In a recent stewardship update, BlackRock, the world’s largest asset manager, warned that it will support fewer shareholder resolutions on climate change this year because they have become too extreme and prescriptive.

The asset manager’s stewardship arm, BlackRock Investment Stewardship, BIS, stated how the US Securities and Exchange Commission’s revised guidance on shareholder proposals has broadened the scope of permissible proposals resulting in a marked increase in environmental and social shareholder proposals of varying quality coming to a vote.

“Our early assessment is that many of the proposals coming to a vote are more prescriptive and constraining on management than those on which we voted in the past year,” said BIS.

Elsewhere the note, which suggests a shift in stance since BlackRock pledged to up its use of its voting powers to influence sustainability in the thousands of listed companies in which it invests, stated how companies face challenges in the near term given under-investment in both traditional and renewable energy. It has resulted in an energy shortage that is now exacerbated by current geo-political tensions.

With this in mind, BIS said it is particularly wary of shareholder proposals to thwart financing traditional energy companies. Similarly it is unlikely to support resolutions which force companies to decommission assets or set absolute Scope 3 emission reduction targets. Moreover, BIS noted that other investors and global proxy advisors ISS and Glass Lewis have been recommending that shareholders not support overly prescriptive or constraining proposals either.

Looking out on today’s landscape, the note states that BlackRock is not likely to support resolutions that it deems to micromanage companies. This includes those that are unduly prescriptive and constraining on the decision-making of the board or management; call for changes to a company’s strategy or business model, or address matters that are not material to how a company delivers long-term shareholder value.

In 2021, BIS supported 47 per cent of environmental and social shareholder proposals in a strategy it says is designed to be both consistent with long-term value creation but not unduly constraining on management in pursuing their strategies to create shareholder value.

Push back

Elsewhere, evidence is growing that the energy crisis is leading other investors to back off pushing for climate resolutions at the big oil groups. Follow This, a small activist investor and campaign group based in the Netherlands with stakes in several oil groups, saw support for its climate resolution at BP’s recent AGM drop to 15 per cent from 21 per cent last year.

“BP may have convinced investors that addressing the current energy shortage overrides addressing climate change,” said Mark van Baal, founder of Follow This in a response. “Neither our climate resolution nor BP’s strategy have changed; their current strategy still does not lead to emission reductions by 2030. However, investor sentiment apparently has changed, likely as a result of the energy crisis and windfall profits brought on by the war in Ukraine.”

Elsewhere, shareholders in US oil and gas producer ConocoPhillips didn’t support a proposal to include Scope 3 greenhouse gas emissions in its emissions reduction targets, with only 39 per cent of shareholders voting in favour of the motion.

This contrasts with last year when companies faced an upsurge of shareholder support for resolutions and votes on environmental and social issues. Like ExxonMobil, forced to take on three new directors on its board, marking a landmark win for activist investor Engine No. 1.

 

Tailings dams, the vast toxic lakes used to store the by-products of mining operations encapsulate the sustainability challenge in the mining industry. Often built cheaply, more dams are collapsing in an increasing trend impacting communities and families in a sector where waste is treated as an externality rather than as part of the business.

Three years ago, the Church of England Pensions Board, CEPB, looked again at how it engaged with companies on the subject. The problem lay with the pension fund engaging with mining groups, seeking assurances and disclosure on their tailings operations, rather than engaging with the problem itself.

“You’ve got to engage the issue and address the problem,” said Adam Matthews, chief responsible officer, CEPB, speaking at Sustainability in Practice at Cambridge University.

That meant getting up to speed on tailings dams; finding out how many companies have them and the universal standards (there were none) under which they operate. “We understood what we needed to start to push for,” recalls Matthews. Three years down the line, CEPB was armed with data on which listed mining groups have tailings dams and where they are located. It found some dams pose huge risks sited next to communities – while others are well run and in remote areas.

In 2020 the industry adopted a universal standard, the Global Industry Standard on Tailings Management, reached as a consequence of investor pressure alongside the support of the UN and PRI, and industry buy-in. “Investors were at the table, driving the process,” said Matthews. “We need to get to the point where we can be assured all dams are operating to the Standard, practices are changing and boards know this is a major priority for their investors. “In a next step, CEPB has started to vote against companies not committing to the Standard.

Water and accesss to minerals next

The pension fund is also isolating other issues in the mining sector similarly critical to the transition and which pose uncomfortable questions for companies. These include sustainable water use and access to minerals. For example, most car companies’ electric vehicle production targets are not connected to the reality of their existing supply chains. Elon Musk recently tweeted Tesla may get into the lithium mining and refining business directly and at scale because the cost of the metal, a key component in manufacturing batteries, have gotten so high.

“We are looking at issues to ensure how this sector addresses systemic challenges,” says Matthews.  “If we are going to meet demand, we need more mines and expansion, yet new mines can take many years to come on online.”

Matthews noted how investors need to get tougher when they engage; engaging with an attitude and interventions that reflects the size of the challenge. CEPB is invested in a number of mining groups, but Matthews said any change has to be sector-wide. One company may do well like Anglo American where he named outgoing CEO Mark Cutifani as crucial to helping drive forward climate and environmental plans – but when others pollute or neglect workers’ rights, the whole sector loses its social licence. “You get external pressure on you, asking how you can invest in a sector that kills people.”

Universal owners

Matthews stressed the importance of working with others. Rather than trying to drive change alone he stressed the importance of building partnerships with other like-minded asset owners to drive systemic change. “There are strategies you are able to deploy once you understand your position,” he said.

Matthews said that pension funds do have legitimacy to push for change. They are acting on behalf of their members to shape issues on a global scale. Still, he noted investors do have a careful path to navigate because some action points are areas for governments – although he noted areas where governments should act, but don’t. The mining industry is crucial to society, yet one of the worst industries at managing systemic change, he said.

Delegates heard how for universal owners, externalities created in one part of the portfolio will be paid for in other parts yet universal owners can’t stock pick their way out.

Universal owners can have an impact via their asset allocation, and the threat of divestment does scare companies. “Tactics are available to universal owners to get companies to change their behaviour,” said Ellen Quigley, sustainability advisor to the CIO, University of Cambridge, who is also a senior research associate at the Centre for the Study of Existential Risk.

She said oil companies will see their cost of capital rise if fewer banks lend to them. She urged investors to engage with banks given most new capital flowing into fossil fuels comes via bank loans and bond issues. She added investors can also steer clear of fossil fuel infrastructure because it is visible and not data dependent.

 

 

There are eight million different species on the planet, of which one million are threatened with extinction. “We have seen a catastrophic loss of species in the last 50 years” said Mike Maunder, executive director, Cambridge Conservation Initiative representing ten organizations including global NGOs and specialist conservation groups working to explore the role of society, business and investors in securing a biodiverse future.

Much of the planet’s biodiversity (the sum of all living things on the planet and their interactions) is still unknown – scientists are still exploring fungal and bacterial realms of life.

Speaking at Sustainability in Practice at Cambridge University, Maunder said it is possible to halt biodiversity loss in our response to climate change, restoring landscapes and seascapes. “We know how to rebuild nature,” he said. He also noted how biodiversity literacy in the finance and business world is poor: the fog comes down and the conversation gets stuck.

Smell the coffee

He noted how domestication of biodiversity needs to carry on. But he warned that the crops that serve us today won’t be the crops of the future; food chains are going to change. Coffee’s path from the wilds of Ethiopia to domestication via the Middle East and Europe is a powerful story of crop domestication. “Modern coffee can be traced to five plants. There is a tiny genetic base for one of world’s greatest crops,” he said.

Yet today, coffee faces risks from diseases, climate change and soil quality. Pollination of coffee crops is also threatened by increased night temperatures. “It is a fragile environment,” he warned. He said the decline in soil health, the loss of pollinators and invertebrates and the wider loss of genetic diversity removes our response to climate change via breeding alternatives. “We need to go back to those wild relatives,” he said.

The impact of biodiversity loss in developed countries is different to poorer nations. Here it impacts where farmers can craze their cattle, or if people can catch fish to feed their family. He noted how 70 per cent of world food production comes from vulnerable small farmers warning that if they struggle to produce food, it will threaten global security. Biodiversity loss causes migration away from degraded land, leading to migration and all the accompanying misery.

Soil

Maunder said that one third of agricultural land is losing its topsoil and degrading, prevalent in Europe and North America’s wheat producing lands. “We need to look at the future of soil when we are thinking of food,” he said. He blamed carbon-rich fertilizers and said once soil health is restored, and organic matter builds back, the need for inputs declines. He stressed the importance of stopping agricultural advancement into new pristine landscapes and urged for the end of the incentives that make food production harmful for biodiversity.

Maunder said that tools do exist to halt the loss. A red list reveals where business activity imposes most losses on nature; he said businesses already know how to build sustainable supply chains. He said biodiversity can be rebuilt in the circular economy, with investment targeting natural regeneration and future proofing business.

Investors should look at a company’s entire activity and identify the risk and dependencies linked to nature. Once investors begin this mapping exercise, they can turn the relationship around.

Pandemic

He also noted that the risk of another pandemic is high because human health is closely intertwined with our environment. “We are very vulnerable to animal disease,” he said. “Covid was not a one off, there are a swarm of potential infections.” He said the risk of disease was another argument for halting forest loss and noted the growign number of diseases in domesticated crops like oranges and bananas.

He noted how biodiversity loss and the climate crisis increasingly overlap. “Climate doesn’t exist on its own,” he said. When natural capital is lost, we measure it in flooding and agricultural collapse in a cost to society that finally begins to resonate. “When business suffers it [biodiversity loss] rises up the agenda,” he concluded

 

Investors should avoid oil companies advocating a business-as-usual growth strategy. US oil giant Exxon has pursued a business-as-usual growth strategy that has underperformed the wider market and peers, said Mike Coffin, head of oil, gas, and mining at Carbon Tracker Initiative who said shareholders of the oil group have only been rewarded because of the cyclical nature of the oil industry.

He said that unlike food production or transport, oil and gas cannot be decarbonised. Oil and gas groups should set goals with an absolute basis for reduction that incorporates end use emissions and downstream products, not just their Scope 1 and 2. He said these targets need to be framed to protect investors; companies plans must be appropriate, exclude divestment and not too dependent on unproven technology.

A low carbon, Paris-aligned world will result in a rapid decline in global demand for oil and gas. This means there is no need for new projects, and existing assets will be able to meet demand. “There is already enough oil and gas out there from production from existing projects to supply demand in 1.5-degree scenario,” he said.

Limiting warming to 1.65 degrees would only allow a small number of new projects to go ahead, yet Coffin said some oil and gas groups are planning a whole range of projects that would go over this scenario. These projects will be stranded; they will destroy investor value and will take the world over emissions targets.

He said that these projects will also take companies up the cost curve in pursuit of growth that amounts to a bet against Paris. “Companies sanctioning these projects are not Paris-aligned.” He suggested oil and gas groups should let their existing assets decline naturally in a runoff strategy that is better for investors and the environment. Alternatively companies can reframe their business away from oil and gas, and either return money to shareholders or invest in new, long term green projects.

No excuse

Coffin said the energy crisis, most prevalent in Europe, following Russia’s invasion of Ukraine shouldn’t put growth back on the table for oil and gas groups. Projects take five years to come to fruition, and demand will rapidly weaken over the next decade, he said, warning of  prices crashing and projects being left stranded. “If you sanction projects now, even if there is demand now, when projects are up and running demand will be in a decline phase.”

Coffin said that if petro-states claim alignment to the Paris goals, they can not justify supporting new projects, and are investing based on short-term prices with risky lead times.

Fellow panellist Mark Campanale, founder, Carbon Tracker Initiative called what lies ahead the biggest reallocation of capital in history. He said the technology behind internal combustion has not changed much in 200 years – it remains inefficient, cyclical and geopolitically dependent. In contrast, renewables are more efficient, not cyclical and once installed are not as volatile as fossil fuels.

He said that all the cheap access to fossil fuels has been found, noting that transporting fossil fuels will become more expensive. In contrast, renewable energy gets cheaper the more it is built. “This is the key distinguishing factor,” he said.

As the price of renewable energy falls, so competition steps up. He said that he had encountered policy makers who didn’t realise that renewable energy is cheaper than fossil fuels. “Renewables are experiencing falling rates and will continue to,” he said. He also noted that ESG-aligned private equity investment does not equate to capital flowing into renewable energy. He said investors need to allocate directly to the sector, especially in the global south.

He noted that the rise in electric vehicles will increasingly dampen oil demand in a trend most visible in China where electric busses are increasingly prevalent. He said air pumps will displace gas boilers where technology and take-up will also lead to a sharp drop in their price. This will be another factor leading to markets discounting fossil fuels.

Earnings calls

Elsewhere he noted how references to carbon in earnings calls has risen sharply. “Climate and carbon have become one of the crucial topics for boards and earnings calls,” he said.

Campanale said that Exxon’s decision to continue to build more capacity and volume echoed companies like Blockbuster video and Kodak that both missed the digital revolution.

He noted that the business model of oil and gas groups is based on producing a product cheaply to sell at a higher price, yet renewable energy is not built on the same model. Oil and gas is high risk; renewables are based on long-term returns. Oil and gas groups could wind down and return money to shareholders, invest in renewables or become providers of new technology around carbon capture for industries that can’t decarbonise.

The panellists also reflected on the importance of aligning executive pay with the transition, something that still doesn’t happen. Executives in the oil and gas sector are still incentivised to grow production.

In this live recording from Sustainability in Practice, hosted by Top1000funds.com at Cambridge University in April 2022, Professor Julian Allwood speaks with Colin Tate.

About Professor Sir Julian Allwood

Julian Allwood is Professor of Engineering and the Environment at the University of Cambridge. From 2009-13 he held an EPSRC Leadership Fellowship, to explore Material Efficiency as a climate mitigation strategy – delivering material services with less new material. This led to publication in 2012 of the book “Sustainable Materials: with both eyes open” – listed by Bill Gates as “one of the best six books I read in 2015.”

Julian was a Lead Author of the 5th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) focussed on mitigating industrial emissions. Amongst others, he was elected as a Fellow of the Royal Academy of Engineering in 2017.

From 2019-24 he is director of UK FIRES – a £5m industry and multi-university programme aiming to explore all aspects of Industrial Strategy compatible with delivering zero emissions by 2050. ‘Absolute Zero’, the first publication of UK FIRES attracted widespread attention including a full debate in the House of Lords in Feb 2020, and has led to a string of other reports, research and impact.

In this live recording from Sustainability in Practice, hosted by Top1000funds.com at Cambridge University in April 2022, Professor Sir David King speaks with Amanda White.

About Professor Sir David King

Professor Sir David King is Emeritus Professor of Chemistry, University of Cambridge; Founder and Chair of the Centre for ClimateRepairin the University; Chair of the Climate Crisis advisory Group; an Affiliate Partner of SYSTEMIQ  Limited;  Senior Strategy Adviser to the President of Rwanda and founder member of the Clean Growth Leadership Network, CGLN. He served as Founding Director of the Smith School of Enterprise and the Environment at Oxford University, 2008-2012, Head of the Department of Chemistry at Cambridge University, 1993-2000, and Master of Downing College Cambridge 1995 – 2000.

He was the UK Government Chief Scientific Adviser, 2000-2007, the Foreign Secretary’s Special Representative on Climate Change, 2013-2017, and Chair of Future Cities Catapult, 2012-2016. He has travelled widely to persuade all countries to act on climate change. He initiated an in-depth risk analysis approach to climate change, working with the Governments of China and India in particular, and initiated a collaborative programme, now known as Mission Innovation, to create a £23bn pa research and development international exercise, which involves 22 countries and the EC, to deliver all technologies needed to complete the transition into a fossil-fuel-free world economy.

In June 2021, he launched the Climate Crisis Advisory Group,CCAG, a global team of 15 climate experts drawn from 10 countries who give monthly public (virtual) meetings on their work, available to all. CCAG are able to respond, with authority and quickly, to current needs in the process of protecting our future, with advice on the actions needed to deliver this effectively and safely.

He was born in Durban, educated at St John’s College Johannesburg and at Witwatersrand University, graduating in Chemistry and a PhD in physical chemistry. He has received 23 Honorary Degrees from universities around the world.

As Govt Chief Scientific Adviser he raised the need for governments to act on climate change and was instrumental in creating the British £1 billion Energy Technologies Institute. He created an in-depth futures process which advised government on a wide range of long-term issues, from flooding to obesity. He was Member, the President’s Advisory Council, Rwanda, and Science Advisor to UBS, 2008-12

He has published over 500 papers on surface science and catalysis and on science and policy, for which he has received many awards, medals etc. and 23 honorary degrees from universities around the world.

Elected Fellow of the Royal Society in 1991; Foreign Fellow of the American Academy of Arts and Sciences in 2002; knighted in 2003; made “Officier dans l’ordre national de la Légion d’honneur” in 2009.  In Feb 2022 he was awarded the David and Betty Hamburg AAAS award for Science Diplomacy