It’s around this time of year, as proxy season gets underway, that Olivier Elamine starts receiving letters and emails from investors.
“There are normally about 50, and you can tell they’re mostly copy-and-pasted because they’re the same letter,” says the CEO of Alstria. “They tell me: ‘We manage X billion euros of assets and we care deeply about ESG, so we would really appreciate it if you could do more. Thank you very much. See you later.”
On paper, Alstria’s business model is about as conservative as it comes: it’s a Frankfurt-listed, BBB+ rated Real Estate Investment Trust that buys, owns and manages offices in Germany. But that’s a far cry from the description Elamine gives it.
“We like to say we’re an activist company, just like there are activist investors,” he says. “We are turning the tables on the conversation, and pushing investors to make sure they’re managing the topic.”
The topic he’s talking about is climate change – more specifically the decarbonisation of industry to bring the world in line with the goals of the Paris Agreement. And Elamine has a lot to say about the current state of dialogue between corporates and shareholders.
“When I have a shareholder phone me and say: ‘There’s low-hanging fruit and it would improve your returns’, my feedback is: ‘That’s not managing ESG, it’s just managing my business. If I manage my business properly, I should already be doing all this business-friendly stuff to reduce emissions, because it’s a no-brainer. We shouldn’t even be discussing this.”
‘If I ask somebody in the street if they are prepared to sacrifice €0.01 to save the planet, they are likely to say yes… But speak to the large funds and it’s much harder. And the reason it’s much harder is because they haven’t had that conversation with their ultimate owner yet’
What the private sector should be discussing, he argues, is the much more complicated reality of reaching the Paris Agreement. And, from where he’s sitting, it isn’t going to be as business friendly as everyone keeps saying.
“As a CEO, reading Larry Fink’s letter was remarkable,” he says, referring to the statement the CEO of BlackRock makes to the heads of the world’s businesses each January – the most recent one of which focused heavily on sustainability.
“He said, very rightly, that we need to address climate change. And he said, very rightly, that it will require a reduction in CO2 emissions of between 8% and 10% per annum. To put that into perspective, that’s roughly what we achieved during the global pandemic.” (Studies suggest emissions fell between 6% and 13% in 2020.) “And then in the next sentence he said it will be a great business opportunity. How can it be?”
If reaching the goals of the Paris Agreement was a good business opportunity, Elamine continues, it would be happening at a much faster pace already: “We need to acknowledge that somewhere along the line, it stops being about the business opportunity – that good business decisions alone won’t get us there – and we need to accept, collectively, that it will come at a cost. Only then will we be able to achieve it.”
In a bid to address this idea, Alstria’s board last year put a proposal to their investors. For each share, Alstria would offer a €0.01 ‘green dividend’, which shareholders could vote to have paid out to them, or remain with the company to spend on pre-identified decarbonisation projects that wouldn’t be done under business-as-usual.
“Here’s the thing: as a business, we’re becoming greener as fast as we are able to without deteriorating our returns,” says Elamine. “A building should only be retrofitted and made more energy efficient at a certain point, from a profit perspective; but investors are telling us to accelerate the process.
“As a manager, that leaves you with an impossible equation to solve, because there is literally no limit to how much you could spend to speed up decarbonisation, so then the question is: what’s the right number and who decides it? Is it me as the CEO? Is it the board? Or is it the shareholders?”
The answer, for Elamine, is clear: it’s the shareholders. “This isn’t my money,” he says, bluntly, and points to his legal obligation to deliver shareholder value. But, in turn, shareholders are pointing to their legal obligations to deliver returns.
"We get requests to be greener, but when I’m on a roadshow, speaking to investors behind closed doors, and I explain to them the cost of doing that, they say: ‘Oh, hold on a minute, I have a duty to my own shareholders, so what is all this talk of reducing returns?’”
This dynamic comes through heavily in the results of the green dividend vote: 95.1% of shareholders voted to have the €0.01 dividend paid out to them, instead of being used on green projects. The retail vote, however, was split down the middle – a result that Elamine believes needs to be at the centre of the conversation about ESG and sustainability.
“If I ask somebody in the street if they are prepared to sacrifice €0.01 to save the planet, they are likely to say yes, because they’re not bound by fiduciary duty. But speak to the large funds and it’s much harder. And the reason it’s much harder is because the large funds haven’t had that conversation with their ultimate owner yet. The retail vote last year shows that the ultimate owner is much more likely to back something that slightly reduces returns but also reduces the risk of climate change. This is the reality, and the vote highlighted the need for more conversation along the entire investment chain.”
Alstria will repeat the vote at its next AGM in May, but with some changes. Elamine says investors found the question complex, and asked for the option of voting on a project instead of a dividend. So the next vote will put forward two projects – one internal (the installation of rooftop solar “that does not meet our financial return expectations”), and one external (funding open source carbon capture technologies, including an NGO called Project Vesta). If shareholders back the plans, the 2022 dividend will be reduced by €0.01 to fund them.
“But this is not really about the one cent dividend, because in the grand scheme of things, it doesn’t matter. It’s about starting a dialogue with shareholders,” says Elamine. “This is about stakeholder value, and getting that right is difficult because it involves arbitrage between two priorities and, as CEO, I report to one side – the investors that own the business – so I need to make sure they agree with me. But too often they just tell me: ‘Go and do the arbitrage and we’ll decide afterwards whether we’re happy with the results’. As owners, their responsibility is bigger than that.
“As a manager, I have no problem being told by shareholders that they don’t want to do things. Then I can decide as a citizen and a father whether I want to work for a company like that. But this fundamental dialogue about responsibility is not taking place right now.”
Instead, too much of the focus is on public image, he continues, explaining that – ahead of last year’s ‘green dividend’ vote, one fund called him up to ask if Alstria would publish the results of the votes, because that publicity would influence the investor’s decision (his answer was ‘no’, individual results would remain confidential).
“But it’s also the obsession with Net Zero,” he adds. “Alstria is not a Net Zero company, and we’re not about to become a Net Zero company, because we simply don’t know how to operate our business without emitting carbon yet.” The firm has offset its emissions for the past three years, but Elamine says it isn’t advertised widely “because that’s dangerous”.
“People outside the business world think these claims mean something they don’t – they think everything is being sorted out when it isn’t. The last thing this problem needs is more marketing, and that’s all those claims are.”
What’s needed is the opposite, he argues: a reality check.
“Society needs to acknowledge that Net Zero will require activity to be down as much as in lockdown, every year for the next 30 years. That is the reality. So surely it’s more responsible to tell the truth about that than to come up with Net Zero claims.”