Beyond stress tests: preparing for the next AGM season

Climate disruption

Leading up to COP21, companies faced investor pressure to report on stress tests or scenario analyses that acknowledge the potential for regulations limiting global warming to no more than 2° Celsius. This was a modest ask which accorded with the then political realities.

In the wake of strong consensus at COP21, however, investors must be more assertive. The focus on disclosure should shift to a call for action, demanding that companies publish transition plans which align with a world where average warming is kept to well below 2°C.

The Evolution of the Ask

Level 1: Disclose risks, providing a sensitivity analysis in different climate scenarios, including 2°C.

Level 2: Disclose transition plan that explains how company will manage the risks/opportunities arising from a 2°C regulatory environment, including GHG emissions, capex, remuneration policy, political influence.

Level 3: Implement plan, even if regulatory regime has not been fully realised.

The reasons for focusing on transition plans include:

  1. Stress tests/scenario analyses are static snapshots in time and can be easily gamed by changing assumptions. This has been clear in the banking sector, where there is much stronger regulatory oversight than on climate issues.
  2. There is little reason to expect scenario thinking to have more than an incremental impact on company strategy if the regulatory or investor context is largely unchanged. For all its strengths, COP21 does not change the near-term regulatory environment and so it will be investors who need to trigger this shift. Looking back over decades, Shell’s expertise at doing scenario analysis is unrivalled yet the company’s decisions have been largely similar to the decisions its peers have made.
  3. In contrast, transition plans focus senior management and board attention on what the company is going to do (level 2) or are doing (level 3). The plans cover key issues including operations, capex, remuneration policy, political influence, and the interaction between these factors. As such, they clearly show management’s commitment to making the needed transition.
  4. Concerns that transition planning is inevitably a “harder sell” to make to investors may be overstated: The 2016 resolution at Southern Company was a transition plan resolution and it received a very similar vote to stress test resolutions at Chevron and Exxon-Mobil, despite receiving less investor and activist attention.
  5. If investors step up their game, this could reassure campaigners and activists, who are deeply unconvinced about the stress tests/scenario analysis[1] A Level 2 ask has the potential to bring together institutional investors with campaigners who have moved on to Level 3 asks[2].

The need for coalition building was highlighted by the president of the World Bank, who attributed a lack of progress on climate change to ineffective alliances between campaigners and specialists (in this case investment specialists). He saw how effectively campaigners and scientists worked together on HIV and challenged climate activists to do better (see below).

Climate change will lead to battles for food, says head of World Bank

The Guardian, 3rd April 2014[3]

Battles over water and food will erupt within the next five to 10 years as a result of climate change, the president of the World Bank said as he urged those campaigning against global warming to learn the lessons of how protesters and scientists joined forces in the battle against HIV.

Jim Yong Kim said it was possible to cap the rise in global temperatures at 2C but that so far there had been a failure to replicate the “unbelievable” success of the 15-year-long coalition of activists and scientists to develop a treatment for HIV.

The bank’s president – a doctor active in the campaign to develop drugs to treat HIV – said he had asked the climate change community: “Do we have a plan that’s as good as the plan we had for HIV?” The answer, unfortunately, was no.

In Preventable Surprises’ view, the biggest obstacle to investors making Level 2 asks is actually leadership of the ESG investment community itself. There appears to be a “categorisation error”, namely that asking for publication of transition plans amounts micro-management.[4]

Respecting the time needed to build better alliances, Preventable Surprises recommends that for 2017, the focus on <2°C transition plans should be limited to one sector and that sector should not be fossil fuels. Existing campaigns have dug in with competing strategies in that space, making collaboration more difficult. There are several sectors that are both high risk and high impact and where there has been little action, including financials, transportation, and utilities. Resource constraints may make it too ambitious to take on an entire sector, in which case selecting one subsector could make sense, such as insurance within financials or automotive within transportation.

The good news is that:

  • Peer-to-peer influencing can be very effective in this small community, for bad or good, and some decision makers in the Aiming for A community are backing transition plans.
  • Corporate leaders (e.g. those companies who have committed to science-based targets) should welcome investors asking for transition plans, as it will put pressure on their peers.
  • Several well respected business strategists and thought leaders (e.g. Professor Bob Eccles, Nigel Topping, Andrew Winston and Michele Wucker) have indicated their support for this shift and are joining the #Missing60 initiative[5] which puts pressure on the 60% of investors who opposed climate change resolutions at the 2016 U.S. AGMs.

Stress tests had their place in the evolution of climate change strategies, however <2°C transition plans take us beyond compliance to address business opportunities and business continuity issues. For this reason, Preventable Surprises will focus on building support for Level 2 transition plans throughout the 2017 proxy season. A significant favourable vote will send a clear signal to buy side/sell side firms and credit rating analysts (the invisible hand of the market) and to regulators about investor intent.




[4] See, for example, this comment by the CEO of a fund manager that is highly regarded – and rightly so – on climate issues: (2nd panel, starting 15:43)



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