Meet the investors pushing climate reality on carbon majors

Through shareholder resolutions, the Aiming for A coalition is getting coal, oil and gas companies to face up to global warming

Investors are warning coal miners to be prepared for climate policies (Pic: Peabody Energy)

Investors are warning coal miners to be prepared for climate policies (Pic: Peabody Energy)

By Megan Darby

On Wednesday Rio Tinto, one of the world’s biggest mining conglomerates, embraced a shareholder resolution on climate change.

The politely worded submission focuses on disclosure of information. Reading between the lines, it encourages a shift away from coal – an increasingly risky bet as governments crack down on greenhouse gas emissions.

“This is an unusual event, although not unprecedented,” chairman Jan du Plessis wrote to shareholders, recommending they vote in favour of the proposal.

It is the latest mini-victory for a quietly revolutionary coalition of institutional investors known as “Aiming for A”.

Since 2012, this growing band of charities, churches, pension funds and commercial fund managers has been putting carbon majors under the spotlight. Representing US$8 trillion of assets at the last count, they are making climate concerns impossible to ignore.

So who is behind this movement? What impact are they having? And where next?

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Helen Wildsmith, the coalition-builder-in-chief, talks to Climate Home over lunch.

As stewardship director for CCLA, one of the UK’s largest charity fund managers, she had been chewing over the problem for years.

It is important to understand why churches and charities like to invest in companies like energy majors in the first place.

Trustees have a duty to maximise cash available for their charitable purpose and tend to favour reliable dividend payments over fast capital growth. Wildsmith likens it to owning a house and spending the rental income, but keeping the house. Oil companies and utilities tick that box.

But Wildsmith realised there were strategic threats on the horizon, which 2009’s climate summit in Copenhagen brought to the fore.

“Quite a key moment for me in the period around Copenhagen, where I started to realise that climate change was not linear,” she says. “A lot of what I read up until that stage had accidentally given the impression that it was a linear system, almost that we could stretch the rubber band a bit too far and then correct it.

“I started realising this was a discontinuous system and we couldn’t stretch it too far or that wouldn’t be good for investors, society and the economy.”

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If policymakers didn’t tackle climate change, the rise in extreme weather could damage all sorts of assets and business models. If they did, it would be severely disruptive to certain carbon-intensive sectors.

It was a different type of problem than responsible investors were used to. Rather than being limited to monitoring companies’ performance on human rights or environmental standards, it cut across their whole strategy.

In 2011, two things happened that gave Wildsmith an idea for how to address that big picture.

One was that US churches wanted to file a shareholder resolution with BP over its response to the Deepwater Horizon disaster. Wildsmith got involved and while they decided there were other ways to address those particular concerns, the idea of a resolution stuck.

The other was a “fleeting conversation” with Peter Montagnon, an ethical investment expert involved in responding to the financial crisis. “It left in my mind the sense that it’s actually quite hard for long term investors to get their voice heard, because of the day-to-day noise in the markets,” says Wildsmith.

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Her brainwave was to use shareholder resolutions to amplify the concerns of long term investors. Traditionally in the UK, these were seen as antagonistic, the preserve of activists buying a minimal number of shares to make a point. Wildsmith envisaged a more constructive approach, as part of a sustained engagement by major funds.

One of her first allies was Tessa Younger of PIRC, research partner to the Local Authority Pension Fund Forum (LAPFF).

Representing 69 of the UK’s 89 local authorities, LAPFF had a record of shareholder activism. Back in 1997, it filed a resolution to get Shell to clean up its act in the Nigerian delta.

While it can’t be said to have solved the problem – only this week, Nigerian communities lodged another lawsuit against the company – LAPFF claims credit for improvements in Shell’s approach to social responsibility.

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The strongest criticism of investor engagement tends to come from activists who prefer divestment from fossil fuel interests. Networks like 350 see energy majors as the enemy, to be shunned not coddled.

With eye-catching stunts and hashtags like #keepitintheground, they celebrate disruptive clean technology – with the odd pang of sympathy towards redundant coal miners.

Aiming for A, by contrast, is the work of a thousand well-mannered meetings. Long term investors value stability. They want a “smooth transition” to a low carbon economy.

At different ends of the spectrum, both are trying to resolve the conflict between a safe future climate and the profits of fossil fuel producers.

To hold global warming to 2C, scientists estimate more than 80% of coal reserves, half of natural gas and a third of oil cannot be burned. In Paris, governments agreed to a tougher “well below 2C” goal, aspiring to 1.5C.

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It took Aiming for A three years to work up to their first resolutions, in 2015. They were anxious to build up enough support to get them passed. Filed with BP and Shell, they aimed to be “supportive but stretching”.

The most important ask was that oil majors consider the possibility climate policies could hit demand for their product. They should model how their assets would fare in a 2C world – and publish the results.

In BP’s 2016 energy outlook last month, there were signs of progress. They added a “faster transition” scenario, which was in line with the International Energy Agency’s “bridge” pathway – not the most cost-effective route to 2C, but potentially keeping it within reach.

“It is a huge move from where the company was a couple of years ago,” says Younger. “I was really pleased to see that. It was more progress than I had expected.”

But she acknowledges that compared to what the Paris agreement mandate, “it doesn’t quite get there”.

“We don’t ask them to set targets. Some people criticise it for not being strong enough, but it is horses for courses.”

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This year, the coalition has turned its focus to mining majors: Glencore, Anglo American and – the first to respond – Rio Tinto.

It is an expanded movement, with co-filers representing US$8 trillion – a 30-fold increase on the first resolutions.

They include four of the world’s ten largest pension funds: ABP and PFZW from the Netherlands, California’s Calpers and the Canada Pension Plan Investment Board.

Even commercial fund managers have joined in, with Bruce Duguid of Hermes coordinating the latest round of interventions.

Duguid says they had voted with the coalition last year, but wanted to make sure their 40 pension fund clients backed closer involvement.

“We had a conversation with our clients earlier last year and they supported us taking a more muscular approach,” he says.

“I think that shows how institutional investors have been increasingly concerned with climate change and know that they need to help drive companies towards the long term agenda, rather than just ask nicely.”

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For the miners more than the oil sector, Duguid says, climate policies bring opportunity as well as risk. While coal looks like a worse bet, copper and uranium have a role in clean electricity networks.

He sees senior management as often supportive of taking a longer term view, but under pressure to deliver immediate results.

As such, he defends the decision to demand disclosure rather than specific actions: “We want the companies to be in the driving seat, we just want to ask the right questions.”

On the back of this investor awakening, Financial Stability Board governor Mark Carney last year launched a task force to address climate risk.

Headed by Michael Bloomberg, it will propose standards of carbon disclosure across the sector, and it could make a big difference, says Duguid.

“We shouldn’t have to use resolutions for long, because it should become obvious this is what investors want and need.”

Read more on: Carbon bubble | Divestment