In 2021, a proxy contest at ExxonMobil led by activist investor Engine No. 1 resulted in the appointment of three directors selected by shareholders rather than management to Exxon’s board.
But two years on from that iconic moment, has the nature of engagement with companies on climate and other environmental themes delivered meaningful results?
It was my pleasure to discuss this topic as part of an expert panel at the Oxford Sustainable Finance Summit this month, and it seems the answer is “it’s complicated”.
Looking back, it appears that 2021 was a high-water mark for asset managers’ support for climate action. The COP26 Climate Conference, held in the UK, had particularly high representation from the finance community.
So, 2021 saw the birth of the Net Zero Asset Managers initiative (NZAM), as well as relatively high support from asset managers for environmental and social shareholder resolutions at company AGMs.
Two years on, analysis by Morningstar and others shows that high support has not been repeated. Also, a number of asset managers are questioning (and sometimes ceasing) their continued participation in climate-focused collaborative engagement initiatives like NZAM and Climate Action 100+.
What has changed in two years?
2021 was an unusual year, in many ways. At a time just after the worst of the pandemic lockdown-era, people re-gathering at COP26 for the first time in a couple of years may have led to some groupthink regarding the kind of climate action asset managers could commit to.
It’s true that broad agreements were reached two years ago on the intention to decarbonise the economy, and financial investment portfolios along with it. But those agreements were light on the specific actions needed to achieve those goals.
In the two years since, there have been several consultations on regulation and standard-setting initiatives, particularly in the US and the EU, and by the International Sustainability Standards Board, also set up in 2021. These have prompted asset managers to be much more specific about what they want investee companies to do to address climate-related risks, and how they should report material information.
The consultation process has surfaced significant differences between asset managers on their level of climate ambition, and it seems that many see it as their role to demand clearer reporting, rather than ambitious action, from companies on climate.
And it would be difficult not to notice that an “ESG backlash” has emerged in the US that has challenged the positive atmosphere around climate conversations that existed two years ago.
All this has prompted a rethink of what effective climate engagement means, and what its goals should be in 2023 and in future.
Hitting the reset button on engagement
Engagement with oil and gas companies on climate change has continued for years with little progress on emissions reduction to show for it. This has prompted questions about whether it was ever realistic to believe that the sector is capable of a self-directed transition to net zero. Two years on from the proxy contest, ExxonMobil – like practically all other oil and gas producers – remains focused on increasing fossil fuel production.
Asset owners in the UK have begun to lose patience with the oil and gas sector for their lack of response to engagement. A key example is the Church of England Pension Board’s decision to divest from oil and gas companies with emissions targets not aligned with limiting global warming to 1.5°C.
Several asset owners also voted against incumbent directors and proposed climate strategies and supported ambitious shareholder resolutions this proxy season, in protest at the slow progress (and sometimes, backtracking) from the oil and gas companies on climate action.
But asset owners have also grown frustrated with asset managers over perceived misalignment with their own engagement objectives. Increasingly, asset managers will be asked to demonstrate how their engagement and proxy-voting approach lines up with their clients’ long-term ambitions on environmental protection. Calls for asset managers to allow their clients a greater say in proxy-voting decisions (as some of the largest managers are already doing) will also increase.
Whatever happens on climate engagement from now on, it’s clear that we’re in a very different era from two years ago. The expectations on companies and asset managers to demonstrate – not just commit to– progress toward net zero have never been higher.