The EQ Positive Impact Portfolios invest exclusively through funds, rather than directly in the underlying companies. We are active investors, and an ongoing dialogue with our fund managers is core to our investment process. By doing so we can influence their voting practises at annual general meetings while pushing them to report more on their impact.
Why do we need shareholder activism on issues like climate change?
Finding, producing, moving and using oil can harm the environment through air and water pollution. Consequently, the EQ Positive Impact Portfolios have no exposure to oil producing companies. However, we have been concerned by the level of denial shown by a number of the big oil majors in regards to the transition towards a low-carbon economy.
According to a study published in the Nature Journal, a third of oil reserves, half of gas reserves and over 80 per cent of current coal reserves should remain unused from 2010 to 2050, in order to prevent the average global temperature rise caused by greenhouse gas emissions from exceeding 2 degrees Celsius above pre-industrial levels.
However, since the Paris Agreement on climate change was adopted by more than 150 countries in 2015, we have seen a number of oil companies investing in tar sands in Canada and drilling in the Arctic. Therefore we decided to keep a close eye on the 2016 and 2017 Annual General Meeting (AGM) seasons to see how this problem would be addressed.
Case study: ExxonMobil AGM 2016/17
With an annual turnover of $218.6 billion in 2016, ExxonMobil is the largest listed oil company in the world. In 2016 it produced 4.1 million barrels of oil per day. As part of the engagement process with its shareholders, Exxon holds an annual general meeting to vote on motions, the outcomes of which, although not legally binding, guide the committee as to the shareholders’ views for the direction of the company.
In 2016, a motion was put forward by the Church Commissioners for England & New York State Comptroller Thomas DiNapoli, a Trustee of the New York State Common Retirement Fund. This stated that ExxonMobil management should analyse the impact of reducing its oil and gas reserves in line with the 2 degrees target. The motion was drafted in response to increasingly vocal complaints that, compared to other oil companies, Exxon was not doing enough to address climate change.
However, the motion only received backing from 38 per cent of shareholders. We were extremely disappointed to discover that the two biggest asset management companies in the world, BlackRock and Vanguard, decided to vote against this motion. As a result, we decided to engage with BlackRock and Vanguard to try to understand why.
BlackRock said that they prefer direct dialogue with the companies to voting against motions. Vanguard agreed to a meeting with their Global Head of Corporate Governance. From that meeting, we gathered that a number of other investors, particularly in the Nordic region had criticised their position and that Vanguard was intent on improving its engagement work with companies.
At the 2017 AGM, the same motion was again proposed and this time an astonishing transformation took place. 62.2 per cent of shareholders backed the motion with much of the support coming from traditionally passively managed companies.
According to BlackRock, following the 2016 motion they took a closer look at both Exxon’s reporting of climate change risks and the views of their own shareholders. These results, together with frustration at Exxon’s refusal to facilitate a meeting between BlackRock and Exxon’s Directors, resulted in BlackRock voting for the 2017 motion and even threatening a vote of no confidence in Exxon’s board unless changes were made.
Vanguard confirmed that they too had supported the motion, claiming that their reassessment of the motion, in regards to a relationship between the proposal and long-term shareholder value of the company, caused them to re-evaluate their views.
Such changes in asset managers’ opinions are encouraging and EQ Investors will continue to engage with them to encourage further support for climate action and change to their long-term strategies.
Read EQ’s recently published five-year review of their Positive Impact Portfolios, taking an overall look at their achievements in delivering social, environmental and financial returns.