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July 5, 2022updated 02 Aug 2022 12:49pm

How climate change engagement can be effective

Whether to pursue climate change engagement or fossil fuel divestment is still subject to fierce debate. Some asset owners have a plan.

By Vibeka Mair

Climate change engagement
Mikkel Svenstrup, CIO at ATP, believes that engagement can deliver positive transition as long as companies are moving “in the right direction”. (Photo courtesy of ATP)
  • Politicians clashed on whether it was better to engage or divest at the Climate Investment Summit last week.
  • Giant investment engagement initiative Climate Action 100+ has come under attack as members have shown little evidence of clear policy on climate change engagement.
  • Pension funds ATP and Brunel Pension Partnership, both members of Climate Action 100+, are attempting to dispel this concern by outlining their climate change engagement practices.

The climate crisis is driving pressure on investors to curb carbon emissions through stewarding carbon-heavy holdings to transition or getting rid of them from their portfolios.

But the approaches divide investors and activists, with some arguing that fossil fuel divestment is passing the buck and others feeling that engagement keeps carbon-intensive firms off the ropes.

The topic also divided politicians at the Climate Investment Summit held in late June at the London Stock Exchange.

Climate engagement or divestment?

Shirley Rodrigues, deputy mayor of London for environment and energy at the Greater London Authority, highlighted the announcement made on 9 February by its pension fund, the London Pensions Fund Authority (LPFA), that the LPFA had divested all extractive fossil fuel holdings in its global equity portfolio, which made up 46% of a £6.9bn total. This followed Local Pensions Partnership Investments (LPPI), the local government pool investment manager for the LPFA, deciding in December 2021 to exclude fossil fuel equities as part of it signing the Institutional Investors Group on Climate Change (IIGCC) Net Zero Asset Managers initiative.

However, later on, talking on a plenary session on climate investing, Guy Opperman, the minister for pensions and financial inclusion, responded to Rodrigues’ speech by saying, “no disrespect to Shirley Rodrigues, but the idea that divestment is the way ahead, as she is proposing with pension funds, is utterly wrong… [pension funds] need to be part of the conversation. And the way to do that is through stewardship.”

The LPFA was, in fact, clear in February that stewardship was its main way of addressing climate change risk. “Engagement remains the primary approach to driving change,” said chief executive Robert Branagh. But he added: “We will and do disinvest where necessary.” He said such action mitigated the financial risk from climate change. He also said it would be welcomed by members urging the pension fund to take a lead on tackling climate change.

Indeed, in December 2021, Capital Monitor argued that divestment and engagement go hand-in-hand, after a data analysis found investors that engage a lot on ESG issues also tend to be early adopters of fossil fuel divestment policies.

However, for the most part, the financial community tends to prefer engagement – the $68trn investor engagement coalition Climate Action 100+ being a case in point. It proposes investors work together on engaging high-carbon emitters on improving climate change governance, cutting emissions and strengthening climate-related financial disclosures.

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But while many agree that the potential for Climate Action 100+ driving solid climate action is huge, there has been criticism that it is falling short.

Speaking at the Future of Climate Finance conference, hosted by Capital Monitor and New Statesman on 8 June, Catherine Howarth, chief executive of non-governmental organisation ShareAction, said Climate Action 100+ was a “brilliantly conceived initiative” in recognising that 80% of global industrial emissions are captured by 167 companies – the focus for its climate engagement. But she also said it lacked teeth.

In a report last month, ShareAction said Climate Action 100+ also needed to be a lot more transparent and stricter about the aims and outcomes of its engagement with companies, and monitor and report on the progress of engagements.

Indeed, at the Climate Investment Summit, an audience member, in response to Opperman’s argument that stewardship not divestment was needed, wanted to know how one could monitor the former by asking: “Are there any particular data metrics or behaviours to look for in carbon-intensive firms when making financial decisions?”

'Forceful stewardship' over climate transition

Both ATP, Denmark’s biggest pension fund with a DKr928bn ($142bn) asset portfolio, and Brunel Pension Partnership, a Bristol-based local authority retirement fund pool with some £35bn ($48bn) under management, were at the summit, and both have distinct ways of measuring progress on climate change engagement.

Sarah Wilson, a stewardship expert and CEO at London-based proxy voting firm Minerva Analytics, says they lead on what she terms “forceful stewardship”, or stewardship with consequences, to make sure holdings transition effectively by using initiatives such as the Transition Pathway Initiative, which assesses how well companies are becoming less carbon-intensive, and Climate Action 100+. With the latter, Brunel, a Minerva client, draws upon the initiative's indicators and benchmarks to assess effectiveness.  

“For public equities, divestment may decarbonise the portfolio but does not decarbonise the planet,” Wilson says. “These funds are realists – transitioning to a low-carbon economy is not an overnight issue. We can’t suddenly take the entire economy back into the dark ages, although Russia might try. We need energy companies to be part of the transition.”

Mikkel Svenstrup, CIO at ATP, explained at the Climate Investment Summit that ATP's global equity portfolio was factor-based and uses data from the public market to assess the effectiveness of its engagement. It looks at indicators such as what are the commitments from company management and whether management has a strategy to execute them. ATP will follow up on plans to assess if its approach is actually working.

“That is actually a pretty good predictor,” said Svenstrup. “That’s what we mean about investing in the transition. As long as they [companies] are moving in the right direction we will be behind them.”

Svenstrup said that not taking this approach meant you only invest in the greenest of the green. “You’re losing out,” he said, reflecting the investment belief that you will make no gains from investing in companies that are green now, but you could in companies that are reducing their carbon exposure, and are therefore likely to be investment winners in a future low-carbon policy environment.

In an email conversation after the event, Jens Bang-Andersen, management partner to the CIO at ATP, said the company does not have a fossil fuel divestment policy per se, but added that it will act where it sees that no other options are viable. “We analysed the investment plans of electricity utilities, which led us to sell off a couple of companies… We have done a similar analysis in the oil and gas industry, which also led to actual investment decisions,” he said.

In 2019, ATP also took a decision to not invest in fossil fuel extraction in externally managed illiquid funds going forward. “We were not comfortable with the long-term prospects of these investments combined with the long investment periods normally seen in these types of funds," said Bang-Andersen.

“As a consequence, we have both sold off and restricted our investment universe from a number of carbon-intensive investments in recent years.”

Also speaking on the panel was Faith Ward, chief responsible investment officer at Brunel Pension Partnership, who said the question of monitoring was really important.

“We’ve embedded Climate Action 100+ within our escalation process,” she explained, where through stewardship it will raise any issues.

Refusing TCFD report grounds for divestment?

Brunel Pension Partnership also uses the Climate Action 100+ indicators as a benchmark. Examples include whether a company has set a short and medium-term target, aligned its capital expenditure with climate or links climate targets to remuneration, or whether it factors in a just transition.

Ward says this helps Brunel understand what it has to continue engaging on. “But we’ve made the case there’s got to be a point at which you lose patience with some of these companies,” she added.

Ward said grounds for escalation to divest could be if a company refuses to publish a Task Force on Climate-related Financial Disclosures (TCFD) report. “If they are not providing you, as an investor, with that information then are they really a company that you want to be invested in long term?” she said.

She noted this was a “last resort” after activity such as engagement and filing shareholder resolutions. “The team has to be there with the stewardship programme, but you just can’t carry on forever because these companies need to have a more assertive stance.”

Brunel has a public climate change engagement and divestment policy that sets a five-point plan, focused on financial system change, not just Brunel’s portfolio. The fund requires asset managers to justify climate-controversial holdings and is pushing for mandatory climate disclosure, for example. The scheme also does its own stewardship and makes some case studies public.

For example, engagement with BlackRock, including a one-to-one meeting with CEO Larry Fink, led the company to join Climate Action 100+, and it co-filed a shareholder resolution requesting that Barclays phase out the financing of fossil fuel companies. The resolution passed in May 2020, exceeding the 20% threshold of shareholder votes required (23.95%). This requires Barclays to consult with shareholders and publish the views received and actions taken within six months.

Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on NSMG.live.

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