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Climate Change: Investors Hold the Key

A groundswell of investor concern about the impact of the climate crisis on the value of investments has continued throughout 2020, notwithstanding the ‘distraction’ of the COVID-19 pandemic.

At the beginning of the year, BlackRock, the world’s largest asset manager, led calls for change, insisting that companies take appropriate measures to account for and mitigate climate risk. Whilst some market observers may be skeptical, the impact of such statements made so publicly by such a significant global market force cannot be underestimated. In parallel, regulatory and reporting obligations on listed companies have continued to evolve; it is increasingly clear that UK-listed companies wishing to avoid climate-related action by shareholders will have to ensure proper compliance with enhanced reporting obligations, as well as being significantly more responsive to shareholder concerns about the environmental impact and sustainability of their businesses.

BlackRock letters

On 9 January 2020, BlackRock signed up to the Climate Action 100+, an investor initiative to ensure the world’s largest corporate greenhouse gas (GHG) emitters reduce GHG emissions, improve governance and provide enhanced climate-related financial disclosures. 

A few days later, on 15 January, Blackrock’s CEO, Larry Fink, published two open letters: one to the CEOs of the companies in which it invests[1]; the other to its clients[2], referring to the inextricable links between investment policy and matters such as commercial risk, sustainability and climate change, environmental and social corporate governance (ESG).

In his letter to CEOs, Fink mentions that investors in Blackrock’s funds, “recognizing that climate risk is investment risk”, ask more questions about climate change than any other issue. He observes that the inherent tendency of capital markets to “pull future risk forward” means that there will be a “significant reallocation of capital” due to climate change. He points out that asset managers must anticipate this if they are to achieve the long-term value investors require.

Fink also comments on access to information about companies’ management of climate risk. He calls for “a clearer picture of how companies are managing sustainability-related questions”, where “each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders”.

In his second letter, to BlackRock’s clients, Fink describes initiatives to ensure that BlackRock’s investment policies absorb climate-related risk. Strategies include increasing the focus of ESG matters in investment planning, developing more investment products that have ESG considerations matters at their core, and using BlackRock’s substantial voting power to bring climate and other ESG considerations to the heart of each company’s purpose, so that investors may “understand if they are adequately disclosing and managing sustainability-related risks, and…hold them to account through proxy voting if they are not”.

Investor power

Although it is clear there is still some road to travel, the Blackrock letters certainly brought into focus how investors have the power to shape positive action on climate change, indicating a shift in thinking as to what may be required of institutional investors to discharge the legal duties owed to their principals and, in turn, what the institutional investors will require from the companies in which they invest.

On 19 April 2020, eight investment groups, including BNP Paribas Asset Management, Comgest Asset Management and DWS, maintained that public companies struggling to ride out the COVID-19 pandemic must not postpone or abandon measures to reduce GHG emissions if they wish to continue receiving investment[3]. On 22 April 2020, Günther Thallinger, Chair of the Net-Zero Asset Owner Alliance, a group of institutional investors with over $4.6tn in assets under management, insisted that “recovery plans [from COVID-19] can and must lay the foundations for an irreversible shift to a resilient, net-zero and inclusive economy” [4]. Similarly, in its Engagement Priorities for 2020, BlackRock makes clear that it will vote against directors whose companies do not make sufficient progress on disclosure and management of environmental risk[5].

In the past six months, numerous companies involved in fossil fuel-intensive industries, including BP, Royal Dutch Shell, Rio Tinto and Vale, have set targets to reach net-zero GHG emissions by 2050. Further, on 19 May 2020, over 150 global companies signed the UN-backed Recover Better Statement that calls on governments to align all COVID-19 recovery efforts with ambitions to achieve net-zero well before 2050.  

At first glance, this suggests that many companies, conscious of the changing requirements of their shareholders, have concluded that adopting a ‘business as usual’ approach simply will not wash when it comes to climate change. However, whilst net-zero declarations represent tentative steps in the right direction, setting targets for 30 years from now perhaps lacks ambition, particularly where these targets do not constitute legally binding commitments. 

Shareholder resolutions

It is clear that collective ‘muscle’ could well be used by shareholders to push for more meaningful corporate commitments on climate change, but action by shareholders in this area, whilst increasing, remains patchy. 

On 7 May 2020, shareholders at Barclays’ AGM voted on “Resolution 30”, a motion coordinated by the non-profit organisation ShareAction, that demanded Barclays set, disclose and report annually on targets “to phase out” financing for companies in the energy sector whose actions are not aligned with the goals of the Paris Agreement[6]. The resolution did not ultimately pass, receiving the support of only 23.95% of votes cast despite significant investor engagement on the issue in the preceding months[7]

Notwithstanding the thrust of Larry Fink’s open letters published four months earlier, Blackrock, one of Barclays’ ten largest shareholders, followed the bank’s formal recommendation in voting against Resolution 30[8] and supporting the bank’s own resolution instead, which sets “an ambition” to achieve net-zero GHG emissions arising out of financing activities by 2050[9]. It passed with 99.93% of votes cast in favour.

This example clearly demonstrates that asset managers with large shareholdings can hold the key to pass climate resolutions. BlackRock and fellow asset managers Vanguard, who together control the largest blocks of shares in almost every publicly traded company in the United States, have an opportunity to be real drivers of change in this sense[10].

In the last two months, climate shareholder resolutions have been filed at meetings of the oil and gas giants Ovintiv, Woodside and Santos, mining group Rio Tinto, and US bank JPMorgan Chase. The resolutions demanded that the companies set climate targets in line with the goals of the Paris Agreement and provide greater disclosure of measures they will take to achieve this. The only motions passed were those filed with Ovintiv and Woodside. This is illustrative of the challenge activist shareholders face: tabling climate resolutions will not be enough; they need those investors with enough voting power to support those resolutions if they are to achieve meaningful corporate action.

Conclusion

The relationships between companies, asset managers, and underlying beneficial shareholders continue to evolve as the commercial imperatives of climate change and ESG-related issues take hold. We expect to see further changes in this sphere in the UK with an FCA proposal (which would take effect from 1 January 2021) to force companies with a premium listing to make climate risk disclosures using guidelines from the Taskforce on Climate-related Financial Disclosures[11].

It seems likely that investors will continue to scrutinise companies’ climate and environmental strategies, and their investment decisions may be influenced by companies’ climate-related disclosures (or lack thereof) with increasing regularity. The more we see companies and institutional investors like BlackRock translate publicly-stated intentions into significant action on climate change, the greater our chances will be of beating the climate crisis.

With thanks to intern James Hilton for co-authoring this blog. 

Footnotes

[1] https://www.blackrock.com/uk/individual/larry-fink-ceo-letter

[2] https://www.blackrock.com/uk/individual/blackrock-client-letter

[3] https://www.ft.com/content/b019e52e-3555-48b5-ada9-d77655bc4f7d

[4] https://www.responsible-investor.com/articles/post-covid-recovery-packages-must-quicken-the-pace-to-net-zero-carbon-emissions

[5] https://www.blackrock.com/corporate/literature/publication/blk-stewardship-priorities-final.pdf

[6] https://shareaction.org/wp-content/uploads/2020/01/Barclays-Plc-2020-shareholder-resolution-ShareAction.pdf

[7] https://home.barclays/content/dam/home-barclays/documents/investor-relations/reports-and-events/AGM2019/AGM%202020%20Poll%20results%20RNS.pdf

[8] https://www.blackrock.com/corporate/literature/press-release/blk-vote-bulletin-barclays-may-2020.pdf

[9] https://home.barclays/content/dam/home-barclays/documents/investor-relations/reports-and-events/AGM2019/NOM-2019.PDF

[10] https://static1.squarespace.com/static/5d4df99c531b6d0001b48264/t/5d8006692e5b035cf0d2b17f/1568674165939/assetmanagerreport2019

[11] https://www.fca.org.uk/publication/consultation/cp20-3.pdf

Related Lawyers: Lianne Craig, Simon Bishop
Related Practice Areas: Commercial Disputes, Human Rights and Environmental Disputes

Related Lawyers