The Rise Of The Investor Eco Warrior: Financial Markets As A Late Climate Change Champion

Last year Royal Dutch Shell, the UK’s most valuable public company, announced a target to have cut its current carbon footprint in half by 2050. The target was formed as an ‘ambition’ rather than a firm commitment and included emissions from cars that run on petrol and diesel Shell sells. With all vehicles expected to be fully electric long before 2050, Shell could be accused of cheating.

However, be that as it may, in December Shell also promised to set concrete short term emissions reduction targets each year from 2020 onwards. Crucially, executive pay is to be linked to those target being achieved. The Anglo-Dutch energy giant’s chief executive Ben van Beurden stated:

“If we don’t meet them there will be consequences to my salary and others,” said Ben van Beurden, Shell’s chief executive. “I hope you are in no doubt . . . [we are] absolutely serious about this.”

The presumed catalyst for Royal Dutch Shell’s new environmental conscience is a shareholder resolution filed earlier in the year. It demanded Shell set hard targets around reducing its emissions. It only received 6% support from investors with voting rights. But the fact that some major institutional investors formed most of that 6% seems to have made a strong impression on Shell’s board. Seeing a growing danger in activist institutional investors committed to forcing positive action on climate change, they have decided to act voluntarily before it reaches tipping point.

The campaign behind the initial resolution was coordinated by activist investor group Follow This. Its founder Mark van Baal commented:

“The real heroes of this story are the institutional investors”.

That, many believe, represents a huge change in attitudes that might do more than anything that has come before in pushing big business, particularly big energy, into the sustainable future that is a prerequisite if international climate change resolutions are to be successfully met. Environmentalists and NGOs may have formed the vanguard of the movement but money managers, in turn influenced by the desires of the millions of private investors whose capital provides their financial clout, could now prove to be the force that will turn the battle.

There is a certain irony in this development, even if it is to be universally welcomed. The asset management industry controls around $85 trillion of capital globally. If big energy companies are often more powerful than national governments, their investors can bring them to heel. But until now investors, the rank and file of those investing online into pension and savings funds, have been more motivated by dividends and returns than environmental sustainability. In turn, their money managers pursued delivering those in order to remain competitive. The result was little pressure on big business and big energy to invest in cleaning up its act.

What’s Changed? Why Are Investors Suddenly Environmentally Conscious?

The shift in investor attitudes to major corporate polluters can be boiled down to two main motivations. The first is the drip effect of education and awareness campaigns leading to public awareness catastrophic climate change is now an imminent threat. Hugely successful nature documentaries such as the BBC’s Planet Earth and Frozen Planet II have had a bigger contribution than might have been predicted in bringing the threat of climate change into the focus of popular culture to a greater extent than ever before.

The 2015 Paris accord on climate change also had a big influence on general public awareness. It resulted in 200 countries committing to taking action to keep global temperatures within a 2C increase of pre-industrialisation patterns.

But perhaps the fundamental factor is the leadership of big asset managers now appreciating the financial risk posed by climate change and the new laws and regulations coming into force on the back of the Paris accord. If temperatures push past 1.5C higher than their pre-industrial revolution levels the effect on climate and sea levels would be expected to have a devastating impact on the global economy.

Even leaving that aside, new laws designed to crack down on emissions will leave large swathes of the current energy and oil and gas industries financially unviable. That will devastate the value of assets belonging to companies that have not adapted on time, something that will have a serious knock-on effect on the performance of their institutional investors.

That position has been articulated by Steve Waygood, the chief responsible investment officer at Aviva Investors, the asset management arm of the British insurer that manages £350 billion in investment capital:

“Right-thinking people who understand the climate science here and are in positions of power and influence are now beginning to think: ‘How does the financial ecosystem benefit or not from climate risk?’ While there are short-term gains to be made, the longer-term environmental disaster spells an economic disaster.”

A 2015 report researched by The Economist’s Intelligence Unit estimated climate change-based financial losses could range at between a best case scenario $4.2 trillion and worst case $43 trillion by the end of this century. For pension funds that need to look decades ahead, that’s a scary prospect. Floods, droughts, heatwaves and forest fires increasing in regularity and impact is also a prospect insurance funds are very motivated to avoid.

Stronger Investor Activism Still Needed

Environmentally aware and concerned investors are growing in influence. In the USA, 25 shareholder resolutions that focus on climate change risk have been filed with stock market-listed energy companies ahead of the spring round of AGMs. Executives have a history of urging investors to vote those resolutions down and that will probably be the case again. But the growing number of resolutions being filed shows a marked change in investor attitudes. Data provider Proxy Insight says the number of these investor resolutions has more than doubled since 2013/14.

To date, however, that hasn’t translated into much solid action. Across energy companies listed in either London or on Wall Street, Minerva Analytics, a market intelligence company, says only one director has been voted off a board as a result of investor resolutions which have been motivated by concern over directors blocking positive climate change management ethics.

A change may be in the offing though. The Financial Times reports that Legal & General Investment Management plans a new strategy of voting against board chairs who are failing to take climate change action. Auditors who fail to take full account on the climate change impact of the companies they are auditing could be the next target. For example, while the Paris international climate agreement commits to coal being phased out by 2030, many auditors are still structuring the depreciation of coal-fired power plants over the next 25 years. That results in a healthier set of financials that the owner of the power plant can use to attract investors as well as keeping share prices, it could be argued falsely, buoyant in the shorter term.

Investors now have to step up their efforts. If firing directors through shareholder resolutions is difficult, an easier and more effective route is to use board votes to install leadership that will take action.

But the worm does appear to have turned. History might now show that investors, usually associated with cynicism and perceived as motivated most by short term gains, became the most influential eco warriors of them all.