‘Investor-Led Revolution’ Pulls Financing Away from Fossil Fuels
The rise of the socially-conscious investor is forcing the rapid evolution of responsible climate policies within the corporate sector, with CEOs and their boards recognizing that profitability—and sometimes, survival—will depend upon pleasing an increasingly vocal and powerful constituency.
“A milestone in the investor-led revolution,” writes Globe and Mail energy analyst Eric Reguly, was passed during Kinder Morgan Inc.’s May 9 AGM in the United States, when “shareholders delivered a wake-up call to the company by passing two environmental resolutions, both of which the company had strenuously resisted.”
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The second resolution “was the biggie,” giving Kinder Morgan until 2019 to “produce a detailed report on the impact of its business on the internationally recognized goal of limiting the global temperature increase to 2.0°C,” Reguly states. “The so-called two-degree scenario (2DS) resolution also required Kinder Morgan to tell shareholders how it plans to transition to a low-carbon future.”
“As you are probably aware, these proposals are non-binding,” Executive Chair Rich Kinder said in a statement following the vote. “However, the Board will carefully consider the proposals and the information contained in the supporting statements in determining what actions to take with respect to them.”
And Reguly notes that Kinder Morgan is not the only corporation being held to ethical account in 2018: “According to Ceres, an American advocacy group that pressures companies to run sustainable businesses, a dozen other oil and gas and electricity generation companies, when threatened this year with shareholder resolutions, also committed to producing 2DS reports.”
It adds up to “a lot of financial firepower pushing companies into getting serious about disclosing their potential environmental liabilities, climate change adaptation strategies, and carbon reduction plans,” he writes. “In the case of Kinder Morgan, big gun shareholders included the Vermont state treasury and America’s largest pension fund, the California Public Employee’s Retirement System.”
Which means that, if companies aren’t taking climate action seriously of their own volition, “investors will take them by the ear and twist.”
One Canadian most willing to apply such pressure is Michael Sabia, CEO of the “all-powerful Caisse de dépôt et placement du Québec, one of the world’s top 20 pension funds, with about C$300 billion in assets under management.”
Demanding of his portfolio managers that “the carbon footprints of their collective investments…fall by 25% by 2025,” while at the same time “insisting that the value of the Caisse’s portfolio of low- and zero-carbon assets…rise by 50%, the equivalent of $8 billion, by 2020,” Sabia “has emerged as one of the driving forces—perhaps the driving force—behind persuading companies to take climate change seriously,” Reguly writes.
And Sabia is “no nature freak chomping away on bark sandwiches,” he observes, but rather “a man whose career lives and dies by investment returns.” He’s also one of a growing number of fund managers who recognize the riches that will accrue from investing in the low-carbon economy—and the peril that attends sticking with fossil fuels.
Critical in securing, and nurturing, the growth of sustainability reporting was the formation of the Task Force on Climate-related Financial Disclosures s (TCFD) by Bank of England Governor Mark Carney and ex-New York mayor Michael Bloomberg.
Established to encourage companies to be transparent about climate risk, both to “help them make the transition to a low-carbon economy and [to] allow investors to put a price on their investments’ potential liabilities, from flood risk to stranded assets,” the TCFD has since secured the support of “over 250 companies and pension funds, with a combined market value of more than $6 trillion.” Canadian signatories include Barrick Gold, Suncor, and the Royal Bank.
What such companies are recognizing, writes Reguly, is that “carbon output, or lack thereof, is now integrated into the day-to-day thinking of the new generation of investors.” Unlike their grandparents, or even their parents, “who mostly wanted fat returns and damn the planet,” many millennial investors care very much about their environmental future. And portfolio managers the world over are taking note.
In a separate report, the Institute for Energy Economics and Financial Analysis (IEEFA) writes that Climate Action 100+, “a group of 289 investors with nearly US$30 trillion in assets under management”, has expanded its reach to include 61 companies “with significant opportunities to accelerate” the changes necessary to keep average global warming below 2.0°C. The group originally formed in December 2017 to engage 100 of the world’s top emitters in climate action.
“The five-year engagement initiative,” IEEFA reports, “aims to convince companies to implement a strong framework for board oversight and accountability on climate change, reduce emissions, and disclose climate risks and plans” consistent with the TCFD’s final recommendations. The hope is that the voluntary guidelines at the core of the initiative will germinate into “an internationally consistent way for companies to assess and publicly disclose potential financial risks associated with climate change.”
“Climate Action 100+ was among a number of movements involving state and local officials, businesses, and investors in the U.S. who committed to advancing the goals of the Paris Agreement on climate change” after Donald Trump decided to withdraw the country from the deal, IEEFA notes.
Most recently, Reuters reports, President Emmanuel Macron of France has thrown his support behind an initiative by “sovereign wealth funds managing more than $2 trillion” to “pressure companies to be more climate-friendly.”