Spring is the season for annual general meetings and this year they provide a test of environmental credentials. Barclays (BARC), Rio Tinto (RIO), BP (BP.) and Royal Dutch Shell (RDSB) are subject to resolutions from activist non-government organisations (NGOs) seeking ambitious commitments in keeping with the Paris Climate Agreement.
The Paris objective is to limit global temperature increases to two degrees Celsius above pre-industrial levels, with strenuous efforts to keep the rise to just one-and-a-half degrees. Estimates by Swiss bank J Safra Sarasin suggest, however, that corporations worldwide are behaving in a manner that will see a rise of more like four degrees.
Unsurprisingly, pressure is being applied to companies in high impact sectors. Yet already there are struggles emerging; Bloomberg reported that Shell has pushed back, with the board recommending investors reject a resolution proposed by the Follow This group.
On the one hand, demanding firmer action on climate change is in keeping with asset managers’ much-publicised focus on environment, social and governance (ESG) issues. On the other hand, this year’s resolutions coincide with a rotation from growth stocks in generally lower carbon sectors such as tech, into more cyclical value stocks which tend to be in dirtier industries.
For big asset managers this represents an examination of how green they really are. With quality growth stocks no longer the only game in town, it is now harder to juggle being enlightened with the imperative of maximising short-term returns for end investors.
A get-out could be hiding behind jargon, which is why NGOs want to ratchet up the pressure and emphasise resolutions rather than engagement. One of the ways ESG benchmark indices prevent the need for exclusion of companies involved in fossil fuels is to score them on engagement with investors. If the bar is set low, they can avoid having to make real progress and be boiler-plated as good for asset managers.
Fear of inflation means the case for having greater relative exposure to energy and mining stocks is stronger than it has been for some time. If companies in these carbon intensive sectors are scoring well on engagement, then taking a value ‘tilt’ in portfolios can be done without ostensibly breaking ESG mandates.
There is nothing wrong with this, but that engagement has to be towards meeting meaningful targets. Hence why NGOs are keeping their feet on the throat of companies to commit to clear and binding resolutions not mealy mouthed assurances, although progress on recognising the carbon impact of the end-use of products is applauded.
In the case of Shell (whose AGM is on 18 May) and BP (12 May), resolutions have been filed by Follow This, an NGO set up by Dutch campaigner Mark van Baal to change the behaviour of oil majors from the inside. They are shareholders and bring together others to force a discussion and make bigger investors vote on more transformative courses of action.
The Paris temperature goals are referenced explicitly and the resolutions demand for clear strategies to meet them in the short, medium and long term. The shareholders also request progress reports at least annually. Follow This is flexible in deciding a measure that the companies should follow, with relative metrics such as green house gases (GHG) per unit of energy used/produced rather than simple absolute targets. Where they do not compromise is on the end goal of absolute emissions reductions compliant with the Paris Climate Agreement.
Last year a significant minority of investors at Shell (14.4 per cent in 2020, up from 5.5 per cent in 2018) voted for climate resolutions, but controversy is brewing. Bloomberg has reported that Shell has tried to pre-empt votes by urging investors to vote for its own softer climate resolutions and to reject the Follow This proposal. Should that happen, the company would lock in softer climate targets for three years and meeting the easier numbers would help those ESG scores that affect their cost of capital.
For activists, these resolutions are also about constantly staying ahead of companies’ attempts to water down resolutions. In the case of the mining industry, they also help fight back at lobbyists. Rio Tinto’s AGM (6 May) is the rallying point for the Australian Centre for Corporate Responsibility (ACCR). As well as reinforcing Paris climate targets, it requests that Rio enhance its annual review of industry associations.
The ACCR wants Rio to suspend its membership of industry associations whose record of advocacy is inconsistent with the Paris Agreement. The purpose is to break the cycle of funding and lobbying between big companies and the groups that do their dirty work for them.
