Climate Action 100+ exits- a crisis of stewardship?

It took just hours for the drama to unravel: Within in the space of a day, two of Climate Action 100+ largest asset managers, State Street and JP Morgan left the network while BlackRock limited its involvement to its international wing, as Net Zero Investor reported last week. The changes remove more than $14trn of assets from the stewardship coalition and mean that the three largest index fund providers no longer form part of the alliance.

The news broke just weeks after Exxon Mobil had announced that it intends to take two of its shareholders, Follow This and Arjuna Capital to court for filing a climate resolution, a move that could trigger increased caution among asset owners to back activist climate resolutions.

For this year’s AGM season, no activist resolution will be filed at the Exxon AGM. This raises the question, to what extent can asset owners still exercise influence over the climate transition planning at oil and gas firms?

“A lack of integrity”

Gustave Loriot-Boserup, founder at Compass Insights and former responsible investment manager at London CIV described the exits “not surprising”, given that historically, the asset managers in question have already not voted in line with CA100+ proposals.

“Our research shows a consistent pattern of undermining and voting against climate related proposals” said Loriot-Boserup. For example, BlackRock has last year opposed all independent shareholder resolutions at Exxon, BP, Shell and Total whilst JP Morgan and State Street rejected most.

This also chimes with research by campaign group ShareAction, which found that some Climate Action 100+ members repeatedly voted against resolutions flagged by the alliance. 

This poses a real challenge for asset owners who are invested with these firms, Loriot-Boserup acknowledges. “It's important to have integrity when it comes to your sustainability commitments. When you have such large investment managers that are backing out of an important alliance like ClimateAction 100+, it does show a lack of responsibility and integrity” he says.

Speaking with his background at London CIV, Loriot-Boserup adds: “Most pension funds within the LGPS have accounts with these managers for passive mandates which are usually in pooled funds” he stresses.

He also believes that investors should now be using their powers and that even passive mandates offered significant room to adjust positions to individual companies if needed. Loriot-Boserup also predicts that this increased divergence between managers and owners could drive up appetite for split voting solutions.

But Sam Mahtani, founder and managing director at Alpha ESG Consulting argues that the impact of the asset manager exits should not be overstated: “What you have got to bear in mind is that CA100+ still has a substantial signatory base including people who are very committed to the cause” he stresses.

He also emphasises that with the implementation of Stage 2 of its engagement programme, ClimateAction100+ is significantly advancing the dialogue with individual companies. He argues that asset managers are unlikely to ditch those conversations, even if they may have left the alliance. “If you are halfway through an engagement with Shell, you will still continue this engagement, the constructive dialogue will still continue” he argues.

Consistent beliefs

Keith Guthrie, head of Sustainability at Cardano and Now: Pensions argues that when it comes to stewardship, alignment on values should be key when selecting a manager.

Speaking at NZI Defined Contribution Forum which took place prior to the asset manager departures from CA100+, he said: “The most important decision trustees are facing today is if the manager is aligned with the trustees’ belief in engagement. It is one thing to look at if voting is consistent, but is the belief consistent? The manager is only going to be speaking to the company about something they believe in, they are not going to have three different conversations because they have three different clients who want a different vote. They are only going to have one conversation with the company” he emphasised.

Exxon: “A threat to shareholder rights”

Another new challenge for investors is that for this year’s AGM season at least, they may face less climate activist resolutions which they could back. In the case of Exxon, Follow This and Arjuna Capital have withdrawn their resolutions amid legal threats.

Cynthia Hanawalt, director, Climate Finance and Regulation at the Sabin Center for Climate Change Law warns that the case poses a a threat to shareholder rights in general, and in particular, here, to shareholders' ability to engage with Exxon on how its business strategy is harming the climate.

Hanawalt points out that the case is unusual because companies would usually turn towards the SEC. “Shareholders have a right to file proposals and vote on them - this is one of the core tools that investors have for providing guidance to the companies they own. Typically, companies are disinclined to sue their own investors, so on its face this is a surprising and aggressive lawsuit. There is also a clear process for resolving these type of disputes through the SEC, which Exxon bypassed, instead choosing to file a lawsuit in what it presumably understands as an oil-friendly court in Fort Worth” she emphasises.

Much will now hang on the outcome of the case. Follow This and Arjuna Capital have said  that the case should be dismissed, given that they have dropped their resolution. Exxon Mobil is expected to respond to this on Wednesday the 21^st of February.

This could suggest that the court may be frustrated with Exxon's attempt to use litigation against its shareholders, Hanawalt believes. “The judge in this case ordered Exxon to reply to the motion to dismiss on an expedited basis, giving the company only a week to respond. 

Arjuna Capital and Follow This (the proponents of the shareholder proposal at issue), have already withdrawn their proposal, so there is really no case left before the court to resolve. The fact that Exxon is pursuing the lawsuit anyway suggests it may have other reasons for suing” she believes.

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JP Morgan and State Street exit CA100+ as BlackRock steps back