Only a year ago one of the great corporate ironies was witnessed when the world’s institutional investors, including many CDP and PRI signatories, voted with BP management in agreeing that BP didn’t need to disclose one of its key environmental risks. A few days later, oil started spilling into the gulf signalling one of the greatest environmental disasters and largest stock repricing events in history. We can only wonder how advisers and funds felt having just supported the board so soon before it became clear that serious risk management practices pertinent to the company’s financial health had been omitted. Yesterday’s protests at BP’s 2011 AGM show the continuing anger of those affected by the oil spill. But for shareholders the horse bolted some time ago. Roll forward 12 months to next week and asset owners have the perfect chance to make amends and drive a leading high emitting company to manage another environmental risk: carbon policy. Next week, Australia’s first climate change shareholder resolution is tabled. The resolution is against Woodside Petroleum, one of Australia’s largest emitters and one set to become a major global player in the liquid natural gas market.
Last year’s Fair Pensions/Co-op shareholder resolution at BP concerned disclosure of its carbon price and other commodity price assumptions. We now understand that both BP and Shell use US$40/tonne, still a highly optimistic number for a base case given the expectation of carbon prices after 2020. Woodside use no carbon price and cite a lack of certainty in local Australian policy for such optimism. They claim that to use any carbon price in a base case would be misleading to investors. Indeed it is, with zero being the most misleading of all!The real debate here lies in the probability and likelihood of rapidly tightening carbon policy after 2020 and how asset owners manage that probability. Most of their exposure is far into the future but that exposure is what BHP CEO Marius Kloppers recently referred to as inevitable.
Woodside Petroleum, like BP, is a manager of capital that belongs to its shareholders. It is not the job of a company to seem to want to use optimistic assumptions about its future in order to further the flow of capital for future projects. But human nature, greed and perverse incentives mean that this is the reality for asset owners. So how can the uncertainty be managed? If you are an asset owner, you might hedge your portfolio. If you are a high emitter you could always invest to reduce emissions to reduce the risk. For companies like Woodside, it is not risk management that will be measured in basis points…it will become a case of manage the risk or disappear. To be fair to companies like Woodside, it is a big leap to expect boards to suggest investing large percentages of earnings to invest in emission reduction technologies. However, their owners could easily drive them to this position, and indeed must.
The difference between fund managers and asset owners in this regard has never been more stark. The cosy relationships between boards, fund managers,analysts, brokers and proxy advisers is a club that the asset owners need to remove themselves from. Most in that club are incentivised over the short term and thus want to deal with certainty, whereas the obligation of the asset owner is to manage the uncertainty.
Woodside and others cannot continue to tell shareholders that their money hangs on either the vain hope of climate change disappearing under the carpet or the carbon capture easter bunny miraculously appearing in the post. The short termers might buy that yarn, but asset owners should reject it out of hand.
In light of Citi’s research that one third to half Woodside’s stock value depends on the carbon price assumption contained in the resolution, surely it is time for asset owners to make the leap from ESG integration to material risk management, and it all starts with disclosure. In the aftermath of the BP Oil Spill and share price destruction, several funds sought action against the company. If the carbon price scenarios outlined in the Mercer report eventuate and companieslike Woodside lose huge amounts of value, members of pension funds might well look back to resolutions like Woodside and ask if there was a reasonable opportunity for their pension funds to have acted to drive the company to reduce emissions exposure. The Woodside resolution, rather like BP, is only first base – mere disclosure of the risks. In the big world of investment, cosy relationships and conservative values, it is all too tempting not to rock the boat. If the sub-prime crisis is one day replaced by its big brother sub-clime, members might one day look back at the early opportunities their pension funds had to take action. Is there a lawyer in the house?
Julian Poulter is a Director of the Climate Institute of Australia and Executive Director of the Asset Owners Disclosure Project