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As 2020 kicked off, Dan Gocher at the Australasian Centre for Corporate Responsibility, a shareholder advocacy organisation, was feeling "pretty optimistic" about its plans to force big Australian energy companies to tackle climate change.
BlackRock, the US$6.8 trillion ($10.2t) asset manager, and other large investors had proclaimed an urgent need to arrest global warming. With the renewed focus on climate change following the devastating bushfires 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 coronavirus pandemic. "Once the virus hit, we said 'God, we won't get anything done [on climate change] for 18 months'," says Gocher.
Like many others, Gocher feared investors would swiftly retreat from recently made climate pledges as markets plummeted. Critics had long argued that the fund industry's nascent love affair with environmental, social and governance investing 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 both regulators and clients increasingly calling for change, asset managers are now 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, says Mirza Baig, global head of governance at Aviva Investors.
Until the virus, "there was still a significant portion of the investor base" that believed tackling climate change "could wait until tomorrow", he adds. "That has changed. Companies and investors are starting to look at the importance of acting now."
At Santos, 43 per cent 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 favour of a similar motion at Woodside a few weeks later. "We were very much surprised by the support," says Gocher.
In Japan, 35 per cent 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 US, 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 US 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 per cent of shareholders vote according to management recommendations, according to Follow This, a green shareholders' group that filed resolutions at BP, Royal Dutch Shell and Equinor, the European energy companies.
Overall, in the US and Canada, average investor support for environmental resolutions during the first six months of 2020 was 32.7 per cent, up from 21.9 per cent in 2019, according to Proxy Insight, a data provider.
"We have had the most successful AGM season ever [for climate resolutions], but because of Covid it didn't get much attention," says Mark van Baal of Follow This. "One by one, these investors see that climate change is such a threat to their assets."
Since the Paris agreement was signed in 2015, the US$85t 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 sceptical of big investors to pay attention, says 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. 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," he adds.
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 US 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 trio are hugely influential and control about a quarter of US 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 centre 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 galvanised many investors. In an open letter in March, pension funds 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 US$69t 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 €30 billion ($52.6b) in the first quarter of 2020, compared with outflows of €148b 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 per cent of leading sustainable indices beating their parent benchmarks in the first quarter.
With a growing business case, more than 450 asset managers, with US$40t in assets, have now 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," says 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."
With their new-found interest in global warming and other ESG issues, asset managers have gone on a hiring spree. The number of investment professionals specialising 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 past three years, according to FT research, while they have also invested heavily into building new systems to examine climate risk.
Their interactions with companies on climate issues is also changing. For years, small religious organisations 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," says Kate Monahan at Friends Fiduciary, a non-profit investment firm for 400 Quaker communities with more than US$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 AM, the asset management arm of the French bank, 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," says van Baal.
Still, there is a divide in how big asset managers vote. BlackRock and Vanguard supported no environmental resolutions in the US in 2015, but this rose to 13.8 per cent and 16.7 per cent respectively in 2019, according to Proxy Insight. BNP Paribas AM and AllianzGI, in contrast, backed at least 90 per cent of environmental resolutions in the US last year.
BlackRock was criticised 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 re-election 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," says Amra Balic, head of BlackRock investment stewardship, Emea.
Not everyone is convinced by BlackRock's approach. The chief executive of a rival asset manager, who declined to be named, says 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. There are people who say they do [factor it into their investments], but look at the voting record. Look at BlackRock's voting record," he adds.
Eli Kasargod-Staub, executive director of Majority Action, a non-profit shareholder advocacy organisation, adds that support from the world's largest asset manger could have swung climate-critical resolutions at Delta Air Lines, Dominion Energy, and JPMorgan Chase to majority support.
With public pledges and increased staff, companies now face the prospect of intense shareholder scrutiny. Small shareholders such as Monahan 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," says Jamie Bonham, director of corporate engagement at NEI Investments, a small Canadian investment manager, with C$7.9b ($8.8b) of assets under management.
"You will see corporate boards a lot more willing to negotiate with shareholders on avoiding proposals," he says. 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 SSGA, says: "Four or five years ago, you would probably debate [with companies] if climate change was a risk or not," she said. "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 UK 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," Jamie Dimon, JPMorgan chief executive, 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," says Charles Crain at the National Association of Manufacturers, whose members include ExxonMobil.
In the US there is a growing pushback against investors acting as climate warriors. Asset managers are gearing up for a row 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 US Chamber of Commerce said that while 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," says Quaadman. "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."
ACCR's Gocher says it remains to be seen whether companies will listen to shareholders.
"Getting these votes doesn't mean companies will change," he says. "Really the test comes in the next 12-18 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".
Written by: Attracta Mooney and Patrick Temple-West
© Financial Times
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