction. One example is our most recent investor letter to Barclays, which asks the bank to improve its Energy and Climate Change Statement. Some shareholder resolutions are now also starting to be filed at banks, such as the resolution on climate risk at Standard Bank in South Africa this year, but this is not yet common practice.
Banks have also been omitted from the target list of CA100+, an investor initiative launched in 2017 to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. Roughly a quarter of CA100+ target companies are oil and gas companies. One reason for this omission is likely the relationships investors have with banks. They are not only shareholders, but also clients, and in fact some asset managers are even owned by big banking groups.
Second, there has been comparatively little investor action on climate change within other sectors of the economy more broadly. That said, there has been some work to redress this. While excluding banks, the previously mentioned CA100+ target company list does look at a range of other sectors beyond fossil fuels, including transportation, food, beverages and forestry and chemicals.
There is also the Investor Decarbonisation Initiative (IDI), which is a group of over 70 institutional investors coordinated by ShareAction. They engage with companies on setting science-based targets in line with the goals of the Paris Agreement and making complementary clean energy commitments. Key focus sectors for the IDI include cement, construction and the automotive industry.
Despite these positive initiatives, investor engagement with these broader industry sectors is still far less advanced than engagement with the fossil fuel industry. One reason for this might be that solutions are even less straightforward. It could be argued that in the case of fossil fuel companies the answer is relatively easy: Either transition to renewable energy, or wind down your business.
For other companies that are not inherently high-carbon, many of the solutions needed are still in the research and development process and far from being commercially viable. This makes investor engagement more difficult. Solutions are not readily available and investors do not necessarily have technical expertise about low-carbon solutions and potential transition plans for each sector.
However, the difficulties linked to engaging with banks and other corporate sectors should not serve as an excuse for inaction. Investors need to step up and hold all of the companies they own to account, looking beyond fossil fuels. This is not only necessary to properly manage climate-related risks to their own portfolios as well as the world, but also to satisfy increasing legal requirements for investors to manage climate-related risks as part of their fiduciary duties.