Can Investors Spur Shell Towards a Clean Future?

The sustainability investing paradox confronting asset managers
Can Investors Spur Shell Towards a Clean Future?
Publ. date 12 Jun 2017
As we’ve all been reading for the last years, sustainability is a hot topic for many institutional investors. Over 1,600 asset managers have underwritten the UN Principles for Responsible Investment (PRI), representing $62 trillion assets under management. But how does it work in practice? Do sustainable investors truly walk their talk and act on mitigating a topic such as climate change as a risk to their capital invested? Can they use their power to change the course of the companies they put their clients’ money in?

We hear a lot about adapting portfolios to climate change and how asset managers can take advantage of a growing range of climate-related investment tools. But what happens in reality when mutual fund companies have the possibility to step up for climate change through proxy voting?

One would think that institutional investors that call themselves sustainable and integrate ESG-factors within their investment process, would vote in favor of climate-related shareholder resolutions. As recently concluded by Ceres, it appears that most of the biggest mutual funds see climate change as an investment risk which could have a negative impact on the risk-return of a portfolio. These investment funds fail to support climate change shareholder proposals. But why is that? Let’s take a recent example which could help us to analyze the situation and draw some conclusions.

Shell’s AGM 2017 as a recent live case

It looked promising: the Follow This shareholder resolution for setting environmental targets aligned with the Paris Agreement submitted for the 2017 Shell Annual General Meeting (AGM), last May. A group of green Shell shareholders asked the company to take a step forward on the climate change issue by aligning its operations with the goals of the Paris Climate Agreement in setting carbon targets and publicly reporting on progress. Even though Shell has been making some progress, the oil giant does not have any quantifiable specific targets connected to GHG emission reduction. The Follow This shareholder resolution was therefore proposed in order to enhance Shell’s accountability, to publicly commit to the low-carbon economy revolution and to chart the way forward.

The (not so) surprising result

On the 23rd of May 2017, Shell’s proxy investors had the possibility to choose between two presented perspectives: Follow This, supported by active responsible investors as Ethos and CalPERS which believe in the power of engaging GHG intensive companies and encourage them to make the energy transition, and Shell itself, which argued that targets aligned to the Paris Climate Agreement would pose a risk at its competitive position.

The bar was set high, as the resolution required more than 75% of the votes in favor to go though. Based on the apparent omnipresence of ESG investing and the fact that some of Shell’s largest institutional holders are UN PRI signatories, one would think that the shareholder proposal would be able to rack up a decent share of votes. Instead, the counter lingered at just 6.34% of votes in favor and the resolution was therefore rejected.

Why did investors not walk their talk?

One could argue that while some asset managers agree on the science of climate change, they do not really see material risks and implications on the stock-return and therefore engage in “investor greenwashing”, using sustainability as lip service to gain credibility. BlackRock, one of the world’s biggest investment management companies, could be seen as an example of this sustainability investing paradox. The mutual fund publicly states that climate change is seen as a large risk for its investments and therefore it committed itself to integrate climate change factors within its investment strategy. The company is a vocal promoter of initiatives such as CDP, but its final vote at the 2017 Shell AGM was against the resolution.

On the other hand, one could believe that lots of work still needs to be done in order to create a proactive environment for companies which enable them to shape their strategy towards the low-carbon transition. As highlighted by Shell, the surrounding environment should enable a company to make the step forward: regulations and consumers’ behavior should be aligned to the energy transition vision and create a level playing field. Collaboration between society, governments and corporations is needed in order to align the different priorities, overcome individual challenges and make the energy transition happen.

Moving forward to the low-carbon revolution

Overall, we could take this recent example to acknowledge the fact that a “sustainability investing paradox” does exist. There could be many different reasons for responsible investors to actually not walk the talk, and some may be more valuable than others. Perhaps rather than seeing it as a limitation, it could act as a starting point to foster a constructive discussion about how asset managers, large corporations and governments could collaborate in order to create an enabling environment to chart the way forward towards a low-carbon revolution.

Image source: Backbone Campaign, Flickr

About Nikkie Vinke

Multidisciplinary advisor in ESG benchmarking, sustainability strategy development and execution. | nikkie@finchandbeak.com

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