Why we need forceful stewardship (and why BAU engagement isn’t fit for purpose)

| 9 December 2015
Blog & Articles

Preventable Surprises is delighted to see growing awareness that finance is arguably the critical player post COP21. And we are also delighted to see engagement taking an increasingly central place in the discourse at COP21. But let’s also be clear: we don’t need more “tea and biscuits” engagement!  What we need now is “forceful stewardship”.

Forceful stewardship is based on the fiduciary responsibility of institutional investors to do what they can to prevent systemic risk due to climate change and the value diminution across the whole portfolio this would result in. Its goal therefore is to prevent warming from exceeding 2 degrees, as well as limiting risk in a particular asset. Hence it is concerned with the demand side for fossil fuels as well as the supply side. To be effective, alongside action by governments which at best will get us to 2.7 degrees, it needs to be a global initiative and it needs to be transparent. This is why we propose investors having to vote at the AGMs of the companies they own for 2 degree transition plans – it is something that investors can get behind collectively (and hence it removes fears of first mover disadvantage and forces the large funds to take a position) and it can be easily monitored from outside (which means it can tap public opinion). Because this relates to systemic risk and has serious financial implications, signing off on the forceful stewardship guidelines becomes a concern of the C Suite, rather than staying at the level of ESG teams.

Background 

Many investors now say they are doing serious engagement.  We know from insiders that this is often greenwash but it’s impossible for outsiders to prove which firms are being serious and which ones are not.  And also it often varies within firms (i.e. investment firms often operate as silos and what e.g. domestic and international equities may have very different approaches to climate risk).  Since we also need all major investors to be acting – especially the mega funds who have been largely disinterested (e.g. US mutual funds, insurance companies acting as investors and sovereign wealth funds, at least of democratic countries) we therefore need something that can be monitored easily by outsiders.  Voting meets these criteria.

We need an engagement ask that’s fit for purpose in terms of managing systemic climate risk.  The only way to manage this systemic risk is to catalyse a rapid energy transition across the whole portfolio. This is over and beyond managing stranded asset risk. Governments at best (i.e. if we assume full implementation) will get us to 2.7C. The best way to bridge the gap and ratchet up the COP agreements is for investors to ask companies in all sectors to disclose their 2C transition plans.  Note this covers all sectors especially heavy users (i.e. forceful stewardship is as focused on demand as it is on supply).  No one investor has the capacity to engage seriously with all investee companies.  And no investors are talking about divesting from all high impact sectors (e.g. auto, utility, agriculture, etc) if progress is slow.  Voting converts this weakness of the investment system (i.e. dispersed ownership) into a strength.  And moreover, one which can be largely delegated to voting advisers if they can be persuaded to scale up their analysis of resolutions.

Finally we need an approach which takes the accountability from the head of the ESG team to the C suite and so gives the ESG team air cover when engagement (which is still very much needed) hits conflicts of interests and cultural blocks.  The forceful stewardship guidelines require C suite attention. Despite all the talk about stewardship and the fact that PRI members now account for 1 in 2 investment dollars in the world, colleagues tell us they are struggling to find funds to co-file resolutions and this despite the fact that we are in the “cottage industry” phase of the project – we need to “industrialise” the initiative and have resolutions supporting the forceful stewardship guidelines tabled at, for example, 10-20% of the world’s largest 500 companies by 2017.

So if this is what “serious engagement” means, then we are all for it!