Stay or sell? The $110tn investment industry gets tougher on climate


As Covid-19 ripped through the world in 2020, a cluster of senior figures at Aviva Investors, the £262bn UK asset manager, held a series of virtual meetings over the course of six months to discuss the other big issue looming over their portfolios: climate change.

Concerned that global warming would hit the long-term valuations of companies, the group decided on a rare course of action for a big asset manager. Aviva Investors warned about 30 fossil fuel intensive companies that if they failed to take radical action to slash their emissions, it would sell out across its equities and fixed income portfolios within one to three years.

It was a bold move that dramatised a growing dispute within the $110tn investment industry.

Many big asset managers still routinely dismiss divestment, arguing it is better to stay invested and try to alter corporate behaviour through background conversations with companies.

However, there are a growing number of large, traditional investors who are taking a tougher approach with companies over global warming, a change in attitude that could have huge ramifications for businesses around the world.

Big investors including ABP, one of the world’s largest pension funds, and Norway’s oil fund, the world’s largest sovereign wealth fund, have announced divestment plans.

At the same time, some of the investors who remain as shareholders are willing to adopt more confrontational tactics — most notably, the successful campaign by an activist investor to join the board of ExxonMobil.

The shift comes as the investors are under pressure from clients, regulators and the public to use their power as shareholders to police companies’ climate change efforts.

Colin Baines, investment engagement manager at Friends Provident Foundation, which lobbies for responsible investment, says that in order to cut emissions, many asset managers will have to rethink how they interact with companies.

Mirza Baig, global head of environmental, social and governance investments at Aviva Investors, who was involved in the discussions, predicts that more asset managers will consider tools such as divestment as the investment industry comes under pressure to prove it is taking climate change seriously.

“An approach where you have perpetual engagement with no real change at a corporate level will be untenable,” Baig suggests, adding that the current “softer approach to engagement” favoured by the investment industry is not delivering the results needed.

The ‘Code Rood’ movement has organised civil disobedience actions in the Netherlands against the NAM oil company collective which includes Royal Dutch Shell and Exxon Mobil
The ‘Code Rood’ movement has organised civil disobedience actions in the Netherlands against the NAM oil company collective which includes Royal Dutch Shell and ExxonMobil © Romy Arroyo Fernandez/NurPhoto/Getty

The climate police

This potential for a tougher approach comes as report after report suggests climate change could have a catastrophic impact on investment returns and the global economy if left unchecked. In August, a landmark report by the UN’s Intergovernmental Panel on Climate Change said “immediate, rapid and large-scale reductions” in emissions were needed to avert a calamitous effect on the planet

Earlier this year, BlackRock, the world’s largest asset manager, predicted a cumulative loss in economic output of nearly 25 per cent over the next two decades if no climate change mitigation measures were taken. Its research also forecasts big falls in returns for sectors such as energy and utilities.

Investors argue they alone cannot change corporate behaviour, with a need for increased regulation and government policy to force businesses to tackle emissions.

But there is a growing acceptance that the investment industry too must play a role in the transition to a low-carbon economy, especially as demand for ESG investing soars. A survey by NinetyOne, the UK-listed investment house, recently found that half of 6,000 individual investors polled across 10 countries believed asset managers should use their influence as shareholders to help drive a reduction in emissions in carbon-heavy companies.

Asset managers are also increasingly expected to prove their eco-credentials in order to win new businesses or keep existing clients. In the UK, a group of foundations, university endowments and religious groups has rolled out minimum standards they expect asset managers to meet around climate change. Investment firms that fail to meet those standards risk being dumped.

Then there is the threat of legal action. Before it announced divestment plans, ABP had faced the threat of legal action over its investments in fossil fuel investments from workers whose pensions it oversees.

Groups such as Climate Action 100+, a coalition of more than 600 investors with $55tn in assets, have also been established to push companies to change. Earlier this year, CA100+ said that 52 per cent of the companies it was targeting — which account for about 80 per cent of global emissions — had set net zero targets.

“What you can see with the CA100+ outcomes . . . is that engagement can be impactful,” says Carola van Lamoen, head of sustainable investing at Robeco, the Dutch asset manager.

But the CA100+ data also reveals the extent to which those net zero ambitions often lack substance. Only around one quarter of companies had included their most material so-called Scope 3 emissions — the emissions from their customers.

Activist Moira Birss protested against the harvesting of palm oil in Liberia outside BlackRock’s headquarters in San Francisco, California, in 2019
Activist Moira Birss protested against the harvesting of palm oil in Liberia outside BlackRock’s headquarters in San Francisco, California, in 2019 © Gabrielle Lurie/Hearst Newspapers/Getty

Moira Birss, climate and finance director at Amazon Watch, the US environmental group, says thanks in part to “toothless” engagement from asset managers, many of the net zero commitments made by companies are “extremely vague or do little to nothing to address the need to rapidly wind down fossil fuels”.

“We need to see way more action from the fund industry,” she adds.

This is backed up by research. A study by academics at Edhec Business School found that while institutional investors claim they are actively engaging with companies on climate issues, this is not followed by an actual decrease in the carbon footprint of those businesses. “[Investors] are unlikely to play a major role in the low carbon transition unless their active ownership becomes more effective,” the authors wrote.

Ben Caldecott, director of the sustainable finance programme at the University of Oxford Smith School of Enterprise and the Environment, says one of the problems with the current model of engagement favoured by the investment industry is that few asset managers have a long-term plan around how to interact with businesses over climate change.

“There has been very little playing chess like a chess champion, where [asset managers are] thinking several moves ahead and coming up with proper strategies,” he says. “Very few are thinking about all the levers they have available.”

These levers include backing greener companies and projects, as well as tools such as divestment and shareholder activism, including filing resolutions at annual meetings, he says.

Cooling towers at the Jaenschwalde lignite-fired power station in Jaenschwalde, Germany
A report by Reclaim Finance found that fewer than half of the world’s 29 biggest asset managers had a policy to limit coal investments © Krisztian Bocsi/Bloomberg

Divestment and activism

The divestment movement traces its roots back to religious groups and foundations, which typically shunned stocks for ethical reasons. In recent years, swaths of university endowments, religious groups and foundations around the world have committed to divest from some fossil fuel intensive companies, but big asset managers and pension funds have been slower to react.

A report by Reclaim Finance, a non-profit, this year found that fewer than half of the world’s 29 biggest asset managers had a policy to limit coal investments, considered one of the most polluting fossil fuels, let alone other carbon-intensive industries.

Many asset managers argue that divestment will not change corporate behaviour. “A lot of investors still feel that in order to influence a company you have to be invested in it,” says Stephanie Pfeifer, chief executive of Institutional Investors Group on Climate Change, one of the groups behind CA100+.

Others argue that by selling out too early on climate grounds, investors could miss out on strong returns over the next few years. In October the FT reported that hedge funds were swooping in to buy up the shares of unloved oil and gas companies, making big profits in the process.

There are also concerns that the shares of the biggest polluters could end up in the hands of less diligent investors, who care little about the global ramifications of climate change. “I’m not convinced that divesting because of climate will solve the issue. There will be people willing to take those shares forever,” says Sébastien Thévoux-Chabuel, a fund manager at Comgest, the French asset manager.

Many asset managers have also been reluctant to get behind shareholder activism around climate change, such as by voting for resolutions calling for companies to set climate transition plans. As recently as 2017, BlackRock regularly argued that it preferred discussing climate change privately with companies, rather than publicly voting for climate resolutions that boards were unsupportive of. Even now, few asset managers co-file resolutions around climate change at annual meetings.

One sign that this could be starting to change is the activist campaign such at Exxon undertaken by Engine No 1, a small hedge fund.

Despite owning just 0.02 per cent of the shares, Engine No 1 managed to win over shareholders to support its efforts to overhaul the oil major’s board, with a mandate to prepare it for a future free of fossil fuels.

Al Gore, the former US vice-president and co-founder of sustainable asset manager Generation Investment Management, said the fact that Exxon was now reviewing its investments in hydrocarbons was a “direct result” of Engine No 1’s campaign, describing the activist’s success as “thrilling”.

But he added that these types of campaigns are “not for the faint hearted”, requiring a lot of time, effort and money. The US hedge fund is estimated to have spent $12.5m on the battle at Exxon, as well as dedicating months to the campaign — something few investors could afford to do with a single stock.

Bess Joffe is head of responsible investment at Church Commissioners for England; and Carola van Lamoen leads sustainable investing at Robeco, the Dutch asset manager
Bess Joffe is head of responsible investment at Church Commissioners for England; and Carola van Lamoen leads sustainable investing at Robeco, the Dutch asset manager

Still others have been inspired by Engine No 1. “We are looking at how we can work with other asset owners to do more [like this],” says Bess Joffe, head of responsible investment at Church Commissioners for England, which manage the CofE’s investment fund and backed Engine No 1. “We see a lot of potential for . . . activist stewardship to play an increasing role.”

Describing Engine No 1 as the “little engine that could”, Joffe says companies need to wake up to the fact that they could be the next target of an effective shareholder climate campaign. “If it can happen at Exxon it can happen to any of them. We will leverage that in future in conversations with other companies.”

Tougher times for companies

Cary Krosinsky, a lecturer at Yale and Brown universities, says that both selling out and activism have problems when they are conducted in isolation. “[Divestment] is largely a waste of time,” he says, while activism can be expensive.

Yet he also argues that selling out of stocks might form part of a tougher approach that is based on a “carrot on a stick” effort. “[What is] not useful is a 10-year [engagement] campaign that leads to little or no change,” he says. If a period of engagement ends with no progress, deciding to ditch a company might make sense, he argues. “That’s not divestment, that’s a sell discipline.”

David Blood, who co-founded Generation with Gore, says that passive giants such BlackRock, Vanguard and State Street Global Advisors will have a harder time divesting. “[They] don’t have a choice until you change the index or you decide to get your clients’ approval to deviate from the benchmark,” he said. “They have to ramp up their engagement efforts quite significantly.” 

But active managers must vote with their wallets, says Blood: “You can have engagement for a while but unless you have a clear and present commitment to divest, your engagement isn’t credible. I don’t think you have decades to work with companies, I think you have a couple of years.”

Catherine Howarth, chief executive of ShareAction, a charity that promotes responsible investment, says investors have an obligation to manage both financial and systemic risk, adding that “high-quality shareholder activism” or divestment can help in this process. “If you just engage and there is never any sanction for the company, you’ll never sell, then management will just continue on doing what they are doing,” she says. “I think we are going to see more divestment and bold activism in the next 12 months.”

Even investors who are big advocates of engagement are increasingly weighing up divestment and increased activism. Earlier this year, Robeco rolled out a new climate engagement programme that included an option to divest.

“Exclusions are a means of last resort. We prefer engagement over exclusions,” says Van Lamoen. “[But] if there is a lack of commitment, then we could opt for divestment.”

New York State Common Retirement Fund, one of the US’s biggest public pension plans, is doing similar. It has dumped 22 coal stocks after a long assessment process and is currently reviewing its investments in shale oil and gas companies.

A demonstrator holds a sign that reads ‘No More Business As Usual’ during a protest in New York
Many asset managers have been reluctant to get behind shareholder activism on climate change © David Delgado/Bloomberg

The Church of England too is ditching stocks over climate concerns, even if Joffe says she believes that “having a seat at the table” is generally more effective. Last year, the church’s two investment bodies restricted investments in companies including Berkshire Hathaway and Korea Electric Power Corp over climate change concerns.

Joffe says a tougher approach, involving activism and divestment, “will have to become more mainstream”, especially if asset managers and asset owners are to meet their net zero commitments.

For companies, this means a tougher time from shareholders, says Tom Matthews, a partner who specialises in corporate activism at White and Case. He adds the “narrative around climate change has shifted significantly versus where it was in 2015”, when the Paris agreement was signed. “We’re seeing companies getting targeted because they haven’t woken up quickly enough.”

As for Aviva Investors, Baig says he believes the UK asset manager will end up selling out of at least some of the companies it is targeting because they are not making progress quick enough. “We have to be bold enough to walk way,” he says.

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