Jump to:
The Russian invasion of Ukraine may achieve what years of global agreements, protests and investor engagement have not been able to – to turn Europe away from fossil fuels and exponentially ramp up investment in renewable energy.
“I believe at the European level it will increase the pace of investment to renewables to be less dependent on Russian gas,” says Francois Humbert, active ownership lead manager at Generali Insurance AM.
Despite concerns that short-term fixes to reduce dependency on Russian gas include increases in fossil fuel production elsewhere, the medium- to long-term direction is firmly towards renewables. The European Commission has proposed a plan to make the European Union independent from Russian fossil fuels – now 40% of its gas, 27% of its oil and 46% of coal – by 2030 with a series of measures including more funds for renewable energy. It is left to individual countries to determine how; and by mid March Germany had already announced an additional €200 billion of investment into renewable energy by 2026.
Environmental, social and governance (ESG) investors have welcomed a positive impact from the war. However, it also has provoked soul searching for some, as they grapple with questions such as whether defence companies should now be considered a social good and therefore investable, or how to extricate themselves from investments in Russia.
The Ukraine crisis actually underlines the need for high ethical standards in business
![Torben Möger Pedersen, PensionDanmark.jpg](https://assets.euromoneydigital.com/dims4/default/dfc645c/2147483647/strip/true/crop/960x535+0+0/resize/840x468!/quality/90/?url=http%3A%2F%2Feuromoney-brightspot.s3.amazonaws.com%2F0d%2F7d%2F897d825846f89dad587c9a9a41ae%2Ftorben-moger-pedersen-pensiondanmark.jpg)
For others it has confirmed the importance of embedding ESG in the investment process. Torben Möger Pedersen, chief executive of PensionDanmark, believes “the 'E' will have a broader geopolitical dimension in the future, and the crisis actually underlines the need for high ethical standards in business.”
However, it also illustrates the limits of investor engagement.
According to Paul Chandler, director of stewardship at the Principles for Responsible Investment (PRI), an investor initiative in partnership with UNEP FI and the UN Global Compact, “what we are seeing is effectively a withdrawal by Western investors from engagement with Russian companies. This is in part driven by the high chance that engagement in the current situation would be futile.”
While divestment is always a last resort for investors, many have been moving beyond engagement in recent years, using more aggressive tactics such as proposing shareholder resolutions. The success of activist hedge fund Engine No. 1 in installing three board members with experience of climate transition plans and renewable energy at Exxon Mobil has been held up as an example of what can be achieved.
Battling the banks
With climate change the main focus of ESG investors, fossil fuel companies are obvious targets, but they are not the only ones. The banks that supply financing to them are on investors’ hitlists as well.
Despite many banks signing up to the UN-backed Net Zero Banking Alliance, which requires they set targets to reduce their carbon emissions, analysis by campaign group ShareAction found 25 signatories have given $33 billion in loans and other financing to 50 companies with oil and gas expansion plans. More than half of that came from four of the Alliance’s founders – HSBC, Barclays, BNP Paribas and Deutsche Bank.
Members must set emission reduction targets for 2030 and 2050 within 18 months of joining, and intermediary targets every five years from 2030 onwards.
HSBC announced its first targets early in 2022. However, Market Forces, a pressure group, warned that these still allowed the bank to finance new and expanded oil and gas projects, and complained that they did not apply to underwriting bonds, only to on-balance sheet emissions.
Facing a shareholder resolution, and following engagement with a coalition of investors coordinated by ShareAction, the bank then toughened its climate commitments. Importantly it agreed to update the scope of its targets to cover capital markets activities by the end of 2022, and promised greater transparency about its progress.
ShareAction has now withdrawn the proposal but has warned that if it is unsatisfied with the bank’s implementation of its commitments, it will file another resolution in 2023.
US banks are facing actions as well this year. The Interfaith Center on Corporate Responsibility has filed nine proposals at Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Wells Fargo, calling for their financing to align with a 1.5-degree Celsius warming scenario, with the first three banks facing additional resolutions asking for greater emissions reporting and transparency.
However, geopolitical chaos seems to be taking its toll. On April 26, resolutions demanding that they align their fossil fuel financing policies with achieving net-zero emissions by 2050 were backed by just 11% of shareholders at Wells Fargo and Bank of America, and fewer than 13% at Citi.
Activist investment platform Tulipshare also has filed a resolution against JPMorgan – to halt investing, underwriting and lending for fossil fuel businesses – by raising about $11 million from venture capital investors and adding to that with money from retail investors on its platform.
JPMorgan faces additional climate-related proposals from: the Boston Trust, an investment management provider; the Sierra Club Foundation, an environmental group; and Mercy Investment Services, the investment programme of the Sisters of Mercy of the Americas. The bank is a particular target because it is the world’s largest financier of fossil fuels.
It is fighting back. It has objected to the proposals on the grounds that they are related to “ordinary business” operations and asked the US Securities and Exchange Commission to reject them. But it may be difficult for JPMorgan to get the proposals thrown out because the SEC has recently changed its guidance on ESG-related proposals.
Exercising the right to vote
In the US, the growing numbers of shareholder proposals are attributed to the SEC reversing a policy from the presidency of Donald Trump that made it easier for companies to exclude certain shareholder submissions from proxy statements.
The new policy is to be more receptive to shareholder proposals regarding issues that have “a broad societal impact”.
![Rebeca Coriat, Lombard Odier.jpg](https://assets.euromoneydigital.com/dims4/default/2735bd5/2147483647/strip/true/crop/960x1156+0+0/resize/840x1012!/quality/90/?url=http%3A%2F%2Feuromoney-brightspot.s3.amazonaws.com%2Fa0%2F6c%2F81c6b5e24a06a81c31a2d00218bb%2Frebeca-coriat-lombard-odier.jpg)
The SEC has proposed further adjustments that will make life easier for ESG investors – changes to Form N-PX, which details companies’ proxy voting records, to simplify tracking and analyzing votes, as well as obliging companies to categorise their ballots so voters can more easily find the issues important to them.
AGMs in the US have seen more action in terms of ESG-related shareholder proposals. According to Rebeca Coriat, head of stewardship at asset manager Lombard Odier, “shareholder proposals are much more frequent in the US. In Europe, we don't have that tradition – they are increasing but still few and far between”.
Interestingly though, European investors are more aggressive voters. According to analysis by PRI initiative Climate Action 100+ of voting at the most systemically important emitters in the US, European investment managers are more likely to vote against directors than their US peers.
Aviva Investors, Amundi and LGIM led the way, voting against 43%, while US managers BlackRock, JPMAM, Northern Trust and SSGA supported directors at 92% of companies.
There is a hybrid movement we're seeing where governance is integrated with environmental and social concerns. This is key because board members need to have expertise in these areas so they can push back on CEOs
Voting matters. Although most shareholder proposals are not binding, analysis by BlackRock found that US companies adopted 94% of proposals with majority support and 67% of proposals with 30% to 50% support.
Some companies are now trying to pre-empt shareholder proposals by putting forward their climate transition plans for shareholder approval. However, PRI is concerned this is a “significant risk because management proposals almost always obtain majority support from shareholders” and has warned investors to be wary of rubberstamping unambitious plans.
Expanding the toolkit
While shareholder activism at AGMs is on the rise – the Sustainable Investments Institute says shareholder proposals are up about a quarter compared with last year – it is just the most recent and visible sign of a longer-term trend of increasingly active investor stewardship.
Engagement has been taking place behind the scenes for years. However, here too investors have been upping their game as ESG becomes more integrated into the investment processes of many institutional investors. A recent survey by Economist Impact found nine in 10 institutional investors agree that direct engagement with companies is vital to the implementation of ESG agendas that will drive system-wide change.
According to the PRI, stewardship and ESG incorporation are complementary strategies that form the basis of responsible investment. A successful engagement strategy “identifies relevant ESG issues, sets objectives, tracks results, maps escalation strategies and incorporates findings into investment decision making.”
![Francois Humbert, Generali Insurance AM.jpg](https://assets.euromoneydigital.com/dims4/default/c3a2271/2147483647/strip/true/crop/960x1060+0+0/resize/840x928!/quality/90/?url=http%3A%2F%2Feuromoney-brightspot.s3.amazonaws.com%2F9c%2F16%2F8fe9396041929c92f1f64646a875%2Ffrancois-humbert-generali-insurance-am.jpg)
Government guidelines for stewardship such as the UK Stewardship Code and the EU Shareholder Rights Directive II, as well as investor coalition initiatives such as the Investor Stewardship Group’s Framework for US Stewardship and Governance, also set principles for engagement between companies and investors.
Investors are becoming increasingly sophisticated in their approach, adding to and improving the tools at their disposal.
At Generali, the approach is “inspired by private equity,” says Humbert, “where investors not only bring cash but also their network and knowledge to actually partner with the company to find solutions.”
To do this, he focuses on quality over quantity.
“Because we really want to have an impact, we concentrate our resources,” he says. “We vote on around 1,700 companies and may have meetings with 700; we have a conversation with 80 companies and from that group we identify 15 where we think we can have an impact, based on three criteria: the exposure we have, the perceived ESG risk and the probability to be able to influence the company.”
We have heard many issuers say that many investors are not prepared – they are asking questions [at AGMs] when the answers can be found in the annual report
Generali’s focussed approach is based on preparation, relationship and collaboration, with preparation “probably 80% of the job,” Humbert says. “We have heard many issuers say that many investors are not prepared – they are asking questions when the answers can be found in the annual report. The goal is to reach almost the same level of expertise as the company you're working with in order to be a credible partner.”
There can be initial distrust from a company to overcome before a partnership can be built. Trust can be fostered by creating value for the company.
“We advised one company to provide greater disclosure; they were hesitant but did it,” says Humbert. “And the next bond they issued was three times oversubscribed because the ESG investors that previously weren’t interested now were, due to the greater disclosure.”
Finding strength in numbers
Generali’s third pillar, collaboration, is one of the big trends of engagement. Broad groups such as the PRI and focussed groups, such as climate change initiatives Net-Zero Asset Owner Alliance and the Institutional Investors Group on Climate Change have brought together investors to magnify their influence.
At PRI, the stewardship programme is split into two buckets, according to Chandler: “helping bring our members together on our collaboration platform or in collaborative initiatives like Climate Action 100+, and helping to improve the effectiveness and the quality of stewardship done by our members, which includes using their influence more assertively.”
Pension fund CalSTRS uses third-party instruments such as the Climate Action 100+ Benchmark and the Transition Pathway Initiative Tool (TPI Tool) to identify laggard companies, specifically those companies that fail to disclose basic climate risks (Scope 1 and 2) and provide Task Force on Climate-Related Financial Disclosures (TCFD)-aligned disclosures.
Making an impact
Investors are under mounting pressure to show their stewardship efforts are having an impact. Francois Humbert, active ownership lead manager at Generali Insurance AM, believes that is why there has been previously a focus on voting, because “it was the easiest way to demonstrate the willingness to impact,” rather than just saying “yes, we’ve engaged with 50 companies”.
In addition, he worries that “when there is a requirement to report on engagement there can be a sort of competition on number of meetings, votes, etc. But the real issue is impact – people are starting to realise they need to prioritise quality over quantity. And quality can only be found in an in-depth exchange with the issuer.”
He believes this is a part of the evolution of environmental, social and governance that has been taking place since the global financial crisis.
“This has happened because of the question raised after the financial crisis from clients: 'What do you do with my money?'” he explains. “At first, we tried to answer this by saying we invest in good companies, we screen. But that has not led to the world changing as we expected. But we now understand the underlying question is: 'How does the money we give you have a real-world impact?' This is why some people in the asset management industry have resigned – because they feel their sustainable investments had no demonstrable impact.”
In order to demonstrate their impact, investors are setting objectives and defining what counts as a positive result. According to Rebeca Coriat, head of stewardship at asset manager Lombard Odier: “Impact really is the million-dollar question. Everybody wants to know what the outcomes of our work are, but it can be difficult to show to your fiduciaries. So, we set very clear engagement objectives that are measurable, allowing us to report against each of them positively or negatively with our reporting tool.”
Investor groups also are giving their members tools to help with assessment.
“We have accountability mechanisms for investors in the initiative,” says Paul Chandler, director of stewardship at the Principles for Responsible Investment, “and a requirement for lead investors to report on their progress with each company they engage with – which stewardship tools they use, how they work with their peers in that engagement team and how it is going.”
Chandler adds that this is a priority area for the second phase of Climate Action 100+, leading up to 2030, “to strengthen accountability mechanisms and help drive a race to the top in terms of signatories being investors willing to use more forceful stewardship tactics when necessary to get outcomes with companies.”
The Climate Action 100+ Net-Zero Company Benchmark assesses companies' performance against the initiative’s three high-level goals – emissions reduction, governance and disclosure – across 10 indicators. The goal is to support investors in their company engagement with sound analytical methodologies and data sets, giving them a tool by which to judge companies and push them to change.
Coriat at Lombard Odier agrees the benchmark is “useful as it gives us more data points to assess where companies are in their climate transition”, and she also rates the initiative’s shareholder resolution flagging system for AGMs. “We voted for 100% of the flagged resolutions in 2021 that were in scope for us.”
The Climate Action 100+ system flags relevant shareholder votes related to the initiative’s goals and circulates information from investor signatories filing or co-filing resolutions at its focus companies.
Earlier this year, the group launched a new programme for carbon-intensive sectors, detailing the actions that companies and other stakeholders such as investors must take individually and collectively to accelerate the net-zero transition.
For companies, it provides support in designing climate-transition plans and figuring out how to decarbonise their value chains.
For investors, it provides sector-specific actions that are needed to reach net zero by 2050, so that they can go beyond asking companies to disclose their emissions or against the indicators of the benchmark.
So far, strategies have been published for the aviation, steel, food and beverage and electric utilities sectors, while later this year, strategies for diversified mining and trucks will be added.
Asset managers can also serve as consolidators of influence.
“We engage directly with Danish companies, but for many other companies, we’re too small to get their attention,” says Pedersen of PensionDanmark. “Federated Hermes pools our resources – collecting input from us and other investors, which is reflected in the dialogue it leads with companies.”
It also provides guidance on voting.
Pedersen adds: “Ahead of a vote at an AGM, Federated Hermes will formulate a common position, which gives us more clout in relation to the individual companies. They assist us by issuing voting instructions at the AGMs of foreign companies in accordance with our policy. However, we can always deviate from a position if desired.”
The successful shareholder proposal at Exxon Mobil was an example of the power of collaboration. While Engine No 1 held just 0.2% of the company’s shares, it rallied the support of some of the company’s biggest institutional investors, such as BlackRock, Vanguard and State Street.
Going beyond climate
The growing emphasis on investor impact is seen most clearly in climate change, where “the expectations of investors have changed, moving beyond the (still-important) focus on governance and disclosure to focus more on real action and impact,” according to Chandler at the PRI. “They are saying the time for sorting out corporate boards, to have them aware of climate change and acting on climate change risks is now passed. It is time to start focusing on how your business is aligned with a 1.5-degree scenario, and how your political influence is aligned with a 1.5-degree scenario, so that you're not, for example, indirectly or directly lobbying to slow down progress on climate change at the policy level.”
But the push to net zero is not the only issue on investors’ agendas, with biodiversity also gaining attention as a separate but linked concern.
![Paul Chandler, PRI.jpg](https://assets.euromoneydigital.com/dims4/default/8d36866/2147483647/strip/true/crop/960x800+0+0/resize/840x700!/quality/90/?url=http%3A%2F%2Feuromoney-brightspot.s3.amazonaws.com%2Ffc%2F4e%2Fed390c1145c9ace69fbfbffac7b8%2Fpaul-chandler-pri.jpg)
The Finance for Biodiversity Pledge, which commits companies to assessing their impact, setting targets and reporting by 2024, as well as the targets and reporting guidelines from the Science Based Targets Network are giving companies and their investors the tools they need.
“There's continuous focus on nature, biodiversity and deforestation,” says Chandler, “all of the issues around resilient natural systems, where investors are starting to see the link between those systems and our economies functioning, and therefore the risk that they're exposed to as diversified investors.”
Beyond environmental concerns, CalSTRS’s list of priorities includes board effectiveness, which encompasses managing diversity, inclusion and human capital as well as executive compensation; responsible firearms; and corporate and market accountability through encouraging regulators, standard-setters and policymakers to promote sustainable markets with a focus on shareholder rights, audit integrity and sustainability related disclosures.
There's continuous focus on nature, biodiversity and deforestation, all of the issues around resilient natural systems, where investors are starting to see the link between those systems and our economies functioning
The S of ESG is getting more attention, with the PRI about to launch a new collaborative engagement initiative on social issues and human rights.
It is also now often considered in connection with either the E or G of ESG.
For example, PensionDanmark believes that not only should human rights risks be assessed and tracked, and robust procedures put in place across the value chain, but that social targets and considerations must be factored into executive pay.
For Humbert at Generali AM, the thesis of the ‘just transition’ – which seeks to link environmental sustainability with social considerations – is seen clearly in the current debate about the effects of Russian’s invasion of Ukraine on energy.
“There have been concerns that transitioning to renewable energy too quickly would lead to higher energy prices, but now we are seeing concerns not just about cost but energy availability and security as well,” he says. “The situation with Ukraine and Russia makes it clear you need to find a balance between social considerations and transition.”
Upping their game
Investors are increasingly sophisticated in their role as company stewards, adding new tools to their arsenals. Chandler sees his role as encouraging them to go even further.
“There's a role now for investors on critical systemic and urgent issues to start using stewardship tools other than engagement, if they're not already, like filing shareholder resolutions with companies that are failing to respond to engagement at the pace needed,” he says. “Beyond that, there are more aggressive tools, like litigation and public engagement, such as going public with a concern that a company is failing to act.”
The way in which investors view ESG risks – and therefore push for change within companies – is becoming more sophisticated too.
“There is a hybrid movement we're seeing where governance is integrated with environmental and social concerns,” explains Coriat. “This is key because board members need to have expertise in these areas so they can push back on CEOs, and there should be cross-membership of committees. For example, directors who are members of the remuneration and the sustainability committees because executive remuneration policies need to be aligned with sustainability strategy. Or climate experts on the audit committee to challenge external auditors on how they are factoring in any audit risks that may come from climate transition.”
And investors’ view of the scope of a companies’ impact is expanding, beyond just the supply chain or in the case of banks, the companies they finance.
“It is one thing to consider the actions of a company or of companies in its supply chain,” says Chandler, “but it's another thing to consider the role of a trade association that a company may be a member of that is trying to weaken worker protections, delay progress on some aspect of human-rights due diligence or is lobbying to weaken or delay climate policies, actions which are directly counter to the interests of investors and their beneficiaries .”
Ultimately, he adds, investors must recognise that “to see an increase in ambition in company performance, that will entail a requirement for investors to also raise the ambition of the stewardship they're carrying out.