As institutional investors begin to plot their corporate governance voting and engagement strategies on climate change for the 2016 AGM season and beyond, a report based on discussion with 70 senior finance and related sector professionals from around the world, outlines why CEOs and CIOs of their organisations should have responsibility for what it calls “Forceful Stewardship” to meet their fiduciary duty on the issue. The report by Preventable Surprises, which styles itself as a ‘think-do-tank’, says action to limit climate disruption should legally be the responsibility of senior management or the trustees/board directors of institutional investors. This, it says, is because climate change is a systemic risk that is material to investment returns, and as a result integral to fiduciary duty. It says this responsibility could be tested legally if the organisation is found not to have assessed the relevant risk.
RI reported earlier this year that Client Earth, the London-based law firm, was looking at a legal test case against a UK pension fund by scheme members alleging that it is breaching its fiduciary duty by not considering the potential impacts of climate change on its investments.
The 134-page report, authored by Raj Thamotheram, CEO of Preventable Surprises, titled: “Investors, Climate Risk and Forceful Stewardship: An Agenda For Action” is the output of a week of on-line dialogue with the senior professionals looking at how investors might become a bigger part of the solution to climate risk.
The report explores how Forceful Stewardship might best work in practice. It coalesces around two simple themes, that companies should have a “low-carbon business plan” and that investors should be able to show thatthey’ve voted for companies to have one. It argues that this simple approach “could become the basis for globally-coordinated citizen investor campaigns”. Additionally, it says investors should vote in favour of resolutions for listed companies to publish assessments of the physical, policy and economic impacts to their businesses of carbon budgets under 2°C and 4°C warming scenarios.
Thamotheram says the Forceful Stewardship Guidelines provide a blueprint for pension trustees and other asset owner decision-makers to act on portfolio climate risk and protect themselves against legal liability for negligence. John Rogers, a former President and CEO of the CFA Institute, a participant in the dialogue who wrote the foreword to the report, said he hoped Forceful Stewardship would form a best practice benchmark for investors on climate change: “The top 1,000 retirement funds control over US$9 trillion – enough to buy all of Europe’s listed companies. These investors, which I call “super fiduciaries”, have the muscle to effect change in the companies whose shares and debt they own. They have long time horizons, and their beneficiaries will stretch across future generations. There is no excuse, and every incentive and duty, for institutional investors to pitch in and mitigate the dangerous path we are on.”
Thamotheram, added: “The paradigm change we’re taking about is the shift to fiduciary capitalism, the idea that your primary duty is your portfolio and its intergenerational equity.”
The report can be downloaded here
Disclaimer: Hugh Wheelan worked on the copy editing of the report.