Investors drop nice-guy role on climate change laggards

Institutional investors and others are using new tactics to push oil and gas companies to get serious about climate change.

Traditional shareholder methods of getting energy companies' attention, like shareholder resolutions or corporate engagement, will not be enough to meet the Paris Agreement goal of bringing greenhouse gas emissions to zero within the second half of the 21st century, investors say.

One of the most dramatic steps came Dec. 9, with New York State Comptroller Thomas P. DiNapoli's announcement that the $226 billion New York State Common Retirement Fund, Albany, will divest from the riskiest oil and gas companies by 2025 and decarbonize the entire portfolio by 2040.

The move follows the 2018 announcement by New York City Comptroller Scott Stringer and Mayor Bill de Blasio that the $211 billion New York City Retirement Systems would start a five-year plan to divest fossil fuels.

Divestment "is a last resort," Mr. DiNapoli said in the announcement, but it will be used if companies don't follow the pension fund's guidelines for transitioning to a low-carbon global economy.

Given New York State Common Retirement Fund's sizable holdings in fossil-fuel companies like Exxon Mobil Corp. and the ambitious goal to decarbonize the portfolio by 2040, the announcement "is the biggest thing in divestment internationally," said New York state Sen. Liz Krueger, who backs divestment legislation.

"I have no question that other states and localities around the country will be looking at this and asking, 'Why can't we do this?' I think this is the beginning of a movement that will sweep the country," Ms. Krueger said after the announcement.

Exxon Mobil also is feeling heat from the $254.7 billion California State Teachers' Retirement System, West Sacramento, which is supporting a shareholder campaign to shake up the energy giant's board of directors.

CalSTRS, which holds more than $300 million of Exxon Mobil stock, is backing Engine No. 1, an activist investment firm that in a Dec. 7 letter told the company it will nominate independent director candidates with strong energy industry experience at the company's 2021 annual shareholders meeting.

Citing the unique challenges facing the industry and a changing world, plus the company's underperformance and the board's lack of outside energy experience, "it is time for shareholders to weigh in," the Engine No. 1 letter said. It also called for serious plans for renewable energy, cost-cutting and management compensation reforms.

The goal, said Aeisha Mastagni, portfolio manager for CalSTRS' sustainable investment and stewardship strategies, "is to get new voices inside the boardroom. We are making sure we have the right alignment of interests in terms of the executive team," as opposed to the current board, which doesn't have experience in the energy industry or with energy companies in transition, she said. "This is providing a solution that we hope will drive performance."

"We've tried other tactics," including shareholder proposals with majority support "that the company has basically ignored," Ms. Mastagni said. "These other traditional engagement tactics have failed."

Investors will get critical backup from BlackRock Inc., which in 2021 plans to turn up the pressure on carbon-intensive companies to transition to a low-carbon economy and push for board directors capable of helping to achieve that. Instead of the 440 carbon-intensive companies it focused on during the last proxy season, it will now target 1,000 companies — representing 90% of major global emissions — for possible actions that include voting against directors. It will also be spending more time assessing the impact of climate change on the companies' business models, said Michelle Edkins, managing director and global head of BlackRock's investment stewardship team in New York.

"What we are seeing is growing urgency from investors to see (energy) companies set out meaningful transition plans, and a willingness to engage companies. There is growing recognition that more could be done," Ms. Edkins said.

Ms. Mastagni of CalSTRS also credits investor groups like Climate Action 100-Plus for harnessing the collective power of shareholders to get other energy companies to take climate change seriously. The global initiative now has more than 500 signatories with a collective $47 trillion under management, including CalSTRS and major asset managers such as BlackRock, Vanguard Group and State Street Corp.

The organization now engages with 167 companies globally to deliver Paris Agreement-aligned emissions cuts, implement strong climate governance frameworks and improve climate-related disclosures.

Another coalition of global investment organizations representing more than $103 trillion in assets is calling on companies and auditors to have their publicly released financial results reflect the effects of climate change.

"Ten or 15 years ago you did not see this collective action. I think these collective groups are shifting that resistance in the U.S., said Ms. Mastagni of CalSTRS. "Things are constantly evolving. It's about ensuring resiliency. It is part of what we are calling activist stewardship."

U.S. energy companies are also feeling pressure from European counterparts like BP PLC and Total SE, which have committed to achieving net-zero carbon emissions, said Andrew Logan, senior director of oil and gas for Ceres in Boston.

"European companies are making bold commitments, which is changing what investors are asking companies to do," he said.

"Going after the board is probably the most obvious way, after a decade or more of investor frustration. Ultimately the board works for the investor, so they have to be responsive" and understand that climate change belongs on the agenda, Mr. Logan said.

Between recent changes at the Securities and Exchange Commission, including no-action letters backing companies and tighter rules for shareholder proposal submissions, "investors see fewer opportunities to file shareholder proposals, which is forcing them to take other avenues. Investors are going to pursue this through other means. The board is emerging as the other target and I think we will see more withholding of votes at other companies," Mr. Logan said. "Investors aren't going to go away. They'll find other ways to make their voices heard."

There are also numerous lawsuits being filed by state and local governments against oil and gas companies seeking to hold them accountable for climate change-related pollution and inadequate disclosure.

There are now at least 24 such lawsuits, including one that the U.S. Supreme Court may weigh in on early next year, that some advocates compare to those against Big Tobacco.

Big Oil "is facing significant risk from a lot of different quarters, including competing sources of energy and even their own investors. It's just more reason for these companies to rethink their business," Mr. Logan said.