The ESG investment momentum has run up against energy supply disruptions since the Russian invasion of Ukraine. As shareholders at the biggest energy companies are asked to vote—again—on various climate resolutions, many investors continue to call for more transparent and detailed plans for how firms intend to align with the Paris Agreement goals. Others, such as the world’s top asset manager, BlackRock, expect to support fewer shareholder proposals this AGM season compared to 2021 as it finds that climate-related shareholder proposals have become unduly more prescriptive and micromanaging.
Sure, large institutional investors are not abandoning the ESG trend or insistence that companies need to be prepared to change as the energy transition progresses. But some, including BlackRock, acknowledge the current energy market pressures and the need for investment in both traditional and renewable energy sources.
Fund managers want companies to double down on the energy transition, which has become an even more urgent topic of conversation after the Russian war in Ukraine and Europe’s subsequent struggles to cut—and ultimately eliminate—its dependence on Russian fossil fuels.
Yet, energy security and economic stability in the short term appear to override the longer-term drive to accelerate the transition toward green energy sources.
Investors are also looking to shift their focus onto actual outcomes instead of on simplified ESG ratings that are based on policy statements.
BlackRock: Investment In Both Traditional And Renewable Energy Needed BlackRock said in early May that “many of the climate-related shareholder proposals coming to a vote in 2022 are more prescriptive or constraining on companies and may not promote long-term shareholder value.”
“Importantly, in the context of voting on shareholder proposals regarding climate-related risk, companies face particular challenges in the near term, given under-investment in both traditional and renewable energy, exacerbated by current geo-political tensions,” BlackRock Investment Stewardship (BIS) said.
“This set of dynamics will — at least in the short- and medium-term — drive a need for companies that invest in both traditional and renewable sources of energy and we believe the companies that do that effectively will produce attractive returns for our clients.”
That’s why BlackRock is likely to back proportionately fewer climate-related resolutions this proxy season than in 2021, as it does not consider them to be consistent with its clients’ long-term financial interests, the asset manager said.
Doubling Down On Energy Transition
Still, investors are not backing down on seeking active engagement with companies and demanding detailed, credible energy-transition plans.
“The way out of the situation we currently find ourselves in is not to abandon the energy transition but to double down,” Nick Stansbury, head of climate solutions at the UK’s largest fund manager, Legal & General Investment Management (LGIM), told the Financial Times.
Last month, LGIM said in its ‘Active Ownership’ report for 2021 that “We believe voting against a company is a powerful tool to express our views and concerns on key thematic issues such as climate change and diversity, as part of our ‘engagement with consequences’ approach.”
LGIM welcomed in its report “positive steps” taken by ExxonMobil to commit to net-zero emissions for operated assets by 2050, as well as BP’s strengthened climate targets announced in February 2022.
“We engaged with BP’s senior executives on six occasions in 2021 as they develop their climate transition strategy to ensure alignment with Paris goals. Following constructive engagements with the company, we were pleased to learn about the recent strengthening of BP’s climate targets, announced in a press release on 8 February 2022, together with the commitment to become a net-zero company by 2050 – an ambition we expect to be shared across the oil and gas sector as we aim to progress towards a low-carbon economy.”
Change Of Focus
Investors are also increasingly looking to affect change in the companies they are invested in, rather than just picking firms with the best ESG scores on paper.
“What do ESG scores tell us about anything?” Ben Caldecott, director of the UK Centre for Greening Finance and Investment, told FT. “They are mainly measuring processes and policies — if a company has a policy in place against deforestation it will get a good score, even if it is deforesting.”
Others are shifting focus to the industries that use the energy produced by oil and gas companies. For example, the Church of England Pensions Board said earlier this month that after co-leading the investor process to establish the first Net Zero Standard for the oil and gas sector, it is shifting focus this year to industry sectors.
“This will see the Board step down from leading engagement with Shell and begin co-leading engagement with Europe’s largest car manufacturers, BMW, Mercedes-Benz, Renault, and Volkswagen,” the board said.
“If the demand for energy doesn’t change, those companies that are supplying it won’t change. We have developed an exacting global net zero standard for the oil and gas sector, which companies that wish to retain their social license can implement. Ultimately those same companies’ ability to deliver on their targets will largely be shaped by a change in demand for oil and gas from sectors like autos, aviation and shipping” said Adam Matthews, Chief Responsible Investment Officer at the Church of England Pensions Board.
However, with energy security concerns front and center and governments prioritizing energy supply in the biggest energy market shock in decades, demand for oil and gas is set to rise in the short term, while chronic underinvestment would plague supply in the medium term.