Preventable Surprises warmly welcomes the focus CalPERS is giving to the issue of climate disruption as a risk to mainstream investors . We particularly welcome the support for the shareholder resolution at Southern Company calling for a 2°C transition plan – the only one of its kind – and CalPERS’ help in proxy solicitation.
CalPERS’ support was a key factor in delivering a vote of 36% “for” the resolution at Southern last year. The result was similar to the votes at Chevron and Exxon, which had a much higher profile. Some investors who voted for the resolutions at the oil majors, which called for a 2°C scenario analysis, abstained or even voted against the transition plan resolution at Southern. These investors argued—erroneously in our judgment—that asking for a transition plan was “micro-management.” CalPERS was not one of them. On the contrary, its leadership on the Southern resolution has sent an important signal about the importance of policy-led voting decisions when dealing with systemic risk issues.
Preventable Surprises also warmly welcomes the very important Mission 2020 project which seeks to bend the curve of greenhouse gas emissions by 2020. Large investors who are supportive of this project clearly need to move well beyond the incrementalist approach that characterizes the ESG project today.
Collaboration needs to be much more radical than has happened to date and it needs to be more strategic too. Such leadership is particularly urgent in light of the policy confusion and paralysis post the Brexit referendum and US elections. To highlight this evolution in investors’ role, Preventable Surprises prefers the term “forceful stewardship” to “constructive engagement.” But whatever the words, what matters are actions.
Preventable Surprises is focusing on utilities this year to tackle the demand side rather than fossil fuel suppliers. As with drugs and other addictions, unless demand for fossil fuels comes down, there will be little chance for curtailing supply. CalPERS is to be congratulated for highlighting the importance of companies that are “Strategically Important Climate Emitters” (SICEs). Many of the 100 most important SICEs are energy utility companies. Preventable Surprises has been helping investors understand that utilities face disruption on several fronts (regulatory, technology, new entrants).
In our view, forceful stewardship in the sector requires:
Much attention has been placed on the fact that CalPERS has rejected divestment on the grounds that it is “ineffective.” The goal of the divestment movement is to reduce the political legitimacy of the fossil fuel sector. Taking a global perspective, it is clear that in some countries, e.g. the Netherlands, the divestment movement seems to have helped build a political constituency for climate action. But equally in other countries, e.g. the USA, the fossil fuel sector has gained significantly in political influence despite a very active divestment campaign. Disaggregating why is beyond the scope of this comment.
We believe both divestment and behind-the-scenes engagement with oil and gas companies have more or less each reached their limitations in a political climate that favours the lobbyists with the largest war chest and close access to political decision-makers be this in Australia or USA. That is why we advocate forceful stewardship by institutional investors and a focus on reducing demand for fossil fuels quickly. Investors need to be sensitive to the risk posed to their portfolios–and their reputations–by siding with status quo and largely denialist corporate and political thinking.
It is precisely because the debate about fossil fuels is so polarized that we invite all those who are focused on the carbon bubble – either because they support this thesis or because they don’t – to also focus on using forceful stewardship to reduce fossil fuel demand.
Supporting 2°C-aligned resolutions at US utilities in 2017 is a perfect opportunity to send a signal to the market that the low-carbon transition won’t wait. Pre-declaration of voting intent (via the Ceres platform) is an important step in building a coalition of investors that will do “radical collaboration” and bend the curve of GHGs by 2020. This more ambitious, international project is needed by 2018 if the Mission2020 goal is to be met.
Globally diversified investors that are climate aware and have a supportive political context—such as exists in California—are the natural leaders for such a project. It would be a catastrophe if the debate about divestment—where beliefs run deep on both sides—were to stop this from happening. Reducing demand should be the joint priority for those who reject divestment as well as those who believe divestment is an essential political signal to send. Relentless optimism—or perhaps more specifically, hope fueled action—is what is needed now.