Tegs Harding: it’s time to shift perspectives on engagement

Most large institutional investors take an ‘engagement lead’ approach to stewardship, believing it to be more effective than outright exclusion in driving real-world change. 

The theory behind this approach being that if you want to influence company behaviour, you need a seat at the table in order to be heard plus dumped stocks will be bought by someone else, usually by investors without the same legal responsibilities on stewardship. 

This approach has been followed by many institutional investors for decades but is being called into question as investors take stock of the impact their engagement programs have had.

Whilst pressure groups have been pushing institutional investors to divest from fossil fuels for some time, some investors who have previously been advocates for an engagement led approach are starting to reach the same conclusion. 

If you just read the headlines on this topic you can be forgiven for thinking engagement isn’t working, but looking at the rationale of divesting investors, you see a more nuanced shift in approach. It’s a shift of mindset from how do we influence the worlds biggest emitters to how do we influence the demand in the rest of the economy?

The AGM season and shifting perspectives

The annual general meeting (AGM) season is a critical time for investors and companies to engage on key issues. 

The backdrop to this year’s AGM season was research from the World Meteorological Organisation showing that the chance of global near-surface temperature exceeding 1.5°C above preindustrial levels for at least one year between 2023 and 2027 is more likely than not (66%). 

For those trustees looking at climate stress tests, the ‘best case’ scenario of no further warming may no longer be possible.

We have also had a summer of extreme weather hitting the headlines around the globe. July 2023 was the warmest on record with new temperature records being broken from Europe to China, wildfires causing devastation in Canada and parts of the Mediterranean and flooding in northern Europe, India and part of the US. The urgency of the climate crisis has never been more immediately apparent.

Against this background, some companies faced accusations of backtracking on previous commitments in pursuit of short-term profits. While most oil companies now disclose their scope 1 and 2 emissions and have targets to reduce these, there is no agreement as to whether they should also take responsibility for scope 3 emissions. 

With scope 3 emissions covering emissions companies are not directly responsible for within its value chain, many oil companies have argued that it is the job of government to regulate their client base and that the health of the global economy is still dependent on energy from fossil fuels. If you judge by the voting record at this years AGMs, a lot of asset managers share this view.

Regulatory pressure and investor stewardship

At present, regulatory efforts have been directed at investors, pushing them to become more proactive stewards of the companies in which they invest, leading to a rise in the number of climate resolutions demanding greater scope 3 emissions disclosure. We’ve also seen growing collaboration among investors and climate activist groups.

Yet despite such efforts, these climate resolutions are failing to gain the support of the wider investor base, with support dropping compared to the levels seen in 2022.

Some institutional investors, who have been engaging for years on these issues, have concluded that engaging with oil and gas companies in this way simply isn’t working. That milestones set over years of engagement programs have been missed and the time has come to divest and redirect efforts towards demand-side actions and policy advocacy.

Rethinking Engagement Policies

As a trustee with influence over the voting and engagement policies of multiple schemes, these shifting perspectives have challenged whether the policies I put my name behind are doing enough, or whether we have reached a crossroads and should instead take this opportunity to revise tactics as other have done.

During a recent event I had the opportunity to engage in conversation with demonstrators from Extinction Rebellion, who were present to raise awareness of their cause amongst the pensions community. 

While I explained the rationale behind our engagement-first policy, one demonstrator fundamentally disagreed with my approach. To him, the scientific evidence was clear and unequivocal: global emissions must be halved by 2030 to have a chance of staying in line with the Paris Agreement. 

He challenged me with two crucial questions: How do I and the asset managers I work with justify our acceptance of these supermajors’ refusal to cut emissions this decade? And how do I tell the difference between a company with a genuine intention to reduce emissions and one that is stalling for time in the name of short-term profits?

I have no definitive answers yet but I am asking questions of the asset managers I work with. I am working to make sure engagement policies have clear and credible objectives, they are based on a plausible theory of change and they have communicated clear, time bound milestones for progress to companies.

As new demand-side engagement strategies emerge, there is an opportunity to bring together those who advocate for maximising profits at any cost and those that champion climate and ESG. Trustees, asset managers and policymakers must engage in meaningful conversations and not gloss over the complexity and nuances of these issues. 

This year has shown that the finance industry alone can not lead us through the climate transition. Addressing climate change requires a multifaceted approach involving investors, policymakers, and society at large. It is through these collective efforts that we can forge a path toward a more sustainable economy.

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