This year’s AGM season is just about over – and it may have marked the first big shift in the relationship between oil and gas majors and climate change. For the first time, at least on any significant scale, demand for action is coming from within the organisations themselves.
In the US, oil giants like ExxonMobil and Chevron suffered major shareholder rebellions. At Exxon, a coup launched by dissident hedge fund activists at Engine No.1 saw three board members replaced by directors with greener credentials.
Follow This, the Dutch shareholder group campaigning for action on climate change, managed to make some noise at Chevron, BP and Shell, gaining support from between 20-40% of shareholders at each of the three votes, hardly a majority and mostly “advisory”, but still an improvement on previous years. Mark van Baal, a founder of the group, hailed the various votes an investor “paradigm shift” – a “victory in the fight against climate change”.
And to most observers, it does feel as though the tide is turning. The real question is if it’s happening fast enough – for the planet, or for anyone with their money tied up in oil and gas.
But it is worth remembering that not so long ago, consensus on both sides was that Governments were the main driver of positive action on climate change and that shareholder only cared about making a quick buck – and you could see why, wind the clock back to the last AGM season and just 15 out of 102 ESG resolutions received majority support.
Whatever has changed, one thing is certain, whether we like it or not the oil and gas majors have a role to play in the drive to reach net-zero by 2050. Regulation in Europe was never going to be enough on its own. Neither was Joe Biden.
At some point, capital is going to have to fall into line too.
Earlier this year Blackrock and Vanguard, the world’s two largest asset managers, joined a growing coalition of investors in the net-zero Asset Managers Initiative. In the recent AGM season, it was BlackRock – which owns significant stakes in most of the oil and gas majors – behind many of the close-call votes and full-on rebellions. And of course, with a big fish like them comes big, tidal-like influence. As word got round of their backing for key votes, others were empowered to join.
One thing people might be asking is what’s suddenly motivating a financial supergiant like BlackRock to back sustainable principles. Few believe that some collective moral conversion is taking place. In fairness, CEO Larry Fink is far too shrewd to claim such a thing. Instead, what he does – and it serves to back up the point that shareholders are exclusively driven by money, after all – it makes a powerful case, strictly in investor language, on the issue of climate risk.
“Climate risk is investment risk” is a phrase churned out repeatedly by BlackRock executives. “Will cities… be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?” Fink wrote in the 2020 edition of his annual open letter to fellow CEOs. “What will happen to the 30-year mortgage… if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat…?”
However terrifying and economically impactful these scenarios are, Fink himself knows that the physical manifestations of climate change represent only a part of investor thinking when it comes to climate risk. A potentially much more immediate one is the impact of regulation on the value of their assets. And here there are signs the walls are closing in too.
Set up in 2015, the Task Force on Climate-related Financial Disclosure (TCFD) was a major step forward. It encouraged companies to make climate-related financial disclosures, but only voluntarily in their annual reports. Joe Biden has made clear he wants to incorporate climate risk specifically into financial rules, and The Securities and Exchange Commission (SEC) is expected to propose new ones in the second half of 2021.
In the UK, things are moving in the same direction. Back in December the FCA introduced a rule requiring companies to state whether they have made disclosures consistent with TCFD’s requirements, and if not why. Only last month the FCA revealed plans to require asset managers, life insurers and FCA-regulated pension schemes to do the same. The regulator has also clearly stated the aim to make TCFD-aligned disclosures mandatory by 2025.
It’s not just Governments causing the regulatory walls to close in, either. In courtrooms they are too. The widely reported landmark case against Shell in the Netherlands saw green campaigners force the oil giant to cut its carbon emissions by 45% by 2030.
None of these developments will have escaped the notice of the big asset managers and the armies of analysts crunching their numbers. Yet for all the rhetoric from people like Larry Fink, keen-eyed observers point to shareholder voting records that provide less cause for encouragement. During last year’s AGM season, which took place after BlackRock’s PR push on climate risk, ShareAction worked out that an additional 17 resolutions would have passed if one or more of the Big Three asset managers had changed their vote. Rationale against these resolutions also appeared to be at odds with other, smaller shareholders, as they had received an average 40.4 per cent support.
The long awaited 1.5C “Net Zero” scenario from the IEA will have made uncomfortable reading for investors in oil and gas majors. It says there can be no more fossil fuel supply beyond what is already committed as of 2021. That alone is potentially devastating news to the likes of BP, Shell and Total – all of whom were betting on natural gas to decarbonise their activities.
One key benefit of IEA scenarios, and a reason so many companies rely on them, is their granularity, deep diving into specific sectors. There’s more bad news for oil and gas here too – one example being the recommendation against sales of new internal combustion passenger cars by 2035 at the latest.
It all means any investors signed up to the net-zero Asset Manager Initiative – like BlackRock and Vanguard and most of the big players, as alluded to previously – will have to review their climate strategies to reflect the findings. This in turn has reopened a big debate within the financial industry in relation to sustainable investment – whether active engagement or divestment is the right path to navigate the months and years ahead.
Popular opinion is it’s better for everyone if the big investors – who are at least now signed up to industry commitments towards net zero – continue to have a seat at the table. The theory goes that otherwise, pulling out their capital will just cause oil and gas share prices to fall. This will not only encourage smaller investors with short-term profit goals to swoop in, but will starve the producers of capital to develop and fund their own transition plans and decarbonisation activities.
For anyone thinking along these lines, the 2021 AGM season was positive, bringing an increase in meaningful active engagement. The bad news is it comes just when developments elsewhere suggest more urgent action may be required.
The implication for the big debate within sustainable investment is clear. Should large scale divestment take place, there will be no shortage of investors waiting in the wings. And they will probably be less sustainably minded than the big asset managers.
Increasingly the best strategy appears to be one that involves active engagement and divestment. In other words, continuing to have a say in organisations where stakes already exist, voting in line with ESG principles, but having a strong and unequivocal divestment threat to back it up.
Aviva – one of the Britain’s top asset managers, and a top 30 shareholder in BP and Shell – is already taking such an approach. At the turn of the year Aviva told companies they should set short and medium-term targets to meet the energy transition, align management pay with climate goals, and ensure direct and indirect lobbying was not in conflict with their public position on global warming. If they fail, with a deadline set of three years, Aviva promises to divest across both its equity and credit portfolios.
“We have an obligation to clients and society to not fund something we believe is catastrophic to the world and capital markets,” Aviva’s Mirza Baig told the Financial Times. “The ultimate sanction is full divestment.”
BlackRock boss Larry Fink has also hinted that his big fish might swim away from companies over the issue.
As always however, the proof will be in the pudding. We haven’t yet seen substantial divestment from oil and gas from any of the big players. But each will be aware of at least two more major factors when they choose where to place all that capital in the coming years.
First, while shareholders may not have undergone a collective moral conversion, the wider public is beginning to. People are waking up to the climate implications attached to their pension schemes.
Second, and probably most important, is the great determinate in finance – finance itself. Research by Morningstar examined the recent performance of 745 Europe-based sustainable funds. It found the majority had done better than non-ESG funds over one, three, five and 10 years. Different research found that from January to November 2020, investors in mutual and exchange-traded funds invested $288 billion globally in sustainable assets, a 96 per cent increase over the whole of 2019.
It’s another sign that with varying pressures bearing down on the energy sector in relation to climate change, capital is finally becoming one of them. This means that fund managers who are sustainably minded – paying close attention to shifts in the market as well as the climate – stand to benefit most.
And when they do, the best news of all is that the planet stands to benefit too.
more than a word.