Investors plot their own extinction rebellion
As Extinction Rebellion protesters blocked streets in cities from London to New York this spring, a quieter revolution was happening in the boardrooms of the world’s biggest businesses.
In polite but firm letters to company chairs and in hard-hitting conversations with directors of businesses from food producers to chemical-makers, long-term investors demanded that large groups drastically increase preparation for a low-carbon economy.
One such investor is Natasha Landell-Mills, head of stewardship at Sarasin & Partners, a British asset manager. Ms Landell-Mills has been tasked with leading engagements with chemical companies on behalf of Climate Action 100+, a group of investors with $33tn in assets.
“We are saying to these companies that [climate change is everyone’s] problem. Every company, and its directors, needs to think how they will be affected,” she says. “We view acting on climate change, given that boards know the impact on the world, as the duty of directors.”
For years, large parts of the global £85tn asset management industry have turned a blind eye to climate issues, favouring traditional investment goals.
This has changed as concern mounts over the financial risk, with pension funds and other clients pushing asset managers to help mitigate the risk of a less hospitable planet.
The Paris accord of 2015 — where 200 countries agreed to limit the rise in average global temperature to below 2C compared with pre-industrial levels — hardened investors’ focus.
Much of the initial effort has been on the oil, gas and coal sectors. Investors with $9.38tn in assets, including university endowment funds, pension funds and asset managers, have at least partially committed to divest from some fossil fuel groups.
Shareholders were also instrumental in pushing Royal Dutch Shell to set carbon emissions targets and to link these to executive pay last December, and they have lobbied for similar steps at other oil groups.
Now other sectors are in their sights.
Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, a European membership body, says: “There is still a big focus on oil and gas but we need to pay even more attention to the demand-side sector. We will see more work from our side on autos and on harder-to-decarbonise sectors like cement and steel.”
Ms Pfeifer is a member of the global steering committee for Climate Action 100+. The group, set up in late 2017, has widened investor focus to industry in general and is urging the world’s largest corporate greenhouse-gas emitters, including businesses such as Nestlé and Rolls-Royce, to take action.
Vicki Bakhshi, director of governance and sustainable investment at BMO Global Asset Management, the $259bn asset manager, says:“A lot of the media attention has been on the engagement with the oil and gas companies. But as investors, if we only speak to the coal, oil and gas companies, that won’t be enough.”
Not all investors worry about global warming but those that do fear that climate change could rapidly alter industries, whether through physical, regulatory or consumer change. The concern is that ill-prepared businesses will struggle to compete, so hitting returns.
A 2015 study, used to assess the global total stock of manageable assets at risk due to climate change, estimated that losses could range from $4.2tn to $43tn between now and the end of the century.
Andrew Howard, head of sustainable research at Schroders, the UK-listed asset manager, says: “Climate change in all its forms will affect every industry to a greater or lesser extent and that is becoming more understood.”
This month, a group of investors with $2tn in assets, which was brought together by Climate Action 100+ and the IIGCC, wrote to the chairmen of construction companies CRH, LafargeHolcim, HeidelbergCement and Saint-Gobain to outline the measures they expect companies to take.
These include cutting carbon emissions to “net zero” by 2050 and setting hard targets to reach that goal. The investors also want business to comply with the recommendations of the Task Force on Climate-related Financial Disclosures, a framework established by the international Financial Stability Board, as well as to assign specific responsibility for mitigating climate change to a board member or committee, and be transparent about any lobbying to water down action on global warming.
In other sectors, demands differ. Mike Everett, governance and stewardship director at Aberdeen Standard Investments, the UK asset manager gives the example of oil and gas companies, where the focus is often on tackling emissions, while a listed asset manager that takes a wrong step faces a risk to its reputation or a hit to its returns.
“There are different sorts of conversations, because the risk is different. But there are also differences between different companies. Some lead and some follow,” he says.
In a sector such as carmakers, Ms Bakhshi says targets are no longer enough. Instead, companies need to think strategically about how climate change could affect them, for example, if cities ban diesel cars or consumers turn en masse to electric vehicles.
She also wants car manufactures to be clear about their lobbying, saying it makes little sense for auto companies to publicly commit to reducing emissions while trying to water down emissions regulations behind the scenes.
“We have been trying to shift the perspective of those companies. In the auto sector and more generally across sectors, the Climate Action 100+ initiative has been very good, making it clear that this is a board level issue rather than a [corporate social responsibility] issue,” she adds.
Ms Landell-Mills says the debate has “moved incredibly quickly”, meaning investors have to consider global warming risks as part of their analysis of any company.
“The attention given to this issue has increased dramatically,” she says. “You are seeing people becoming really concerned by climate change. Just look at Extinction Rebellion. People are much more aware of the risks and companies need to catch up. They have a responsibility to act.”