Take Five: Engaged on Stewardship
A selection of the major stories impacting ESG investors, in five easy pieces.
This week saw big questions raised over how and why investors use their influence as active owners.
Common cause – At least some UK-based asset owners and managers found themselves on the same side of a couple of arguments this week. After a pension fund-led coalition laid out new expectations for managers on climate related-stewardship, there were signs of consensus among customer and supplier over the name of the game. Responding to the Financial Reporting Council’s consultation on its update to the UK Stewardship Code, the Pensions and Lifetime Savings Association objected to the removal of references to ‘society’ and the ‘environment’ in the proposed new definition of stewardship, warning also that lack of clarity around the term ‘sustainable value’ could lead to greenwashing. In its response, the Investment Association, also flagged issues arising from the use of ‘sustainable’ – albeit due to its status as a restricted term under the Financial Conduct Authority’s naming and marketing rules for sustainable funds. And some of its 250 members argued the new definition “removes the connection with the positive externalities of stewardship and de-emphasises the importance of long-term systemic risks that investors are exposed to”. Common cause between asset owners and managers was also reflected in the signatory list of a letter to BP Chair Helge Lund, calling for a ‘Say on Climate’ vote at the oil and gas firm’s 2025 AGM. Shaken, or at least stirred, by the comments of CEO Murray Auchincloss in response to stake-building by activist hedge fund Elliott Management, investors called for greater transparency on BP’s capital expenditure plans to avoid their exposure to “stranded or value destructive assets as the energy transition progresses”. Whether BP or the FRC take any notice of these collective concerns is another matter.
Immediate impact – The investor letter to BP was scrupulously constructive – making suggestions on the kinds of metrics it might consider using to demonstrate Paris-alignment – and contained no hint of the consequences at the upcoming AGM should the firm decline to take its advice. Its drafting may or may not have been influenced by rule changes announced by the US Securities and Exchange Commission (SEC), which seek to dissuade investors from using their voting power to put pressure on portfolio companies to meet their expectations, as well as giving firms more scope to exclude shareholder resolutions. The former had an immediate impact on two of the world’s largest asset managers, who this week temporarily suspended all pre-AGM meetings with firms to give themselves time to fathom whether their approach to stewardship broke the new regulations. The latter prompted investors to condemn the sheer mayhem caused by handing firms the right to deny resolutions filed under the previous rules. According to new ShareAction analysis, the US’s largest four asset managers only voted for 7% of 279 environmental or social-related resolutions last year. The SEC’s new rules might further suppress their appetite or opportunity to even do that in 2025.
Miners on the move – The new issuer-friendly US rules could appeal to mining group Glencore, which announced this week that it is considering shifting its primary listing from London, with CEO Gary Nagle confirming that New York could be an option – if it can deliver “the right valuation”. Rival Rio Tinto has also been mulling a move, launching a review of its listing options under pressure from Palliser Capital. The activist has argued it should follow the example of BHP, which switched to a primary listing in Sydney in 2022, but Rio this week advised shareholders to reject the proposed move. The departure of two such major miners would be a new blow to London’s fading prestige, having lost 88 primary listings last year. As this week’s ESG Investor feature reports, it’s too early to tell whether new listing rules introduced last year, and other light-touch initiatives backed by the Capital Markets Industry Taskforce, will revive the City’s ability to attract new issuers while retaining existing ones, like Rio and Glencore. But given the many obstacles to the mining sector’s journey to long-term sustainability, perhaps London’s proposed reinvention as a transition finance hub may yet be its best option for keeping them.
Call to arms – This week’s rapid realisation that the US has no interest in deploying troops or weapons in Europe over the long term, regardless of the consequences for Ukraine, has intensified discussions on increasing investment in the region’s defence industry. Donald Trump’s return to the White House had already spurred plans for a new European defence fund, but the prospect of a decoupling of western military capabilities has further focused minds. There is nothing to stop sustainable investors channelling capital to weapons manufacturers and many ESG-focused funds already do just that. But some may worry that investment in the defence industry might not be regarded as taxonomy-aligned, given minimum social safeguards. Equally, there could, in time, be concerns over the obligations for firms to address human rights harms along their value chain under the Corporate Sustainability Due Diligence Directive (CSDDD). These might seem minor qualms but observers have long called for further regulatory certainty on the circumstances in which sustainable funds can invest in the defence industry. Could next week’s sustainable finance omnibus provide that clarity? If not, a white paper on the future of European defence scheduled for early March probably will.
Material differences – The defence of double materiality was a major theme this week in Europe ahead of the release of the sustainable finance omnibus next week. As well as giving full backing to CSDDD, Spain and Denmark voiced support for the Corporate Sustainability Reporting Directive’s embrace of double materiality, with the principle also supported by Germany’s Sustainable Finance Advisory Council, in a submission which included marked departures from the country’s official position. The incoming CEO of the Global Reporting Initiative – which was involved in the development of the supporting European Sustainability Reporting Standards – said double materiality was “essential for effective sustainability reporting, ensuring companies manage financial risks while also addressing their broader impacts”. Despite the torrent of feedback, the European Commission is still sticking to its ambitious 26 February deadline for releasing its draft, alongside its second omnibus on investment simplification and the Clean Industrial Deal. The drafts follow this week’s release of Europe’s landmark ‘Vision for Agriculture and Food’ – which seeks to deliver environmental sustainability and food security – and revisions to its Waste Framework Directive, targeting food waste and the fashion sector. Europe and the US might agree on less these days, but their policymakers are certainly matching each other for work rate.
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