By Fiona Reynolds, CEO, Principles for Responsible Investment (PRI)
Investors, as active owners and stewards of capital, have an obligation to engage with business to drive long-term value creation for their clients and beneficiaries. Given the climate emergency that the world is facing, it’s a priority for many investors to focus on industries such as the oil and gas sector to mitigate climate change – which is a permanent, structural risk for institutional investors. The world’s central banks have just reinforced this view.
A number of companies – including Shell, BP and Equinor – are responding to investors’ engagement and concern by starting to take action on reducing emissions in line with the Paris Agreement. Others, in particular Exxon, are notable for their unwillingness to engage in a meaningful dialogue with investors and provide assurance that their strategy is consistent with the goals of the Paris Agreement.
Some may say that Exxon is just one company – but it is not just any company. The stance it takes on climate has significant influence across the global energy sector as we move towards a low-carbon economy with rapidly falling technology costs. For more than a decade, investors have been putting resolutions before Exxon around climate and carbon issues, including aligning its strategy with the Paris Agreement. Some investors are questioning if the board is responding reasonably, asking if it is looking to work with long-term owners on disclosure, transparency and preservation of value through the coming transition.
The company announced this week a commitment of up to US$100m to research technologies that could cut greenhouse gas emissions. This is welcomed, but it doesn’t address investors’ concerns about how the company is managing the low-carbon transition.
Along with many investors, we have noted with concern the recent ruling by the SEC noting that Exxon is not required to let its shareholders vote on setting greenhouse gas targets. Proposed changes to shareholder rights in the US, imposing more onerous requirements on investors that submit proposals for a vote at a company’s AGM, are also concerning, and the PRI is actively engaged with the SEC to support shareholders’ rights.
Recently, the Church Commissioners for England and New York State Common Retirement Fund filed an exempt solicitation with the SEC for the Exxon AGM. Part of this solicitation is for the separation of chairman and chief executive roles, with an implicit link between governance and climate strategy and engagement. Exxon has claimed that these investors are misrepresenting their position on these issues in an effort to influence voting at the AGM later this month.
There are also growing calls for investors to vote against the re-election of board members who are not taking action to address a company’s climate risks and to disclose those actions to shareholders.
The crucial role of corporate governance is clear, as across all sectors there is a strong link between good corporate governance leading to increased shareholder value and in turn greater returns for long-term investors.
Investors are lifting their engagement on climate issues, the ask Force on Climate-related Financial Disclosures (TCFD) process is gaining momentum and every global company has a responsibility to contribute to meeting the Paris Agreement. Many boards are heeding this message. What happens to boards who don’t…only time will tell.