Tasked with voting for directors on behalf of millions of savers, they have the power to make a difference.
As we emerge from the 2019 voting season for listed companies — the time of year when shareholders elect company leaders — asset managers have once again ducked their responsibility to help address the climate crisis. At ExxonMobil, Chevron, BP, Shell and Total, directors were appointed with an average 97 per cent support from shareholders. Yet these companies are collectively ploughing billions of dollars into future fossil fuel extraction, which threatens the climate and makes increasingly questionable investment returns. Business-as-usual is unsustainable and this must mean change to the corporate leadership promoting it. Asset managers, tasked with overseeing companies and voting for boards of directors on behalf of millions of savers, have the power to achieve this. Companies continuing to deploy capital in a way that perpetuates the fossil fuel economy is harmful to shareholders for two reasons.
First, they lock us on to a pathway that scientists tell us threatens planetary stability. According to research by Carbon Tracker, for example, the carbon emissions generated by roughly 60-80 per cent of expected capital spending on new oil projects for the next decade will exceed what the world can cope with if it is to avoid climate chaos. Auto manufacturers, construction companies and heavy industry likewise often invest in new infrastructure and equipment without considering its climate impact.
Second, where companies fail to take into account the regulatory measures that governments will inevitably take to combat climate change, their profits are likely to be hit, harming shareholders. Rapid advances in clean technology only bring forward this headwind. It should be self-evident that businesses linked to the fossil fuel economy need to change. Boards need to commit to align with the 2015 Paris agreement’s goal of keeping global warming well below 2C and set out a credible strategy for getting there, which protects shareholder capital. This may mean shifting capital into low carbon alternatives or shrinking and returning cash to investors. According to think-tank Aurora, the $500bn or so a year being invested in oil and gas is roughly what is needed for wind and solar every year to meet the Paris goals.
To drive decarbonisation, asset managers must move beyond supportive statements and use their votes. If a company’s strategy is flawed, shareholders can change the leadership. The question is why so many asset managers are failing to vote for change. One problem is a lack of accountability: few savers have any idea how their shares are being voted. Often, they do not even know which companies they hold shares in.
Another obstacle is short-termism. Too many fund managers believe climate change is unlikely to affect them over the next quarter or financial year where they are focused. Some believe their fiduciary duty prevents them from acting. The opposite is more likely to be true. Where asset managers fail to reflect material risks in their investment process, it is hard to see how they are putting their clients’ interests first. We’ve seen the story of failed accountability before. It resulted in the financial crisis. Directors at banks were routinely reappointed with more than 95 per cent support despite overseeing strategies that led to a dangerous build-up of risk. The consequences this time around will probably be far graver than in 2008.
There is some good news. Directors at Maersk, the global shipping company, last year committed to aligning their strategy with the Paris goals. Amazon has just announced they will get to net zero carbon emissions by 2040. On the investor side, the ClimateAction 100+ initiative has brought together institutions managing assets worth more than $35tn to call for better climate governance. But time is running out. It is no longer enough to applaud progress that only gets us half way.