UK stewardship stocktake: engagement at a gridlock?
Net Zero Investor brought together a group of senior UK institutional investors to discuss whether investors have made progress on climate change engagement
While the news headlines were dominated by a record number of resolutions, investor support for climate activist resolutions is on the wane. Meanwhile, some of the world’s biggest oil and gas firms have backtracked on their climate ambitions. In the first of this three-part series, based on discussions held at our June Stewardship Roundtable in London, investors discuss whether shareholder engagement might be at a gridlock.
Tessa Younger, stewardship lead at the CCLA kicked off the debate by highlighting three key trends that dominated this year’s AGM season. First, average backing for environmental and social proposals has dropped from 37% in 2021 to just 20% this year and only 3% majority support this year, compared to 23% a couple of years ago. Younger attributes this in part to spillover from the anti-ESG movement in the US as larger asset managers such as BlackRock and some asset owners like CalPERS and CalSTERS have altered their voting stance from one year to the next. “Mizuho comes to mind, there was a resolution in 2020 which was filed again this year with the exact same wording, and it was voted against which is quite striking really. It is quite clear that there isn’t just a shift in sentiment but also increasing segregation of markets” she argued.
A second key trend are major fossil fuel giants backtracking on earlier climate ambitions, Younger said, describing the results of activist resolutions at Shell and BP AGM’s as “disappointing.”
Third, she highlighted a growth in popularity of board sponsored transition plans as an attempt to avoid more ambitious proposals being put forward by activist shareholders, these have doubled in number in Europe.
Despite these potential adversities, she said the stakes for good stewardship creating “real world impact” were higher than ever: “We really have to grasp the nettle, be clear on what the scientific evidence is telling us and ensure that our stewardship action has appropriate ambition for tackling change” Younger argued.
Stewardship rubber hits the road
Investors expressed frustration with the lack of engagement on climate change, particularly among major oil and gas firms. Fossil fuel giants Shell and BP had earlier this year scaled back on their net climate targets, among record profits from oil and gas extraction.
This is in part a sign that the engagement process on climate change is maturing, argues Marian D’Auria, global head of Risk and Sustainability at mining firm GFG Alliance and chair of the pensions committee at USS. “We’ve gone from commitment to commitment to commitment and we’re now so far down the road that people are actually having to show progress against these targets, that is where the slight rowing back is coming from” she argues.
But she also emphasises the importance of remaining persistent: “This is really where the stewardship opportunities come in, this is where the stewardship rubber hits the road. It was all fine when everybody was on the same page, it’s now going to be a real test to the power of stewardship when people are starting to backtrack. What is the most efficient way of keeping this going?”
Younger has little faith in corporate transition plans, highlighting that only 5% of FTSE100 transition plans are deemed effective according to the TPT framework. “The Science Based Targets Initiative offers useful tools for looking at Scope III emissions. But it’s also about ratcheting up. When people first signed up (?) it was first below two degrees, it has not got to be 1.5 degrees. So this is about honing down on the timeframes, are these really rigorous?”
Colin Baines, stewardship manager at Border to Coast, argues that engagement between investors and fossil fuel giants is increasingly gridlocked. “Only last year, they released their climate transition plan and within just six months they jettison it, after getting an overwhelming shareholder mandate. Despite what they had to say, this was significantly rolled back with seemingly no consultation with the shareholders.”
Having liaised closely with other pension funds on this, he emphasises that neither he or his peers have been contacted by BP ahead of the decision. “The fact that both Shell and BP are backtracking on their ambitions and are fronting it out with shareholders is indicative of the real shift in the environment that we have seen from last year.”
This sentiment is echoed by Sheila Stefani, who has recently joined the pool LGPS Central as head of Stewardship. “We have observed a disappointing decrease in support for shareholder resolutions compared to our expectations. The potential implications of BP and Shell's actions concern us greatly.” For Stefani, this highlights the importance of investor collaboration: “We have expressed our dissatisfaction to companies that have scaled back their commitments especially when shareholders were not consulted ahead of announcements. LGPS Central actively participates in collaborative initiatives such as Climate Action+ and we believe it is crucial for us to amplify our concerns even further in light of this proxy season.
A problem with absenteeism
Two key factors are driving the trend towards backtracking, argues Baines. One is the fact that while a small group of investors is outspoken on climate change, the majority tend to vote with the board: “There is a problem with absenteeism, shareholders simply voting with management by default without giving it a second thought, that is one of the major challenges we are facing, to get them to be active.”
A second challenge has been the impact of the energy crisis, which has led to skyrocketing profits for oil and gas firms. Baines describes this as “the tension between short-term profits and long-term value. The Ukraine crisis is an opportunity to maximise profits in the short term” he argues.
Managers and owners – a growing gap?
The challenge of “absenteeism” as Baines describes it, could also be attributed to a growing disconnect between asset owners and managers. The UK Asset Owner Roundtable has recently commissioned a review to what extent voting patterns of the world’s largest asset managers aligned with asset owner’s long-term fiduciary duty.
But D’Auria argues that investors also bear some responsibility in this: "To be fair to the asset managers, we still assess them based on their performance over the last quarter or last year. So what do we incentivize in terms of behaviour?"
For Stefani, this highlights the importance of due diligence before selecting a manager, particularly when it comes to passive investments: “ When appointing a manager, it is essential for us to have complete trust in their abilities. We maintain engagement and voting rights at all times, even when managers are responsible for managing the capital and selecting stocks on behalf of our beneficiaries. As part of our ESG integration framework, we expect managers to provide quarterly reports on their stewardship activities.
"Stewardship practices for passive investments and fixed income are not significantly different because exiting these investments swiftly is not always feasible. Hence, investors like us leverage their stewardship skills to the fullest extent and selectively exercise voting rights for passive equities to express dissatisfaction or concerns” she emphasises.
Another challenge is the fact that in some cases, a positive target on climate change might have unintended consequences elsewhere, argues Victoria Ruleva, investment strategy governance manager at Pensions Insurance Corporation, which as an insurer invests predominantly in fixed income and private markets.
“This year, we have set more targets on the social side. We found that people are a little bit more on board with climate engagement, there are clear science-backed targets which don’t exist yet for the just transition. This is especially important for the just transition, there is a risk of doing good in one area and bad in the other. So we’re adding this to the mix of complex issues.
The lack of progress on shareholder engagement could be an indication that other levers might become more important, according to Andrew Dobbie, national officer for capital stewardship at Unison. He highlights that the union, which represents 1.3m members including LGPS members, has a broader set of tools available to influence corporate behaviour. “If your business is investments, you can use those investments to influence people. We’re also interested in campaigning and mobilizing members in particular places where they are running campaigns.”
Dobbie argued that if stewardship would reach a dead-end, the union would increasingly prioritise other strategies to influence corporate behaviour. “It does look as though regulatory levers are going to be more useful than trying to persuade people by the use of stewardship tools. I wonder if we are reaching a point where we want to be putting our resources into this rather than stewardship.
He also said that fragmentation of voices among institutional investors remains a challenge but expresses hope, that the LGPS pools and the Local Authority Pension Fund Forum (LAPF) could help accelerate their voice.
“We also try to operate international levers, for example through the committee for workers capital, which enables us to tap into the expertise of places where trade unions are very well established, for example American, Australian, and continental European, especially Dutch trade unionists” Dobbie said.
The CCLA has also increasingly focused on policy engagement, for example by sitting on the policy committee of the UK transition taskforce.
“One example is the National Policy Statement for England and Wales, which is about the strategy for their road, rail and freight strategic networks. Of course, they should be electrified. We have responded to that, so we have put in a response really emphasizing that point.”
But she also highlights that while Network Rail has set a target to electrify 448 kilometres of traffic a year and last year they did two. “Like with Shell, they have got these targets but you have got underperformance on what they are doing. Transport is 25% of UK emissions, globally it is about 18% so it is in all our portfolios’ Scope III emissions. I know this is just UK focused and we’re a global investor but sometimes you’ve got s bigger voice in your local market” Younger believes.
But investors also emphasise that these temporary headwinds should be no reason to abandon stewardship efforts. Baines still sees some signs of progress. “Just because we have seen a couple of disappointing votes at Chevron and BP doesn’t necessarily mean that stewardship is on the wane, we have also seen several resolutions withdrawn because companies were doing what the co-filers asked, so it has an impact. If you file a resolution, you get into the boardroom, you get to see the chair or the CEO and the AGM is dominated by that issue. Quite often you get a good amount of change.”