It is not by choice that the top management of ExxonMobil will now be analysing – and reporting on – how increased political focus on climate change and stricter legislation regarding carbon emissions could impact the company. Investors have been working to increase transparency in ExxonMobil regarding climate change for several years. And at this year’s general meeting in Dallas, they finally achieved majority backing for the proposal.
“This may seem like a very small victory, but in the grander scheme of things, given how big and powerful these companies are, this was a monumental event,” says Hetal Damani, co-head of the Nordea Responsible Investment team.
The world’s largest investment companies allegedly behind proposal
In the case of ExxonMobil, Nordea voted twice to increase transparency when the proposal was made at the last two general meetings. This year, the proposal was allegedly made by two of the world’s largest investment companies, BlackRock and Vanguard, who pushed heavily for its adoption. There is increasing concern among investors that the value of companies, whose assets comprise production and reserves of fossil fuels, could decline significantly after the ratification of the Paris agreement in which the world’s countries (with the exception of Syria, Nicaragua and presumably the USA) have agreed to strive to combat global warming.
“In the past, climate change has been considered a long-term, far-out-there issue, but we're seeing agencies like the International Energy Agency predicting that initiatives like the Paris Agreement could cause a peak in oil demand by 2020 under a 450 scenario. So these issues aren’t as long term and far out as we originally thought. It’s more that we’re waking up to the issue,” explains Damani.
Investors are taking action
The example of ExxonMobil, where the company’s owners – its investors – are actively taking a stance and making demands, shows that investors are thinking about all their investments and not just individual holdings.
“If a company upstream pollutes the water supply, companies downstream suffer the deterioration in their water. So you do not want the company upstream maximising its profits, because a diversified shareholder will also suffer the consequences for the companies which are downstream,” as Professor Elroy Dimson, Cambridge Judge Business School, who has studied active ownership for more than 10 years, clarifies with this straightforward example. He also believes that you cannot simply sell your shares in these companies and thereby avoid taking a stance on the issue.
“It is likely that many of the new initiatives in renewable energy will come from companies whose background is in fossil fuel power. And if investors get rid of their shareholdings in these fossil fuel companies, they will be owned by other investors, who just don’t care,” says Dimson.
18,000,000,000,000 euro in leverage
Investment companies and banks are focusing more and more on joining forces to practice active ownership. IIGCC, a network of 130 of the largest banks, pension funds and investment companies in Europe, is a prime example. Its members manage huge sums of money – EUR 18 trillion to be exact. And they have banded together to develop a series of guidelines, which companies within oil and gas, auto manufacturing and utility supply can employ to analyse and report on the impact of climate change on their company.
“Climate change as an investment risk has really risen up the agenda of portfolio managers and asset owners. In this regard, the IIGCC is a strong forum for investors to come together and exploit our leverage. This is very important to us. And if I was a client in a fund, I would want to know that my money was being put towards something positive that improves the environment,” concludes Damani.