Why did some fund managers vote against the Exxon/Chevron climate resolutions?

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Prior to the historic Paris Agreement to reduce global greenhouse gas emissions, investors gained support at BP, Shell, Statoil and other companies for resolutions asking them to stress test their portfolios against a scenario where the 2°C goal is achieved. These measures passed with nearly 100% investor support, feeding hopes that the Paris accord would inspire continued success this year. Yet similar measures failed at Chevron and Exxon, attracting roughly 40% in favour. Where did the other 60% of voters go? Preventable Surprises launched the Missing60 initiative to hold to account those investors who believe that non-U.S. companies should publish the annual scenario analyses but who reversed course in the U.S. The risks arising from climate change—and fiduciary duties—are not bound by geography, so why should investors have different expectations of management in different countries? The question is somewhat facetious. The management of BP, Shell, and Statoil supported the 2°C stress test resolutions, while management at Exxon and Chevron not only advised a vote against the measures but even lobbied the SEC to keep the resolutions off the ballot. The question becomes why did 60% of investors prize loyalty to management above their right—we would argue their duty—to challenge boards and executives to show that their business models are fit for purpose in a 2°C-aligned world? Shortly before its annual general meeting, Standard & Poor’s downgraded Exxon from its coveted triple-A credit rating due to high debt levels. Yet only 40% of shareholders demanded a public accounting of how these high-cost, debt-funded fossil fuel ventures would fare in the face of increased emissions limits.
As SEC filings this month have revealed the positions taken by large investors, Preventable Surprises contacted some of the largest Missing60 voters, as well as a cross-section of asset owners and managers who supported stress tests disclosures. The explanations for their votes follow.BlackRock believes that the engagement it does with thousands of investee companies is a more effective weapon in combatting climate change than resolutions targeting a few select companies, according to Michelle Edkins, a Managing Director at BlackRock and Global Head of Investment Stewardship. She would not comment specifically on the Exxon and Chevron votes, but spoke broadly about BlackRock’s approach to stewardship. While some U.S. companies want to dismiss ESG issues as a niche interest among
labour unions and environmentalists, BlackRock uses its position as the world’s largest asset manager to make clear that it sees climate risk as material. “Engagement is as much us sharing with them as them telling us their views,” she said. “It’s an open exchange of opinion and perspective based on trust. If they give a clear sense that they get the point and are willing to adapt, we give them time.” She also noted that exposure to climate risk is a systemic issue requiring a systemic solution: “We are actively participating in the market-level debate. This is a systemic risk that you can’t diversify away from.” BlackRock is a member of the FSB’s Task Force on Climate-Related Financial Disclosures (TCFD) and Edkins is involved with organisations such as the Sustainability Accounting Standards Board (SASB) and the International Corporate Governance Network. In 2015, BlackRock co-published with Ceres a guide to help U.S. institutional investors engage with companies on sustainability issues.
Edkins, who started her corporate governance career in 1997 at Hermes Pensions Management, said in her experience policy development is most effective when it’s practitioner led. She said FSB TCFD and SASB are both examples of groups aiming to produce practitioner-developed outcomes that are more effective than a top-down approach that can lead to unintended consequences. “There are a lot of promising things happening at a market level that will lead to better disclosure and to consistency among peers,” she said.
Preventable Surprises appreciates the importance of private engagement, but we also believe that transparency underlies the proper functioning of markets. Private conversations between privileged investors and
executives prevent investors who are not privy to those conversations from making informed choices. Greater transparency is needed in fossil fuel companies’ efforts to identify and address climate risk.
While we applaud BlackRock’s work on a policy level, we also note Exxon’s ongoing funding of the American Legislative Exchange Council, which has long promoted climate change denial to state legislators and promotes “model” bills designed to protect the interests of its oil, gas and coal funders. The reality is that Exxon has known for decades the damage done by carbon emissions and has consistently worked to impede a regulatory response. Responsible investors must not condone such behaviour through proxy votes.
Vanguard provided the following statement: “As a matter of policy, we generally abstain from voting on proposals (typically on environmental and social topics) that we do not believe have a clear link to increasing shareholder value. The vote aside, if the topic of the proposal is something we believe to have long-term value implications, we will engage with the company to understand their processes for overseeing and managing those risks.” On its website, Vanguard relates that it discussed shareholder proposals with a large oil and gas company. “After analyzing the issues underlying the (resolution), we have encouraged the company management to make specific improvements in how it assesses the severity of these risks, communicates to shareholders about the risks, and works with key stakeholder groups to improve practices.”
Preventable Surprises: Like BlackRock, Vanguard is content with private conversations, leaving the rest of us to wonder what questions were asked, what answers were given, what are the repercussions if promises are broken? Given that Exxon has forecasted 25% growth in oil consumption over the next 24 years, it is clear its leadership has not been able to think in terms of a transition to a low-carbon future. Vanguard asserts that there is no link between the stress test proposals and shareholder near-term valuations. Bank of England Governor Mark Carney calls this the tragedy of the horizons: Investors who do not anticipate a short-term impact will not act to address long-term risk, even as ice shelves dissolve, species disappear, and systemic risk builds. Carney created a task force that is designing a consistent and transparent system for reportingclimate risk. Systemic risk by nature is pervasive, inter-related, and unpredictable, as the housing crisis showed. As a dominant passive investor, Vanguard should be a leader in leveraging its ownership position to address climate risk. By not holding Exxon and Chevron to the same standards of disclosure as at other oil majors, Vanguard is condoning industry laggards.
BNY Mellon’s statement emphasized that its investment arm is made up of more than a dozen investment management boutiques and a wealth management division, and each votes “in the best interest of its clients and in accordance with the clients’ investment practices.”
Preventable Surprises: Like BlackRock and Vanguard, several of BNY Mellon’s subsidiaries are signatories to the Principles for Responsible Investment (PRI). The third principle states: “We will seek appropriate disclosure on ESG issues by the entities in which we invest.” Global warming is humankind’s most pressing and obvious risk; it is difficult to understand how investors who oppose disclosure of these risks can remain PRI signatories.
Fidelity Investments statement said the company votes “based on an evaluation of a proposal’s likelihood to enhance the long-term economic returns or profitability of the portfolio company or to maximize long-term shareholder value. Where information is not readily available to analyze the long-term economic impact of the proposal, FMR will generally abstain.”
Preventable Surprises believes that the Paris accord has made it untenable for asset managers to ignore the risks to their beneficiaries posed by carbon-intensive portfolio holdings. We will work toward proxy votes in 2017 that will force laggard companies to recognize and respond to the paradigm shift that the Paris accord represents.

In tomorrow’s part 2 of this article we look at the fund managers voting in favour of the same resolutions, as well as some of the broader voting data from the AGMs

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