The divest-invest campaign has helped foundations focus on the contribution of fossil fuel producers to climate change and on the need for mission-driven investing. But divest-invest is only the beginning of the story. To rapidly shrink greenhouse gas emissions, we must focus on utilities—the largest consumers of fossil fuels—as well as oil and gas companies. To the degree foundations hold shares in utilities, they have a voice and it is more important than ever that they use it, particularly in the U.S., where many politicians are indifferent or hostile to climate-friendly regulations.
Oil and gas companies in most cases have no long-term future; they will continue to fight efforts to reduce their activities, just as coal companies did during their rapid decline. By contrast, the global energy utility sector has a future but it is a future fraught with technological change, regulatory turbulence, and business disruption. Having a transition plan to a low-carbon economy will not be a concession to environmentalists—it will be a business imperative.
Hence we are encouraging investors to co-file and vote for resolutions asking energy utility companies to prepare transition plans to a <2°C warming world. And we ask foundations to use their shareholdings in energy utility companies to support these resolutions. Foundations’ shares—and voting rights—are often held by asset managers. But a recent legal opinion by ClientEarth, written for U.K. pension fund trustees, shows that this needn’t be the case. (Very similar issues are covered in these two guidance notes relating to the US context: 1, 2)
“By making small adjustments to their contractual arrangements (the mandate or equivalent) with their asset managers, trustees can substantially increase their legal leverage to have a say (and even have the final say) on how their scheme’s or institution’s shares are voted in particular AGMs. In addition, trustees can generate meaningful change simply by acting as intelligent consumers, asking more questions and demanding better transparency, both before and during the mandate period.” ‘The Missing 60: What can investors do to secure improved climate voting by asset managers?’ ClientEarth
ClientEarth suggests that trustees begin to discuss these issues with their investment consultants, who should be able to advise how they can improve control over voting rights. Specific recommendations, explained in more detail in the opinion, are:
Demand transparency: Trustees can insert a clause that legally requires the asset manager to disclose how they plan to vote on a particular issue at a particular AGM if asked to do so by the trustees (this is not the same as requiring blanket disclosure of all votes).
Do due diligence when hiring: All regulated asset managers should publish a statement explaining whether or not they adhere to the principles of the UK Stewardship Code. Trustees should examine a copy of this statement before offering a mandate to an advisor. In addition, here are some key things to look for in their voting policy and proxy voting guidelines:
- Whether climate change or climate risk feature at all;
- What approach the asset manager takes on shareholder proposals, in particular:
- do the guidelines (and past voting patterns) reveal a tendency to support management on shareholder proposals, or are proposals genuinely considered on their own individual merit;
- to what extent does the asset manager rely on recommendations made by their proxy voting service provider; and
- what is their approach to stock lending and recalling stock for voting?
Seek explanations: Trustees can seek to compel asset managers to provide reasons to justify voting decisions. The requirement to “regularly account to their clients … as to how they have discharged their responsibilities” will, in some circumstances, include an obligation to explain why shares were voted in a particular way if clients ask for an explanation. Trustees can in particular ask how their asset managers voted in the climate disclosure resolutions at BP and Shell (98% votes in favour) and Exxon/Mobil and Chevron (around 40% votes in favour.) This will highlight whether your investment manager is one of the Missing60 voting inconsistently on a key climate change resolution.
Influence future votes: How this can be done is likely to vary depending on whether the assets in question are held in a segregated account or in pooled or mutual funds, with the former offering more opportunity for client leverage. Even where the foundation is invested in a pooled or mutual fund, however, trustees can select a product or manager that allows trustees to vote in proportion to the foundation’s level of investment in the fund. Or, rather than moving to a firm that allows this, trustees may want to consider taking steps to improve the voting record of their existing asset manager. The ClientEarth legal opinion provides a number of ways to do this.
Confronting professional and highly paid investment managers and consultants may not appeal to foundation trustees. But the more investors challenge business as usual, the more companies will be forced to face their role in sustaining climate-damaging activities. As long as energy utility companies remain addicted to burning fossil fuels, the Exxons of the world will provide their drug of choice. Leading a planet-saving intervention may not have been what foundation trustees signed up for, however they will be in good company in the 2017 AGM season.
This blog was originally posted on the Preventable Surprises website in December 2016.
Carolyn Hayman OBE is Chair of Preventable Surprises and a Trustee of the Margaret Hayman Charitable Trust. Her career in government, the private sector and the non-profit sector has focussed on innovation and startups, including most recently as co-founder and CEO of Peace Direct.