23rd May 2017 09:18:00 AM (UTC)
Shareholder engagement on climate change comes of age
Edward Mason, Head of RI with The Church Commissioners explains what’s at stake at ExxonMobil this proxy season
One week ago, in a move that signalled a fundamental shift in their engagement with the oil and gas industry, institutional shareholders voted in huge numbers against the board of Occidental Petroleum to pass for the first time ever a contested shareholder proposal calling for more disclosure on the business impacts of climate change.
The proposal, lead-filed by Wespath Benefits and Investments, asked the company to undertake and publish climate scenario analysis for the business, including for a 2°C scenario. The vote in favour was a massive 67%. It is one of a family of 2°C scenario analysis resolutions this proxy season, the highest profile of which has been filed at ExxonMobil for its shareholder meeting on 31 May.
The core message of the Occidental vote is that major institutional investors, especially in the wake of the publication of the recommendations of the FSB Task Force on Climate-Related Financial Disclosures (TCFD), now have no qualms about asserting their requirement for climate-related disclosure when necessary.
Amongst those voting for the proposal was BlackRock, Occidental’s largest shareholder. This takes things another big step forward from last year’s scenario analysis proposals when, at ExxonMobil, a resolution was supported by a majority of the corporation’s top 25 shareholders, including its third largest, State Street, as 38% support was recorded notwithstanding board opposition.
The story of shareholder engagement coming of age was firmly underscored earlier this week in a new report from CDP and the four investor networks that make up the Global Investor Coalition on Climate Change (GIC). Investor Climate Compass: Oil and Gas – Navigating Investor Engagement combines CDP analysis of the performance of ten leading oil and gas companies on climate strategy and disclosure with assessments by investors of the progress achieved through engagement – where necessary assertive – since 2012.
The results confirm that investor engagement on climate risk is having a real impact on board and executive decision-making. They also confirm the work still to be done by investors if the companies are to face up fully to the challenges of the transition to a low carbon economy and assure investors that they are managing risks and opportunities prudently. On scenario analysis, the report finds that seven of the companies do some form of scenario analysis about the impacts of the Paris Agreement (and its goal to curb greenhouse gas emissions fast enough to keep global temperature rise to less than 2°C). Only three of these have sought to quantify the financial impacts of the IEA’ s 450ppm scenario. Exxon have done neither.
The report calls on investors to make their stewardship strategies for 2017/2018 more ambitious, using all the tools available, to ensure that companies:
• do more, and better, scenario analysis and transition planning
• disclose in line with TCFD guidelines; and
• secure the competence they need at board level for good climate governance.
The report places ExxonMobil firmly at the back of the super-majors’ pack on climate change strategy, disclosure and willingness to dialogue with investors (alone among its peers Exxon will not make non-executive directors available to investors to discuss governance of climate risk – or anything else for that matter).
This highlights that the most pressing outstanding investor action during the 2017 proxy season is to pass the 2°C scenario analysis proposal at Exxon co-filed by New York State Comptroller Thomas P. DiNapoli (as Trustee of the New York State Common Retirement Fund), the Church Commissioners for England and over 50 other investors with $5tn of assets.
ExxonMobil still contends that a 2°C scenario does not lie within a ‘reasonably likely to occur’ range of planning assumptions. Investors carrying the financial risk of climate change and the low carbon transition beg to differ.
I ask all institutional investors to ensure that they come down on the right side of this vote, which will be historic. With 2017 the year when shareholder engagement on climate change has come of age, asset managers whose stewardship practice lags peers will face even more difficult questions, not least from their asset owner clients.
Previously published in RI News.
— IIGCC (@IIGCCnews) May 15, 2017
Oil and gas industry heeding (some) investor demands on climate risks https://t.co/EnJlrpbj9f
— IPE.com News (@IPEnews) May 17, 2017
— Helen Wildsmith (@HelenWildsmith) May 19, 2017
30th March 2017 11:00:00 PM (UTC)
Scaling up green investments: from ambition to asset allocation
Like me, you may want to check this statistic, which I first heard about in a report on the UK’s carbon emissions for 2016. Apparently, that year, the UK’s carbon dioxide emissions fell to a level that was last seen in 1894. Yes,1894….the year, coincidentally, when the first petrol driven powered car was patented.
The decline of coal-fired power has been a major contributor to this trend, but the rapid deployment of low carbon technologies, notably wind power, but also solar have played a key role. Wind power, for example, produced more electricity than coal-fired power in 2016.
The growth in green technologies is not, however, just reserved to the power sector. Britons were reminded in mid-March that their energy bills actually declined in real terms between 2008-2016. The increasing costs of support for low carbon power having been more than offset by improved efficiency in electrical products such as lighting, fridges, freezers and boilers.
These changes in the UK - mirrored in other countries around Europe and the world - are part of a significant shift in the overall complexion of the economy. These changes are also evident in the approach that large investors are taking to their investments. This is why on 14 March, the Institutional Investors Group on Climate Change, together with WHEB and Pictet Asset Management, convened a members seminar to hear how leading asset owners and investment consultants are reshaping their approach to sustainable and low carbon investments.
Among large asset owners there has already been substantial progress
One thing that was immediately apparent is the progress that has already been made. Some 72% of respondents to an IIGCC survey have already made green/sustainable investment allocations amounting to €53bn in total. The most prominent asset classes so far are listed equities and real estate - which make up more than two thirds of the total - with other asset classes including private equity, fixed income, forestry and infrastructure accounting for the remainder. On average, asset owners have allocated 6% of their total assets to sustainable investment strategies; and all respondents indicated that they plan to increase their exposure to green investments in the future with the majority focusing on infrastructure, real estate and private equity.
Building a strategy involves multiple steps
There is no straight-forward ‘road-map’ for asset owners to follow, but some key steps emerged from the discussion at the IIGCC event in March:
Positioning environmental social and governance (ESG) issues generally, and climate change in particular, as materials risks was a key point. Reflecting this understanding in the Board’s approach to their fiduciary duty was also highlighted. Investment consultants emphasised the importance in starting by defining a set of ‘investment beliefs’ as a foundation for then integrating ESG risk and opportunity into investment processes and portfolios.
While only 25% of respondents to the survey indicated that they had set a specific target for low carbon or sustainable investments, it was nonetheless highlighted that targets are an effective tool in focusing attention on accelerating the shift into these types of investments.
Opportunities greater and risks lower than commonly perceived
Panellists also pointed to some misperceptions about the challenges in shifting assets into sustainable themes. For example, there are plenty of opportunities available across almost all asset classes (the dishonourable exception being hedge funds), and in many cases the experienced risk has proved much lower than what was anticipated.
Complexity, the overarching barrier
Complexity was highlighted multiple times as a barrier. Specifically, for example, around the definition of what ‘green’ or ‘sustainable’ should mean. No common set of definitions has yet emerged with most asset owners developing their own in-house definitions.
The education of trustees and consultants also remains a challenge – though it was noted that most Defined Benefit schemes on corporate pension funds are largely ‘de-risking’, so the agenda is most pertinent to Defined Contribution schemes, at least for corporate pension funds.
A lot of progress made, but a long way to go
The IIGCC seminar was heavily oversubscribed. No doubt this was in part because of the high quality of organisations presenting. It may also be due to a growing acceptance that sustainable investing is an increasingly important component of modern portfolio management. A lot has been achieved in a relatively short space of time. The world is now investing approximately US$300bn annually in low carbon infrastructure from virtually nothing just a few years ago. The challenge though is that to avoid catastrophic climate change will require US$1trillion of annual investments. A lot has been done. A lot more still needs doing.
Previously published in RI News.
— IIGCC (@IIGCCnews) March 31, 2017
— jenny anderson (@j_strattan) March 14, 2017
Investor Solutions Workshop: Scaling up green #investments - from ambition to asset allocation, 14 March, London https://t.co/IYnRHjqqo4 pic.twitter.com/qPHOAazUN3— IIGCC (@IIGCCnews) February 16, 2017
IIGCC welcomes TCFD’s draft report and suggests various ways to improve the final framework
Stephanie Pfeifer,CEO of the Institutional Investors Group on Climate Change
On 14 December 2016, the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) issued its draft recommendations on climate-related financial disclosures and launched a 60-day public consultation that closed on 12 February 2017.
In a formal response to this consultation, developed in discussion with members, IIGCC welcomes the critical work led by the TCFD, recognising it represents an important step forward in the harmonisation and wider adoption of greater climate-related disclosure by companies and financial actors.
IIGCC endorses the TCFD’s seven principles for effective disclosure of climate-related risks and opportunities as a means to improve the reporting of reliable climate information in financial filings, offering a more comprehensive view to investors and other stakeholders.
IIGCC believes the TCFD’s recommendations – structured around the four core elements of governance, strategy, risk management, and metrics/targets – represent a vital step forward in global efforts to drive harmonisation of climate-related disclosure by organisations already engaged in such activities and the adoption of such practices by many more companies with no such experience to date.
While climate-disclosures are already mandatory in some jurisdictions, we emphasise these requirements are not always well understood or routinely complied with. IIGCC therefore recommends that the TCFD ensures its final report makes explicit precisely where companies must already disclose climate-related financial risks.
IIGCC welcomes the TCFD’s ‘supplemental guidance’ for certain sectors (prioritised to reflect the carbon intensity of operations or products) and suggests these offer a solid starting point towards more coherent climate disclosure.
However, we warn that the TCFD’s current recommendations relating to the standardisation and comparability of data (including for scenarios) are not yet strong enough. As it stands, the proposed framework will leave it up to each organisation to select the metrics they want to use to assess climate-risks and opportunities. This can work against consistency in financial filings over time, hindering comparability, and may encourage companies to evade robust disclosure until specific reporting metrics are required by financial regulators.
IIGCC calls for several key reinforcements to the TCFD recommendations on corporate disclosure:
- Materiality: Companies should be tasked to disclose which risks/opportunities they have identified as financially material and those that they consider immaterial despite being identified as potentially material by investors, regulators or other key stakeholders.
- Three additional disclosures for the framework: board-level expertise on climate risk; whether (or not) remuneration at board and management level reflects climate-related performance; and the processes used by the board member responsible for climate policy to ensure consistency between public policy positions adopted by the company and any trade associations to which it also belongs.
- Green metrics: the narrative around disclosure about ‘risk’ (e.g. carbon emissions data) – should be balanced within the framework by addition of disclosure requirements related to ‘opportunity’. e.g. revenues from ‘green’ products that help mitigate climate change.
- Scope 3 emissions: Companies should have to disclose these especially in the energy, agricultural products, mining, and transportation sectors.
- Non-financial sector groupings (of companies): should be narrowed to more closely reflect levels of risk exposure. For example, companies as diverse as a mining company and a large real estate owner (with scope 1&2 emissions that may vary by an order of magnitude) should not fall into a single grouping for buildings and materials.
- Definitions must be developed in detail by sector-specific experts (under the umbrella of the TCFD or an equivalent body) for what constitutes a short, medium and long-term horizon for each sector
IIGCC considers scenario analysis an important form of risk assessment and calls for a standardised ‘best practice’ approach employing a two-degree scenario with commonly determined (and disclosed) assumptions / procedures to help normalise the use of such analyses and improve the comparability of the outcomes and costs they show.
IIGCC acknowledges the TCFDs recommendations will also focus investor attention on the need to be more transparent themselves about how they address climate risk across their portfolios. Since the quality of disclosure by investee companies determines the quality of disclosure by investors, we stress that the number one requirement for asset owners and managers to develop an effective disclosure strategy is for them to have more complete, meaningful, reliable and consistent data across companies and sectors. We also call for the TCFD’s guidance for investors – currently weighted toward equities – to cover more asset classes. In addition, information on an investor’s engagement work with investees on climate change issues can be an important part of climate disclosure.
Finally, we make plain that it is critical to international efforts to curb the risk of dangerous climate change that the TCFD’s final recommendations are fully implemented. IIGCC therefore urges the G20 to show leadership on this agenda during the German 2017 presidency on the implementation phase of the recommendations as well as the evolution of climate disclosures going forward. The G20 could, for example, task a designated body to oversee and monitor implementation of the TCFD’s recommendations and to develop them further as methodologies, metrics and practices evolve as part of global efforts to fully implement the Paris Agreement and meet the climate challenge.
This comment was first published in Business Green
Download the full IIGCC response to the TCFD consultation.
— CDP (@CDP) February 22, 2017
— IIGCC (@IIGCCnews) February 22, 2017
26th January 2017 03:05:00 PM (UTC)
Reflections from Davos and Rome
As a Davos first-timer, I had no real idea what to expect. What I found fascinated me.
As always, there is some truth to the cliché: the hum of helicopters and rumble of limousines is never very far off. There is also a very exclusive set of meetings, complemented by a ferociously effective multi-tiered ticketing process. And the cold is harsh and biting, particularly at night.
I’ve no doubt that the real business of Davos is done in private one-on-one meetings. But there is another side to the World Economic Forum. The CEOs, heads of state, statesmen and – increasingly (1) – stateswomen present were made keenly aware of the social issues of the day. The Edelman trust barometer, which indicates the general population’s trust in business, government, NGOs, and media has declined broadly, and Oxfam’s survey on inequality, which shows just eight men own the same wealth as half the world, were a focus of discussion at the meeting – and will have rendered it something of a baptism of ire for first-time CEOs.
For my part, I was there for three reasons. First, to promote the Business Commission on Sustainable Development (BSDC) report, which endorses our concept of public league tables that rank companies on their performance in relation to the United Nations Sustainable Development Goals. Second, to build support for our associated World Benchmarking Alliance, which we are putting together alongside BSDC, Index Initiative and the Corporate Human Rights Benchmark, which I chair. And third, as a member of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), to represent Aviva as an asset owner and asset manager, and advocate for the associated recommendations in our Seeing Beyond the Tragedy of Horizons report, which Aviva launched at COP22 in Marrakech. To that end, we were proud to work with Carbon Tracker, IIGCC, 2 Degrees and others in co-hosting a series of side events, policy round-tables, dinners and networking opportunities at the meeting.
For me, in addition to a very successful launch of the BSDC report, the best news was the way ‘Davos-Man-And-Woman’ responded to the TCFD recommendations on climate disclosure. Paul Simpson of the Carbon Disclosure Project (CDP) offered this summary at one of our round-tables: “No company CEO pushed back strongly on the recommendations; there is overall support for the theme of standardisation and consistency; and all of the companies said they are not hearing enough from their investors”. This is good news for the TCFD debate and the last point is, of course, a key challenge for IIGCC members to reflect upon since it underscores the importance of IIGCC’s ongoing engagement work but also the need to persuade many more investors to make such activities a routine facet of their investment management practice.
Paul also mentioned that CDP had been involved in a big conversation about scenario analysis – specifically the issue of carbon-pricing corridors – and how to ensure it is effective, useful and comparable. Understandably, one concern was that because of the task force’s focus on report and accounts, we may lose the richness offered by more detailed reports. Other concerns were raised about the recommendations surrounding Scope 3 emissions, particularly by a few companies in the extractive sector which claimed such emissions are beyond their remit, as they are produced by other firms.
Personally, I think the solution to this simply requires standardised conversion factors, and the International Accounting Standards Board is best placed to work on these. There was also some resistance to investor disclosure, which I consider untenable – particularly where it is someone else’s money and they carry the risk. Equally positively, NGOs have also recognised they need to incorporate the recommendations into their work. For example, CDP is aligning its questionnaire around the TCFD recommendations and producing benchmarks ranking corporate performance in this area.
I had also seen some evidence of stakeholder alignment around the TCFD recommendations at the ‘Rome Roundtable’, convened by the Global Foundation, which - thanks to the efforts of Frank Pegan of Catholic Super and IGCC in Australia - was also attended by Stephanie Pfeifer (IIGCC) and Chris Fox (CeresINCR) as representatives for the Global Investor Coalition on Climate Change. Arriving in Davos via the Vatican was surreal. We’d had an audience with the Pope, which was incredible. I thanked him for what he had achieved with Laudato Si, whose impact has been described by academics at Yale University as the ‘Francis Effect’ (2).
During the broader meeting we worked with a number of archbishops, cardinals, ministers, heads of state and two central bank governors for two days. The Global Foundation is aspirational in scope and inspirational in delivery. It is likely to lend support to IIGCC, Ceres and others in our joint work to ensure finance supports the transition to a zero-carbon economy. Cleverly, the Rome event was in part designed to target those en route to Davos, which demonstrates the Church clearly believes ‘Davos-Man-and-Woman’ has both influence and a social conscience.
And this was the most interesting lesson I learned at the World Economic Forum: the social conscience of Davos is open for all to see. It is not a subconscious afterthought, nor a legitimising ruse. Indeed, for many of the stakeholders I met it was the raison d’etre of their trip to Davos – particularly given what everyone kept referring to as “recent events” in the US.
Given our collective concern at IIGCC regarding what President Trump might do to the UNFCCC Paris Agreement, the palpable depth of international support for the agreement at Davos was heartening. One very well placed stateswoman suggested the previous administration had tied up the US commitment to the Paris Agreement so tightly that it would be extremely difficult for Trump to unwind.
This was promising, but it is no guarantee. It is very clear to me that IIGCC will need to re-double its now very effective policy engagement to ensure we use our combined market savvy and investment nous to counter the short-termism of the Trump approach. More importantly, we also need to ensure we finance the technology that will drive the transition – so expanding the Climate Solutions Programme at IIGCC to help investors accelerate low carbon investment is timely. A series of properly-coordinated National Capital Raising Plans embedded within the Nationally Determined Contributions, and included within the UNFCCC Global Stock Take, would also bring us closer to this objective.
However, the market has already demonstrated it can deliver the capital to the right technology. It is the scale and speed of supply that needs direction. I have no doubt IIGCC and the other investor networks in the Global Investor Coalition can trump Trump, particularly with the Francis Effect supporting us.
NB: the Consultation on the FSB TCFD recommendations is open until February 12. Please do all you can to respond.
(1) WEF confirmed 21% of Davos delegates this year were women – 29% less than there should be, but progress on previous years and the result of a genuine effort on the organisers’ part.
(2) Yale and George Mason University study found 17% of Americans and 35% of Catholics say the Pope’s stance on climate change has influenced their own views on the issue.
Honored to meet Pope Francis—> a beacon of hope in the global fight for social justice, sustainable development & tackling #climate change https://t.co/tHbBZcBX4n— Christopher N. Fox (@ChristopherNFox) January 25, 2017
The challenge presented by the FSB Task Force’s proposed climate disclosure framework
Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change
Last week when the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) published its report for 60-day consultation, Nick Robins - Co-Director of the UNEP Inquiry into the design of a sustainable financial system - asked somewhat rhetorically over Twitter ‘was this the day that climate disclosure came in from the cold & finally became core to finance?’
Certainly, this game-changer kicked off by the outstanding leadership of FSB Chair and Bank of England Governor Mark Carney, is the first time a group representing players from all parts of the investment chain – big business, bankers, accountants, investors – have developed a framework to render more transparent the profound risks posed by climate change and bring their governance firmly into the boardroom.
But against the current political backdrop in the US and Europe, what must happen over the coming months for the TCFD ‘s recommendations to truly becomes a milestone for integration of climate information into mainstream financial reporting sufficient to ensure the hard economics of climate risk forever trump the politics of climate denial?
Emission reductions required under the Paris Agreement alongside changing technology and demand dynamics imply a potentially disruptive move away from fossil fuels that will transform all major sectors. Robust disclosure has a critical role to play in enabling financial markets to price risks correctly, reward corporate strategy aligned with political objectives and technological progress, improve the efficiency of the low carbon transition by ensuring capital is put to most efficient use and sanction corporate strategy that ignores climate risk. Without it we will continue to see ill-informed management decisions that drive up the cost of the transition for policy-makers, investors and – ultimately – for consumers and communities, forcing governments to address the consequences of market failure.
IIGCC actively supported the work of TCFD, responding to the first public consultation about the scope of its work, presenting to TCFD plenary and submitting a full response (in tandem with INCR in North America and IGCC in Australia/NZ) on investor priorities for companies to to report their greenhouse gas emissions, disclose climate related risks, integrate these into their core business strategies, and make routine consideration of opportunities arising from a rapid transition to a low carbon economy a routine part of board-level decision making.
Investors called for TCFD to include the development and disclosure of 2-degree stress testing; absolute emissions reduction targets; information on resilience of a company’s strategy with regard to CAPEX planning; R&D; the full integration of a climate risk management approach to board level strategy; and use of both quantitative methodologies and narrative reporting to support comparisons over time that demonstrate progress year-on- year. We also emphasised the importance of better corporate climate risk reporting for any future disclosure of portfolio climate risk by investors themselves, and how best to support the development of methodologies emerging to support this
As stated in our supporting statement to the TCFD report, IIGCC believes material climate disclosures must become a routine part of annual corporate reporting practice. If fully implemented in all key markets the TCFD framework will drive more robust decisions that accurately reflect physical risks posed by climate change and transition risks arising from swift adoption of clean and efficient technologies. This will help secure business resilience over the time horizons relevant to the needs of long term institutional investors and their beneficiaries. It will also support the evolution of tools and methods for financial institutions to improve their own reporting practices and curb their portfolio-level exposure to climate-related risks (where disclosure standards should remain non-descriptive enough to encourage innovation and allow best practice to emerge).
What’s now crucial is the pace and scale at which institutional investors lean in to require companies to use the TCFD framework to bring consideration of climate risks and opportunities (under different scenarios including a 2°C pathway) into routine business decisions and competent board-level scrutiny / governance.
Investors will encourage adoption through their work as supporters of IIGCC’s corporate work programme and users of IIGCC’s Investor Expectations Guides for key high carbon sectors (oil & gas, mining, utilities and automotives) which offer a way to be consistent about how to require greater disclosure in line with TCFD standards. We hope many more investors will come forward to strengthen these co-ordinated engagement initiatives and to support the work of a new IIGCC sub-group on shareholder resolutions (formed recently to take forward work previously undertaken by Aiming 4 A).
IIGCC also wants to see governments adopt the TCFD recommendations as a key part of wider efforts to implement the Paris Agreement and facilitate a well-managed transition to a low carbon economy. In particular, IIGCC is asking the German 2017 Presidency – as part of its key agenda priority to focus on climate action - to persuade all G20 governments to drive early adoption at a national level. Likewise, IIGCC is asking the G20 to ensure the work begun by TCFD can be taken forward by the Green Finance Study Group as part of a collective commitment to implement TCFD recommendations in full and under the shortest possible timeframe, monitor their implementation and consider how to continuously improve climate disclosure in future.
Some investors are also calling for the International Organization of Securities Commissions to consider how it could enable greater standardisation in climate risk reporting practice and do more to secure consistency in the way regulators promote such disclosure.
So in answer to Nick Robins, if enough investors now use the TCFD recommendations, both to drive change within the companies they own and better manage their own portfolios, IIGCC believes publication of the TCFD’s first report can mark that moment in history when those who drive the economy and the market made plain to governments they can and will ensure markets transition to a well below 2°C world.
As previously published in Responsible Investor
— IIGCC (@IIGCCnews) December 14, 2016
— IIGCC (@IIGCCnews) December 14, 2016