Edward Mason: Shareholder engagement on climate change comes of age

One week ago, in a move that signalled a fundamental shift in their engagement with the oil and gas industry, institutional shareholders voted in huge numbers against the board of Occidental Petroleum to pass for the first time ever a contested shareholder proposal calling for more disclosure on the business impacts of climate change.

The proposal, lead-filed by Wespath Benefits and Investments, asked the company to undertake and publish climate scenario analysis for the business, including for a 2°C scenario. The vote in favour was a massive 67%. It is one of a family of 2°C scenario analysis resolutions this proxy season, the highest profile of which has been filed at ExxonMobil for its shareholder meeting on 31 May.

The core message of the Occidental vote is that major institutional investors, especially in the wake of the publication of the recommendations of the FSB Task Force on Climate-Related Financial Disclosures (TCFD), now have no qualms about asserting their requirement for climate-related disclosure when necessary.

Amongst those voting for the proposal was BlackRock, Occidental’s largest shareholder. This takes things another big step forward from last year’s scenario analysis proposals when, at ExxonMobil, a resolution was supported by a majority of the corporation’s top 25 shareholders, including its third largest, State Street, as 38% support was recorded notwithstanding board opposition.

The story of shareholder engagement coming of age was firmly underscored earlier this week in a new report from CDP and the four investor networks that make up the Global Investor Coalition on Climate Change (GIC).

Investor Climate Compass: Oil and Gas – Navigating Investor Engagement combines CDP analysis of the performance of ten leading oil and gas companies on climate strategy and disclosure with assessments by investors of the progress achieved through engagement – where necessary assertive – since 2012.

The results confirm that investor engagement on climate risk is having a real impact on board and executive decision-making. They also confirm the work still to be done by investors if the companies are to face up fully to the challenges of the transition to a low carbon economy and assure investors that they are managing risks and opportunities prudently.

On scenario analysis, the report finds that seven of the companies do some form of scenario analysis about the impacts of the Paris Agreement (and its goal to curb greenhouse gas emissions fast enough to keep global temperature rise to less than 2°C).Only three of these have sought to quantify the financial impacts of the IEA’ s 450ppm scenario. Exxon have done neither.

“I ask all institutional investors to come down on the right side of this vote”

The report calls on investors to make their stewardship strategies for 2017/2018 more ambitious, using all the tools available, to ensure that companies:

• Do more, and better, scenario analysis and transition planning
• Disclose in line with TCFD guidelines; and
• Secure the competence they need at board level for good climate governance.

The report places ExxonMobil firmly at the back of the super-majors’ pack on climate change strategy, disclosure and willingness to dialogue with investors (alone among its peers Exxon will not make non-executive directors available to investors to discuss governance of climate risk – or anything else for that matter).

This highlights that the most pressing outstanding investor action during the 2017 proxy season is to pass the 2°C scenario analysis proposal at Exxon co-filed by New York State Comptroller Thomas P. DiNapoli (as Trustee of the New York State Common Retirement Fund), the Church Commissioners for England and over 50 other investors with $5tn of assets.

ExxonMobil still contends that a 2°C scenario does not lie within a ‘reasonably likely to occur’ range of planning assumptions. Investors carrying the financial risk of climate change and the low carbon transition beg to differ.

I ask all institutional investors to ensure that they come down on the right side of this vote, which will be historic. With 2017 the year when shareholder engagement on climate change has come of age, asset managers whose stewardship practice lags peers will face even more difficult questions, not least from their asset owner clients.

Investor Climate Compass: Oil and Gas – Navigating Investor Engagement is a collaboration between four investor networks that collaborate regularly as members of the Global Investor Coalition on Climate Change (AIGCC, Ceres, IGCC, IIGCC) and CDP.

Edward Mason is Head of Responsible Investment with the Church Commissioners.