By Irina Slav
When Bank of America proclaimed it would no longer finance Arctic oil and gas drilling, it was just the latest in a string of banks virtue-signaling to the climate change lobby. Few oil companies have the desire – or extra cash – to explore in the Arctic. But now asset managers and their clients are coming together to put some real pressure on the industry. About a month ago, a group of large investors known as the Institutional Investor Group on Climate Change (IIGCC) sent a letter to a number of energy firms insisting that they detail the potential effects of climate change on their financial performance in their accounts.
The group, which collectively manages some $9 trillion in assets, wrote, “By providing vital information on performance and capital for an entity, the accounts are key to how capital is deployed by management as well as investors. If the accounts leave out material climate risks, too much capital will go towards activities that put shareholder capital at risk. Worse still, this puts all our futures at risk.”
The letter, whose signatories include JP Morgan, AXA Investment Managers, Fidelity, and Northern Trust, praised BP and Total for their efforts to shift their business from oil and gas to renewables, noting this showed that the shift was not only feasible but could be done quickly.
The addressees of the letter included BP and Total, as well as fellow Big Oil majors Shell and Eni; European utilities including EDF, Enel, and Engie, and materials heavyweights such as Glencore, Arcelor Mittal, and BHP. The investor group also targeted transport majors including Airbus, Daimler, and AP Moeller-Maersk.
Fast forward a month and another asset management group has stepped out on the scene: the Net Zero Asset Managers Initiative. The initiative, involving 30 asset managers including AXA, Fidelity, UBS, and Legal & General Investment, has committed to supporting the net-zero 2050 plan through reducing the emissions of companies in which the asset managers’ clients invest. In other words, the initiative aims to make emitters cut their emissions so their clients will continue investing in them.
Just how significant these initiatives are was made clear in the comments of one of the signatories to the initiative.
“The transition to net zero will be the biggest transformation in economic history and we want to send a clear signal that there is simply no more time to waste,” David Blood, senior partner at Generation Investment Management, said. “The opportunities to allocate capital to this transition over the coming years cannot be underestimated. Without the asset management industry on board, the goals set out in the Paris Agreement will be difficult to meet.”
Indeed, any goal would be difficult to meet without help from investors, especially large institutional investors. And if these investors are eagerly jumping on the net-zero-by 2050 train, energy companies need to pay special attention.
How asset managers approach the issue was recently illustrated by BlackRock. The world’s largest asset manager earlier this year said it was putting 191 companies on watch, as it put it, with regard to emissions, saying it would engage with these companies to help bring emissions down. Later in the year, the number of companies BlackRock would engage with rose to 440, and now the asset manager has boosted the number to 1,000. The goal of this engagement: aligning company operations with the net-zero-by-2050 scenario.
The firm is pretty straightforward about how it would advance that goal: “Where we believe companies are not moving with sufficient speed and urgency, our most frequent course of action will be to hold directors accountable by voting against their re-election,” BlackRock said in a recent report about its 2021 stewardship expectations.
“Our data, discussed in more detail below, tells us that voting against directors is effective: 83% of the time our votes against directors in the FTSE 350 over remuneration concerns resulted in revisions to pay policies within 12 months,” the asset manager noted, adding that “41% of companies where we voted against directors for diversity reasons in 2019 increased their board diversity in the following year.”
Energy companies – and other big polluters – are in for one hell of a ride in a quite literal sense. The picture, as asset managers are painting it, comes down to “Cut your emissions or we’ll cut your money.”
It is difficult to imagine a more effective pressure tool, especially amid a pandemic that has hurt virtually every industry, except Big Tech and – this is a notable exception – renewable energy. While laypeople argue on social networks about whether it’s all baseless hype or the only way forward for humankind, investors are boarding the net-zero-by-2050 train and setting out ways to make sure the ride will be profitable for them. If energy companies want to share in the profits at some point, they will need to spend heavily on emission cuts now.