Case Study

Engaging Companies on Climate Change

As companies begin to experience more direct impacts from climate change at both a regulatory level, as well as in their direct operations and supply chains, asset managers, insurance companies and pension funds are starting to act.

A recent study by Harvard Business Review of 70 senior executives at 43 global institutional investing firms showed that ESG was almost universally top of mind. Participants included BlackRock, Vanguard and State Street as well as giant asset owners such as the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS) and the national pension funds of Japan, Sweden and the Netherlands.

According to the US SIF Foundation’s biennial Report on US Sustainable, Responsible and Impact Investing Trends, climate change and carbon were the top ESG issues for money managers representing $3 trillion in assets and the third-biggest issue for institutional investors with a collective $2.24 trillion in assets in 2018.

“Up to 80% of coal assets will be stranded, up to half of developed oil reserves. A question for every company, every financial institution, every asset manager, pension fund, or insurer is: What’s your plan?”

Institutional investors across Europe, Asia, Australia and North America are acting on the risk of falling fossil prices and stranded assets by divesting from coal and other carbon-heavy companies under active management. The number of institutional investors committed to cutting fossil fuel stocks from their portfolios has increased dramatically up from 180 in 2014 to more than 1,100 in 2019. The world’s largest sovereign wealth fund, which manages $1 trillion of Norway’s sovereign wealth assets, received approval from the country’s parliament for the largest fossil fuel divestment to date, dropping more than $13 billion in fossil fuel investments in 2019, including eight coal companies and an estimated 150 oil producers.

Following in the footsteps of BNP Paribas Asset Management and Candriam, BlackRock recently announced its intention to remove shares of all companies that generate more than 25% of their revenue from thermal coal production from both its actively managed equity and bond portfolios. BlackRock expects this to be completed by the middle of 2020. This announcement came after the company faced increasing criticism — and a targeted campaign — to end it’s backing of coal companies.

Despite a small but growing number of large-scale fossil fuel divestments, a majority of asset managers prefer an approach of direct engagement with companies on high-risk topics such as climate change, more so than divestment. Some investors, such as Japan’s $1.3 trillion national pension fund, believes it can be better to stay invested and push companies to change their business practices. But that engagement-oriented approach can also have its limits, particularly in the case of fossil fuel companies who are lagging on climate change, and have no intention of shifting their business models towards low-carbon energy alternatives. Asset managers such as BNP Paribas are taking a more aggressive stance, divesting from companies that fail to make changes after direct conversations, and then reinvesting again if the company makes the changes the company asked for.

As risks from increasing GHG regulations and stranded assets grow alongside increasing global action on climate change, companies that begin to more aggressively engage fossil fuel companies on climate change will be well placed to benefit. These companies will not only more effectively manage their exposure to under-performing carbon-intensive companies, they will likely benefit from reputational improvements.

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