More Ambition Needed from AMs on Fossil Fuels
Existing investment and engagement policies are not up to par with challenges, according to ShareAction.
Asset managers have been asked to ramp up the robustness of their climate-focused investment and engagement policies for fossil fuel companies.
In a guidance paper, responsible investment charity ShareAction addressed fossil fuel policies, recommending asset managers take a more purposeful and effective approach to investing in and engaging with the sector.
“Reducing fossil fuels is at the core of transition, but we often hear confused narratives from investors,” Niall Considine, Head of Investor Standards at ShareAction, told ESG Investor. “They have been telling us they find it challenging to take a more ambitious approach.”
Current policies set by asset managers are simply not going far enough to mitigate the risks the fossil fuel sector poses to the climate transition, he said. But the incentive to act should be strengthened by a growing recognition of the financial impact of rising temperatures, paired with the significant growth in cheaper renewable capacity.
As such, ShareAction felt there was an opportunity to cut through the confusion and bridge the gap between scientific research and the day-to-day challenges facing asset managers and stewardship teams on the ground.
In the third paper of its ‘Responsible Investment Standards & Expectations’ (RISE) series, the charity stressed the need for a “new investor blueprint for the fossil fuel sector”, recommending a series of actions for asset managers.
It called for tighter investment restrictions and for significantly limiting exposure to thermal coal and oil and gas companies expanding their production and capacity, and, where exposure is retained, for engaging more robustly with the sector.
ShareAction also encouraged asset managers to engage with asset owners and policymakers to influence mandates, rules and incentives to end fossil fuel financing and support reduced production.
Considine suggested they should prioritise ambition, as fossil fuel companies have the most to lose from the climate transition and, as such, are the most incentivised to resist it.
“New renewable capacity will soon exceed growth in global energy demand on current trends, meaning fossil fuel consumption can reduce, [but] fossil fuel companies are still planning to increase production,” he said. “Over-producing fossil fuels relative to the growth in available renewable capacity is a threat to efficient transition.”
Although the oil and gas sector accounts for 15% of global greenhouse gas emissions, scientific evidence suggests demand will peak by 2030.
Yet, the sector remains widely unprepared for the climate transition, with just three of the 25 largest firms planning for flat production in the near term, and only one targeting a decline.
In recent years, oil majors have also backtracked on their climate commitments – with some even choosing to pursue legal action against shareholders. NGOs have previously found that 161 (29%) members of the Glasgow Financial Alliance for Net Zero were financing 229 of the world’s largest fossil fuel developers.
“While there are very few opportunities to invest in genuinely aligned fossil fuel companies today, focusing investment on [the] most ambitious should encourage momentum towards alignment with transition goals across the sector,” Considine added.
No excuses
ShareAction also provided counterarguments to asset managers’ logic for maintaining their exposures to fossil fuel companies.
Many, for example, claim that fossil fuel companies are just “meeting demand”. While the non-profit acknowledged that economic prosperity is linked to energy access, it argued that transitioning the global economy doesn’t hinge on demand being met, but rather on how it is met. As such, the role of fossil fuel energy should diminish as renewable capacity is upscaled.
Asset managers also argue that divestment does not work, and that they lose influence when they exit fossil fuel companies. In response to that, ShareAction said engagement only has value when it’s effective – which includes ensuring there are material consequences in place, including divestment.
“Asset managers should divest from fossil fuel companies that are proving resistant to influence and concentrate their finite engagement resources on those which can plausibly be influenced,” the paper noted. “This will enhance the effectiveness of the investor voice in catalysing change.”
A critical mass of asset managers choosing to divest from laggards in the fossil fuel industry would materially affect the supply-demand equilibrium, ShareAction argued.
“Contrary to what some commentators have said, we believe investors have significant influence over the companies they own and fund,” said Considine.
ShareAction has previously challenged investor-led engagement initiative Climate Action 100+ to increase transparency from asset owner and manager members on their climate-related engagement efforts with carbon-intensive companies.
Behavioural pattern
Every year, the responsible investment charity publishes an analysis of how the world’s largest asset managers have voted across environmental and social shareholder resolutions. This showed that in 2022, resolutions that received more than 50% support fell from 21% in 2021 to 14% in 2022 and 3% in 2023.
The 2023 edition also identified an “enduring pattern of poor support” for climate resolutions regarding fossil fuel financing. Such resolutions averaged 22% of support in 2022 but dropped to 16% last year.
“There are signs that this trend is continuing through this [proxy] season,” Considine said. “We understand some of the drivers [behind] that, with the politicisation of sustainable investing and the energy transition, particularly in the US. Yet the urgency to act has increased and impatience across civil society is growing.”
An assessment of the fossil fuel exclusion policies of 25 asset managers by ShareAction recently showed that most had limited restrictions on oil and gas companies. But asset owners can play a critical role in pushing managers’ ambition by implementing mandates that clearly set goals and expectations on how to frame investment in and stewardship of the fossil fuel sector, the charity suggested.
As such, asset managers should be required to support these mandates through better disclosure of how they are being met.
“We would like to see asset owners really challenge some of the narrative around limited investor agency over fossil fuel companies’ strategy,” said Considine.
Last year, the Net Zero Asset Owner Alliance (NZAOA) urged asset managers to work smarter, not harder in engagements with investee companies and policymakers on climate. The alliance outlined four principles asset managers should apply to their climate engagement strategies and underlined the importance of aligning climate engagement outcomes with portfolio management and stewardship decisions.
“NZAOA members expect their asset managers in both private and public markets to pursue integrated and tailored climate strategies across all their functions,” a spokesperson for the alliance told ESG Investor.
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