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RI Interview: Loretta Minghella: leading difficult investor discussions with the Church of England and ExxonMobil on climate

The First Church Estates Commissioner talks to RI about where shareholders go now after a bruising AGM battle.

In the history of shareholder-company engagement on climate change, investors (with the Church of England as one of the leads) v ExxonMobil will go down as a notable skirmish; splitting the oil majors between those who appear to be working publicly with investors, and a major resistance action by Exxon.
The spat now moves into discussions behind closed doors in an attempt to defuse the tensions that saw Exxon petition the SEC for successful dismissal from the AGM of a resolution calling for disclosure of greenhouse gas targets aligned with the Paris Climate Agreement; which then led investors to fire back with an alternative resolution to split the company’s CEO and Chair, and describe it as a “warning shot”. And a potent one at that, with 40.8% shareholder backing.
The Church and the New York State Common Retirement Fund were the lead filers on the dismissed greenhouse gas proposal. The two headed the engagement at Exxon for the powerful Climate Action 100+ group, the $33 trillion investor initiative, which asks companies to make emissions reductions across their value chain consistent with the goals of the Paris Agreement.
The real hard talk comes now though. The Church and other shareholders are getting muscular on their engagement to get the oil and gas majors to radically shift their business in line with the Paris Agreement. The Church has drawn a line in the sand on getting results by the end of 2020. If the majors don’t move, it will start to divest with an aim to be fully out by 2023.
Response so far in the sector is mixed; BP and Shell are talking change. Exxon has gone on the defensive, hitting back at what it said were “unwarranted” accusations that it had not engaged with shareholders on climate risk.Loretta Minghella, First Church Estates Commissioner at the Church of England – appointed by the Queen – will be one of its senior investment representatives in the Exxon talks, supported by Edward Mason, Head of Responsible Investment for the Church Commissioners, and a former diplomat (Wikipedia has a good explanation of the role of the Church Commissioners.)
Minghella believes Exxon’s dismissal of the Church’s resolution shows it is worried. She indicates that the Church has a firm, but open-handed approach right now: “Are Exxon willing to shift? Well, they have joined the Oil and Gas Climate Initiative, a CEO-led initiative to look at practical steps to cut emissions. They are also part of the council working on a new co-operative approach to carbon tax dividends that would allow the profits to be rebated to ordinary citizens. That’s an important step forward. They’ve declared support for the Paris climate agreement and said the US should not withdraw. So, I think they have taken some positive steps. It’s not all as bleak as it might look from the AGM. They have reached out to us and we will now go into a period of private dialogue. There won’t be a running commentary on that. But, I am hopeful that this shot across their bow leads to some productive steps.”
Minghella’s involvement is fascinating. She mixes the experience and pragmatism of a former financial regulator with the practical compassion of her last role as CEO of Christian Aid. They combine in the current job: oversight of the Church’s £8.2bn endowment fund that finances its running costs as well as a portion of pension money accumulated prior to 1997. The Church also has two related but distinct asset owner entities: the £2.5bn Church of England Pensions Board, which runs the pension assets of its clergy, and the £2bn CBF
funds, running miscellaneous funds from its dioceses. Minghella’s pragmatic thinking on climate change was laid out in a speech to the Church Synod – it’s decision-making body – back in July 2018 when it was debating aligning its assets with its mission. (A video of the whole debate is available on You Tube: Link). A core tenet of the Church’s mission, she says, is to tend to people in need, especially those in poverty or affected by natural disasters. Another is “safeguarding creation”. But she points out that the value that may be the most important to her work as a Commissioner is for the Church “to use the opportunities it has to stand up for change”. In her Synod speech she described climate change as a ‘wicked problem’. She says there are two meanings to this: “One is that it is phenomenally complex and layered involving politics, social justice, the environment, geography and personal behavior/necessity.”
The second, she says, is that for the Church it is a theological challenge: what should its response be? “Society has unwittingly industrialised through carbon, and, as it turns out, off the backs of the world’s poorest people. From my work at Christian Aid I’ve seen that one of the driving factors of poverty and fragility in communities is the impact of climate change. We have a responsibility now to do something about it because when hurricanes strike or extreme weather hits, it is the poorest, and notably women, who pay the highest price. Making the transition from where we are now to where we need to be is urgent. But it’s also difficult.”
Minghella believes the Church’s financial heft is a forceful tool in the fight: “We have an opportunity to use our investments in the most responsible way we can. It enables us to join investor coalitions and insist on change. It would be very nice if policymakers could solve the problem. But as shareholders we have a fantastic opportunity to get companies to listen to us. To solve a wicked problem requires the public, civil society, all manifestations of faith organizations, government, business and finance working together. The work we’re doing now as investors is about putting pressure on businesses to play their full part in bringing about a more sustainable environment, which is necessary forinvestments to do well. Countries need sustainability and stability to attract and retain investment. That doesn’t happen in increasingly fragile countries.” On the core question of divestment of fossil fuel companies – a major debate within the Church and other faith organisations – the advice from its Ethical Investment Advisory Group was to pull money from companies making more than 10% of their income from coal and tar sands. Minghella says: “These were deemed to be egregious high emitting companies where you could not reasonably expect the change we expect from companies who are less concentrated in terms of emissions.” For oil and gas majors, the Church decided to remain invested and lobby for change backed up with clear data and time horizons for response. The strategy is backed in principle, if not timeframe, by the Climate100+ $30 trillion investor coalition whose presence was felt on the Exxon shareholder register. Minghella is surprised by how many investors look to the Church for an activist lead: “I hadn’t realised how much something like the Transition Pathway Initiative (TPI) that we created with our Church pensions colleagues, the Grantham Institute and the Environment Agency would win support from peers who asked that us to think carefully about the implications of divesting and to stay invested and engaged. I get a clear sense for why that is now. It’s because we’ve produced strong financial returns, so this is not a NGO campaign, but it aligns our ambitions of being a successful institution financially and responsibly. I see how powerful engagement could be. And when I get a chance to explain it to Church members they see the potential strength of it also.”
TPI uses publicly disclosed company information researched and collated by FTSE Russell to gauge the quality of companies’ management of greenhouse gas emissions against international targets and national pledges made under the Paris Agreement. Minghella notes: “The data for the TPI is rigorously, academically underpinned. Companies can see that we’re not being purely ideological. Investors with over nine trillion dollars worth of assets now back it as a rigorous benchmarking tool for progress. And companies are working with it.”

The big question, of course, is what investors actually expect oil and gas companies to do? Minghella is clear: “We’re expecting them to shift their business models dramatically over time. And we’re looking at ways of measuring them via TPI on two axes, their management approach and performance, because you can get the systems in place but the results can defeat all the efforts. We’re not prescriptive about how they get there. But we expect them to come up with targets aligned with the expectations of Paris.”
Apart from Exxon, is the Church pleased so far with the response?
Minghella says: “I think we’ve seen some extraordinary progress. There have been encouraging steps forward at Shell and BP. We’ve seen Glencore’s statements on coal and Scope 1, 2 and 3 CO2 emissions reporting. But we’ve had some setbacks and disappointments. The Exxon vote was I hope a real wake-up call for them to act. This is now a very significant coalition of large investors – approaching a majority of their shareholders – who want transparency and action.”
The time constraint for engagement and divestment is key, she says: “You’ve got to draw the line somewhere. To stay invested you need to see that the company is going to come in line with the Paris goals within the foreseeable future. We are trying to set out a rational, defensible, empirical, transparent framework for evaluating whether or not we think they are on the right track. One of the strange things about climate change is that people talk about it as though it can be negotiated away, but the scientific evidence says the opposite.”
Minghella says other shareholders in the Climate Action 100+ coalition will make their own decisions about their deadlines for action. But she believes that their willingness to step up at Exxon is an indicator time is running out.Away from engagement, Minghella says policy changes that could support investors’ endeavours on climate include a tougher approach to the price of carbon and reductions in fossil fuel subsidies: “A recent International Energy Agency report pointed out the eye-watering levels of the latter. Then, when we have extreme weather events, the public has to swallow the cost; so we’re paying twice,” she says. In terms of environmentally friendly investments the Church can make that meet its risk/return requirement, one of the biggest in its portfolio, she says, is its forestry holding, now at circa £350m. This is sequestering about 2 million tons of carbon per annum. On its land holdings it also has wind and solar farms with a capacity of 43 megawatts, enough to power more than 20000 homes. She says: “It’s not huge but it’s growing. We’re proud of the fact that we’re able to do those things alongside other smaller holdings in renewables. About 4.5% of our portfolio would now count as low carbon.” She believes equally important work is being done with its broader portfolio. Its biggest third-party fund manager running its listed equities portfolio has a sustainability criteria overlaying every investment it makes, as indeed do all its external managers across all asset classes.
Awkwardly though, as RI reported recently, the carbon footprint of The Church Commissioners investment portfolio has risen over the past five years. Minghella says it is a short-term anomaly because of the way it reports the ratio between carbon emissions and revenues: “When revenues are down, the level of emissions alters the ratio and makes things look worse. If we’d taken the same data one month later the CO2 levels would have been 23% lower. It fluctuates a lot. What’s more important is the direction of travel to get the CO2 level down.”
Another problem the Commissioners will have is
safeguarding its finances. The oil and gas sector are deemed by many investors to be their big dividend income generators, and potential divestment could knock that significantly. Minghella says: “One of the things about wicked problems is that they make you feel overwhelmed when you need to be strategically clear. The strength of the Synod resolution is that it gives us that clarity of purpose and direction. We will have to make those divestment decisions and live with the financial consequences. We take the long view by being as diversified as we can be in terms of asset classes and geographies. And we have an incredible investment team that is always looking to shield ourselves from the ups and downs.” She says the assets committee she chairs is clear about the importance of sustainability in both protecting and enhancing its funds.
Another big issue the Church has been leading on is transparency on mining tailings lakes post the Brumadinho disaster in Brazil where 246 people were killed, and 24 are still missing following a catastrophic landslide. Minghella says: “One of the first things that I did when I became first Commissioner was to help launch our new extractives policy. It was rooted in the advice of the EIAG and looks for leadership from companies on the environment, stewardship, human and labour rights, etc. We are working with the Catholic Church, the Methodist Church and others on this agenda. What we’re looking for now in relation to tailings dams around the world is a very high degree of transparency. We cannot forget that hundreds of people died at Brumadinho. We divested straight away, but we need to know what tailings dams companies have, and what the likelihood is of another disaster happening. Then we can make a responsible decision as investors about whether we stay invested in those companies or not. Brumadinho had a catastrophic effect on the share price, so institutional investors have to be serious. In our experience transparency drives much better behavior.”
That work looks set to escalate after sixty-nine percent of extractives companies failed to respond to an “urgent” investor call for better disclosure about the safety of their mining waste storage facilities: Link to RI story Church is also making a big push on diversity on corporate boards where it believes action has been disappointingly slow. Some 27 FTSE 100 companies, including insurer Prudential, Barclays, the bank, and Centrica, the energy services company, have fewer than 25 per cent female directors. Minghella says: “We’ve been taking firm action voting against chairs of nominations committees at the relevant FTSE 100 companies. I’m shocked to learn that some companies are so far behind when the evidence is clear that diverse boards perform better financially.” She says her time as regulator during the financial crisis showed her that an absolute failure of risk management across many companies, allied to a similar systemic blindness, was ultimately about a culture where groupthink had taken over. With our sustainability hat on we’re saying companies have got to have the kind of culture where different perspectives can be brought to bear on problems. Some boards don’t seem to understand that, so I’m very glad we’re pressing on it.”

Asset allocation of the Church Commissioners: Link

1. Global equities 23.2%
2. Defensive equities 8.1%
3. UK equities 8.8%
4. Private equity 6.1%
5. Multi-asset absolute return 13.0%
6. Timberland and forestry 4.1%
7. Infrastructure 0.7%
8. Commercial property 3.3%
9. Residential property 6.4%
10. Rural let land 8.3%
11. Strategic land 3.0%
12. Indirect property 1.6%
13. Value linked loans 1.2%
14. Emerging market debt 1.4%
15. High-yield bonds 3.2%
16. Private credit strategies 3.2%
17. Cash and cash-like assets 4.3%