Investors can, through carbon exposure metrics driving divestment and reallocation strategies, reduce the emissions intensity of their listed equities portfolios without having any direct or immediate impact on emissions in the real economy. As above, this is concerning in itself, but risks can be mitigated where company engagement practices and initiatives respond forcefully and with a clear and transparent strategy to address systemic risk.
However, in this section we raise a further concern: the potential for conflict, within a fund or a collaborative engagement initiative, between divestment/reallocation behaviour and engagement activity, particularly where a divestment decision is taken in circumstances where engagement behaviour has been non-exhaustive. It is crucial that participants in collaborative engagement strategies grapple with these conflicts.
Key questions include:
Where, for instance, a participant in the Climate Action 100+ initiative divests or substantially sells down a stock for which it has responsibility as ‘lead’ or ‘support’ engager, what are the implications for CA100’s ongoing engagement with that company?
What engagement and escalation tools should peer collaborative engagement participants expect a ‘responsible divester’ to have deployed before taking such a decision?
Are there shareholder strategies, particularly legal avenues, that can and should be explored post-divestment?
Should divestment by a fund with collaborative engagement responsibility for a company be read as evidence that successful engagement with that company is unlikely? If so, shouldn’t that be disclosed to the rest of the initiative and indeed other stakeholders relying on engagement strategies to drive down real world emissions?
These are not merely hypothetical concerns. The broad and increasing uptake of intensity metrics by CA100 participant funds implies widespread divestment and reallocation activity by those same funds.
Funds tend to be guarded about these decisions. We have been reliably informed of a handful of examples where divestment or substantial downselling has, or is likely to have, happened among lead CA100 engagers, but have as at the date of publication been unable to confirm these decisions on publicly available material.
According to the NZAOA, “transformation in the real economy is a must if we are to reach the ambitions set in the Paris Agreement… Holding a large proportion of low-carbon assets or divesting out of high-emitting ones will not be enough”. For universal owners such as superannuation funds, reducing the carbon intensity of portfolios must be complemented by a focus on reducing emissions in the real economy (the position of passive asset managers will be considered in a subsequent report). Furthermore, they must ensure that companies are actually reducing emissions rather than simply divesting emissions intensive businesses or shifting emissions up their supply chain. Low or declining emissions intensity may give clients and beneficiaries a potentially inaccurate impression that fund strategy is driving declining emissions in the real economy, and that the entirety of climate risk is being managed effectively. Transparency will be critical to ensure ease of comparison and accountability for decisions made.
NZAOA states that engagement is “the mechanism through which the impact on real world emissions is most likely to materialise”, but implies that investors should be willing to provide the necessary capital for the transition “so long as the sector activities are transformable to a net-zero economy”. In Australia, numerous investors have concluded that companies involved in the extraction and combustion of thermal coal fit the criteria for divestment, as outlined in Section 5. While NZAOA argues that “there is currently limited empirical evidence to support a divestment beyond coal and distressed segments of the oil and gas sector”, some investors have already decided that broad divestment from the oil and gas sector is warranted.
Investors seeking to reduce their emissions intensity through divestment or selling down must consider the implications for their engagement practices and avoid the false economies of reduced portfolio intensity.
8.1 Transparency around divestment and escalation
As outlined in Section 5, many ethical and some mainstream investors have been divested from companies materially involved in thermal coal mining for several years. In 2020, several Australian funds announced their divestment from two widely held, Australian thermal coal companies, New Hope Group and Whitehaven Coal. However, none of the funds that announced their divestment from these companies in 2020 had disclosed their reasoning or timeline for doing so, prior to divestment. Notably, for the last three years, remuneration reports and the re-election of directors at both companies were passed with an average of 98% shareholder support. This level of support suggests that either investor discontent with the strategy of the two companies is very recent, or that discontent did not translate into voting behaviour—a key company engagement and escalation tool—over that timeframe. In our assessment, the latter is substantially more likely, and speaks to a failure of institutional investors to fully comprehend the levers of engagement and escalation available to drive company decarbonisation.
Of the superannuation funds that announced divestment from thermal coal companies in 2020, none publicly declared their intentions prior to divestment. Arguably, one of the most important aspects of divestment is the signalling to other companies and investors. If divestment affords power, one of its key components was not utilised. To date, divestment decisions by Australian investors have not had as much impact as they could have had, had they been transparent about the conditions which would result in an escalation to divestment, prior to the act itself.
Those investors that have set short- or medium-term emissions reduction targets for their entire portfolios are unlikely to achieve equivalent emissions reductions across all asset classes. As discussed in Section 5, Aware Super was able to reduce the emissions intensity of its equities portfolio by 40% virtually overnight. It is unlikely to achieve this outcome in its infrastructure or property portfolios as quickly. If the reduction in carbon exposure in listed equities portfolios is likely to be greater than that achieved in other asset classes, then it implies an even greater inconsistency with companies that have yet to set ambitious targets for 2030 or sooner. AGL Energy, for instance, does not intend to close its remaining two coal-fired power stations until 2035 and 2048. For investors that have set themselves targets for 2030, AGL Energy may simply become uninvestable.
Beyond private conversations, the IIGCC Net-zero Investment Framework (Section 5), suggests the following pathways for escalation, where engagement has failed to deliver an outcome over several years:
voting against the board, remuneration policy or annual report and accounts if the company is not on track to achieve its plan and targets for a period of two or more years;
voting against Mergers & Acquisitions (M&A) unless the post M&A company meets or can be expected to meet targets within a reasonable period; and/or
co-filing and/or supporting shareholder resolutions.
While there has been increasing support for shareholder resolutions in Australia in recent years, few institutional investors have co-filed resolutions, and no Australian institutional investor has filed a resolution itself. This is despite mounting evidence that shareholder resolutions are a powerful tool to elicit shifts in company behaviour: recent analysis by BlackRock shows that “[w]here a shareholder proposal received 30% to 50% support the company fully or partially met the request of the proposal 67% of the time.”
ACSI’s comprehensive analysis of climate commitments by companies in the S&P/ASX200 index found that while climate risk disclosure is steadily improving, emissions reduction targets aligned with the Paris Agreement are limited.
ACCR’s analysis of the 25 largest emitters in the S&P/ASX200 suggests that investors could focus their attention on a relatively small number of companies to achieve significant change. Investors must be willing to engage forcefully, using all the tools available to them, in order to drive change within listed companies.
The climate commitments made to date by various Australian investors suggest that there is a vast discrepancy between their own commitments and those of the largest emitters in the S&P/ASX200. The current commitments by many of Australia’s most carbon intensive companies, including AGL Energy, Rio Tinto, South32 and others, are inconsistent with those of a growing number of investors, who are likely to divest from those companies unless their commitments are sufficiently ratcheted up in the near term.
8.3 Climate solutions
The IIGCC Net-zero Investment Framework (Section 5) recommends investors set a goal for the allocation of a percentage of assets under management or revenues to climate solutions. Similarly, the Divest-Invest movement suggests investors that divest from fossil fuels reallocate the funds to climate solutions, rather than simply reallocate the capital to existing shareholdings.
To date, there is little evidence to suggest that Australian investors that have divested from fossil fuel companies have reallocated those funds to climate solutions. While many funds have invested in renewable energy, energy efficiency and energy storage solutions, these decisions appear to be made independently of divestment from fossil fuels.
Following its divestment in November 2020, Aware Super announced a $30 million investment into battery storage hubs in New York City, but it is not clear that this was a direct reallocation of the proceeds from its listed equities divestment.
Some funds may be limited by their strategic asset allocation, which would restrict how much capital could be reallocated from listed equities to infrastructure or property, for instance. Some investors may choose to reallocate capital to other listed companies that prioritise climate solutions, be they renewable energy utilities, electric vehicle manufacturers or mining companies extracting minerals required for zero-emissions technologies. Investors must consider what happens beyond divestment. Investment in climate solutions is not prescriptive, and there are myriad opportunities for investors to promote climate action.