Earlier this year, one of Meryam Omi’s deputies at Legal & General Investment Management sat down with board members and managers from Exxon to discuss how the oil giant could address the climate crisis. LGIM, which manages about $1.3 trillion, is one of Exxon’s top 20 shareholders.
The Exxon delegation listened, but it didn’t accept the suggestions, says Omi, LGIM’s head of sustainability and responsible investment strategy. Around the same time, Exxon persuaded the US Securities and Exchange Commission to block a shareholder resolution that pushed the oil giant to do more to address climate risks.
So, in June, London-based LGIM announced that it had dumped about $300 million worth of its Exxon shares and would use its remaining stake to vote against the reappointment of Exxon Chairman and Chief Executive Officer Darren Woods. “There’s got to be an escalation,” Omi says.
As the risks of the climate crisis have become more pronounced, so have efforts by major investment firms to push companies in greener directions. They tried talking. Then they started backing shareholder resolutions. Now, LGIM is at the forefront of a more aggressive, and controversial, tactic: divesting. “You cannot have the same conversation for 15 years with no results,” Omi explains. (Exxon responded to LGIM’s announcement by saying that it publishes an annual tally of emissions from its operations and is on track to meet targets for reducing methane emissions.)
Momentum is gathering, says Mark Lewis, who leads climate change investment research for Paris-based BNP Paribas Asset Management. He likens it to the divestment campaign that forced companies participating in apartheid-era South Africa to change course, and he invokes the spirit of Gandhi: “They’ve ignored us and laughed at us. I think now they’re fighting us. So next we win.”
But he knows it won’t be easy. In March, as he helped the BNP Paribas press team put the finishing touches on an announcement that its actively managed funds would exit almost €1 billion ($1.1 billion) of coal stocks as early as next year, he thought the news might cause a few “ripples” and not much more. In fact, Lewis was bombarded with emails and calls, not all of them polite. “It surprised me how big the reaction was,” he says.
Lewis, who earlier in his career was a utilities analyst at Deutsche Bank AG and deputy head of investor relations for German power company EON SE, had formed close business relationships, even friendships, with coal executives. He says the decision to cut coal was painful, but ultimately he had to face the economics.
Demand for thermal coal, the kind used to generate electricity, is declining in much of the world as governments seek to cut carbon dioxide emissions. Some asset managers are deciding it’s risky—for their clients and the planet—to keep shoveling capital into companies with environmentally unsustainable business strategies. This year almost every major public oil company faced at least one shareholder resolution about climate change. Those proposals won record support. (Michael R. Bloomberg, founder and majority owner of Bloomberg LP, in June launched an effort to phase out every US coal-fired power plant by 2030.)
Most money managers prefer engagement to divestment, and funds designed to track indexes have no choice. Climate-Action 100+, a group of money managers overseeing more than $33 trillion, works to influence the largest corporate emitters of greenhouse gases. So far the organisation has persuaded Royal Dutch Shell to set short-term climate targets and publish a report on its lobbying of governments. Members backed a shareholder resolution that asked BP Plc to detail how each new capital investment aligns with the Paris Agreement adopted at the United Nations Framework Convention on Climate Change in 2015. That resolution, supported by BP’s management, won the approval of 99% of shareholders in May. Mining company Glencore Plc has agreed to limit coal production.
Climate Action 100+ members “use this engagement, both the process and the outcomes, to inform their own voting and investment decisions,” says Stephanie Maier, the director of responsible investment at HSBC Global Asset Management, who also serves as chairman of Climate Action 100+’s steering committee. “For certain investors this may ultimately include divestment, but that would only be when all other options have failed.”
Climate activists say the awakening of the world’s money to the perils of global warming is too little, too late. But for some people inside money management, the speed of change is hard to believe. At LGIM, Nick Stansbury says he remembers the day in December 2016 when he was called into a meeting with about 25 of his fellow portfolio managers. Understanding the implications of climate change was going to become a priority, they were told.
Stansbury says he already had deep misgivings about the future of the oil market. Oil companies’ value depends on investors believing that demand for crude will always grow. For 100 years, that belief had been justified. But if renewable-energy sources gain market share and crude demand stutters, the market would go haywire, he says. That could trigger a huge re-rating of major oil companies—of which LGIM holds more than $12 billion in shares. “It was a lightbulb moment,” he says.
He spent a year analyzing different parts of the energy market to try to draw some conclusions. But he knew his clients wanted more. On an airplane from Oslo to London in early 2018, staring at a blank piece of paper, he pondered how to build a comprehensive financial model. He’d need data (lots of it), a team of analysts, and months to work on it. He got what he needed. When the model ran for the first time in October, it took hours to go through its paces.
The results confirmed his fears: Tiny tweaks to government policies could cause oil demand to halve or to almost double by 2050. The crude market could become exceptionally volatile, and investors would probably start fleeing within the next five years. The model helped LGIM rank companies most at risk to climate change. “Uncertainty around the level of demand growth creates massive instability in the way oil markets work, and that has all sorts of implications for investors,” says Stansbury, who’s now head of commodities research.
LGIM’s Omi says this kind of rigorous analysis has persuaded big companies, typically resistant to change, to begin making serious strategic shifts. When LGIM divested some oil company stocks last year, she says, some of the fund managers protested, “These are really good stocks!” She replied, “I know they might be good stocks for you, but these are the rationales. This makes sense for our clients.”
© 2019 Bloomberg L.P.