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Wouldn’t It Be Nice (if soft engagement was enough)?

By Alex Wilks, Senior Strategist, Sunrise Project

Upbeat music boomed across the huge hall as 2,000 investors, analysts and advisors gathered for the PRI In Person conference in Barcelona in December 2022.

No Beach Boys, although we were a stone’s throw from the sea. But their song “Wouldn’t It Be Nice” came to mind several times as senior investors spelled out how they engage with companies. With lyrics slightly rewritten as:

Wouldn’t it be nice if you were greener?

Then we wouldn’t have to wait so long

And wouldn’t it be nice to cut emissions

In the kind of world where we belong.

You know it’s gonna make it that much better

When we can say good job, engaged together

Wouldn’t it be nice if we could shake up

Your capex plans and your lobby, too.

Playing the role of nice, supportive advisors to companies is nowhere near enough as our world hurtles towards a future of climate breakdown. Five years ago today, the Climate Action 100+ initiative was announced aiming “to drive action on climate change by the world’s largest corporate greenhouse gas emitters”.

According to an October press release from CA100+, the only actions from the vast majority of these companies have been long-term 2050 aspirations and some additional disclosures. With little immediate action: “only 20% have established ambitious medium-term targets that cover all material scopes and are aligned with a 1.5°C pathway”, while fewer than 10% have aligned their capex or their lobbying.

Imagine how much further we would be by now if the now 700 investors involved in that and similar initiatives had used their AGM votes to tell board directors that their jobs are at risk if they continue failing to tackle climate risks.

UN Secretary General Antonio Guterres spelled out to the conference that “private and public investment must phase out fossil fuels” and that there is “no room for non-movers, fake-movers, or any form of greenwash”. Yet much current investor engagement fails to exert discipline on company directors to stop such greenwashing.

Günther Thalinger, a board member of giant insurance company Allianz told the crowded hall in Barcelona “we want to engage more strongly”. Good, and the Net Zero Asset Owners Alliance which he chairs has set out some clear ways that investors can challenge high-emitting companies, and also asset managers.

However other influential investors who spoke in Barcelona appeared to endorse current softly, softly approaches to transform companies. For example, a member of the CA100+ steering committee – Francois Humbert, Engagement Lead Manager at Generali Insurance Asset Management, advocated “more carrots, less sticks”. He went on to give an example of “building trust with companies so that they can ask for help”: connecting decision-makers at CEZ, a Czech power utility, with experts who could help them model the social impacts of shutting down coal plants.

In a session on how to turn around negative political lobbying by companies and industry associations, Charlotta Dawidowski Sydstrand, Head of ESG at Swedish pension scheme AP7, made a helpful distinction. “Engagements are really good” in situations where there is “a mutual understanding” with the company. But “a lot of our engagements are more successful when you at least mention the possibility that you’re prepared to act at the AGM”.

This thinking was amply borne out by the winner of the PRI’s Stewardship award. An independent jury awarded this to Rathbones, a UK-based investment manager, as the coordinator of a Votes Against Slavery (VAS) plan, leading a coalition of 122 asset owners and asset managers managing a total of £9.6 trillion.

The stewardship case study submitted to the PRI summarises that the coalition engaged with 44 companies for failures to tackle modern slavery (forced labour and similar abuses) in their supply chains. The coalition’s success rate is huge: they judge 39 of the 44 target companies as now compliant and have commitments from the remaining five have committed to act. And they emphasise that “This engagement is focused on changing company behaviour, not on mere process or activity.”

The threat of escalation to AGM voting was key. The case study spells out that engagement was “backed by the threat of coordinated votes against the company’s report and accounts”. “When we told one company that Rathbones and other shareholders in the collaboration would vote against the annual report at the AGM, this led to a compliant statement less than 24 hours later. Such is the power of VAS”.

In case the message is not clear, the case study repeats:
“The most important feature of the engagement – and a cornerstone of our theory of change – is the link with AGM voting. Many engagements simply involve writing to companies to advocate improved disclosure. However, VAS members threaten to withhold their approval of the annual report and accounts of non-compliant companies. This is the strongest power of censure available to investors, but one of the least used. We believe the link to public chastisement through an AGM vote is unique among investor collaborations”.

Earlier this year 34 leading global investors worth $7 trillion wrote to 17 large, heavy-emitting European companies warning that they would use audit and accounting-related AGM votes to raise concerns about inadequate climate risk analysis in financial statements. At one of these companies, CRH, audit-related votes were “flagged” by CA100+. But only 2 investors voted in line with the CA100+ flag on CRH. And “relevant votes continue to be waved through by the vast majority of shareholders at companies identified as having inadequate disclosures.”

This follows similar findings in a report by Majority Action and another by ShareAction earlier this year.

There’s nothing to stop investors in CA100+ and similar voluntary schemes replicating the clarity of thought and action exhibited by the investors tackling modern slavery. CA100+ gave itself five years to succeed, a deadline that is now less than 6 months away. As senior decision-makers negotiate a possible extension, it’s the right moment to. Investors that want to be a member of any new phase could easily be asked to set out how they will use routine and resolution votes at AGMs to express their views at companies that the CA100+ benchmark judges to be failing to tackle climate risks.

If the majority of the investors currently doing climate engagement were to do this, we can still decarbonise the economy in time to keep warming below 1.5oC, something that Fatih Birol of the International Energy Agency assured the conference is still possible.

And we can look forward to future PRI conferences including a mass singalong of Queen’s “Another One Bites the Dust” over a slideshow of company board directors that investors have voted out.

Follow Alex Wilks on Twitter and LinkedIn.

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