Combating Climate Risk Calls for Strong Stewardship

As responsible fiduciaries, institutional investors need to push U.S. companies on climate risk disclosure and greenhouse gas emissions reduction.


An International Energy Agency (IEA) report this week showing global carbon emissions and economic growth decoupling again in 2015 is good news for investors. That news should be tempered by the fact that emissions must fall at a rate of 4 percent a year for the foreseeable future to avoid runaway climate change.

Does humanity need an energy miracle to reduce carbon emissions enough to keep planetary warming below 2 degrees Celsius, as advocated by Microsoft co-founder Bill Gates and others? Of course this miracle is needed, and would be most welcome as a deus ex machina to rescue humanity at this critical time. But investors shouldn’t wait. Starting today, they can become better stewards by insisting that companies develop and implement credible, transparent and verifiable plans for reducing carbon emission using proven technologies.

Gates is absolutely right when he identifies the need for massive investment in energy storage technologies. We need grid-level storage if coal and gas generation are to be mostly replaced by renewables. We also need China, the U.S. and Europe to agree on a carbon price high enough to encourage steel and cement companies to catch and store their emissions. But we cannot just sit on our hands waiting for these things to happen. Investors must act now to compel emission reductions by companies they own if the worst consequences of warming are to be avoided.

The Breakthrough Energy Coalition, an investment fund led by Gates, aims to lead private sector development of important new and profitable technologies for reducing global emissions from fossil fuels to zero before the end of the century. Yes, this is an impressive and commendable goal. But let’s not lose sight of an equally miraculous change: mobilizing the private sector to invest in decarbonization at scale using the proven technologies we have available now. Institutional investors have a pivotal role in bringing about this change.

Forceful stewardship is a tool for investors who recognize that climate change is a systemic risk that is material to investment returns. It is based on two key observations that Gates and other leaders are beginning to recognize. First, climate change poses a significant and increasing systemic risk to the global economy now and affects investment portfolios and therefore the security and financial well-being of investment owners. Second, as part of their fiduciary duty, asset owners and their agents need to incorporate the risks and opportunities that attend to climate change, preferably by engaging with the management and boards of the companies in which they invest.

Increasing support for investor stewardship continues to gain traction in the U.K., where the majority of asset managers and owners have made a commitment to implement the Financial Reporting Council’s U.K. Stewardship Code. Stewardship activities under the code increasingly include engaging with companies on climate risk. The “Aiming for A” investor coalition has gone a step farther after filing successful shareholder resolutions on climate risk with oil giants BP and Royal Dutch Shell. Last December the “Aiming for A” coalition also launched a new round of shareholder resolutions on climate risk with the major mining companies, this time with the support of mainstream investors not previously vocal on the climate issue.

In America, both U.S. and U.K. investors are now working together to engage the oil and gas industry on climate issues. U.S. companies, previously shielded by coopted regulators, have acted as if they can ignore climate risk. Chevron and ExxonMobil have informed the U.S. Securities and Exchange Commission of their intention to block shareholder resolutions on climate risk. In contrast, the boards of BP, Shell, Norway’s Statoil and, recently, Canadian oil sands extractor Suncor Energy have endorsed similar resolutions. Such actions suggest that the giants of the U.S. oil and gas industry are woefully out of step with the rest of the world. External pressures are mounting to bring them in line.

New York State Comptroller Thomas DiNapoli and four other ExxonMobil shareholders, including the Church Commissioners for England as a co-filer, have petitioned the SEC to require the largest publicly traded oil producer to include a substantive resolution on climate risk in its annual shareholder proxy. ExxonMobil’s publication of a climate risk report, in 2014, indicated the company would continue with business as usual, unless forced to change by new government policies. Hence the current resolution asks ExxonMobil to disclose the resilience of its business model and impact on oil and gas reserves with respect to a 2-degree-or-less warming scenario. U.S.-based Wespath Investment Management and U.K.-based Hermes Investment Management have filed a similar resolution on climate resilience with Chevron.

There’s more evidence in the U.S. of forceful stewardship beginning to create the conditions for an energy miracle based on what the private sector can do with currently available low-carbon technologies. This year the Montclair, New Jersey–based Tri-State Coalition for Responsible Investing filed a resolution with Chevron requesting that it adopt greenhouse gas reduction goals. Another Tri-State CRI resolution filed this year with Southern Co., a major U.S. utility, calls on that company to provide a report on its strategy for aligning business operations with the IEA’s 2-degrees-Celsius scenario. Each of these 2016 climate resolutions, filed in the wake of December’s COP21 Paris Climate Change Conference, sets the stage for companies to take action to reduce emissions using the best currently available technologies. Responsible investor stewardship calls for companies to reduce emissions now, and not wait for an energy miracle that’s unlikely to occur in time to keep planetary warming below 2 degrees.

Effective stewardship requires investors to actively engage the companies they own to address the systemic risk of catastrophic climate change. Clearly, new technologies are needed and will be developed, but it is doubtful these innovations can be realized fast enough to avoid the nonlinear, irreversible impacts that will occur if emissions are not also reduced dramatically and quickly. New energy technologies require research, discovery, development, demonstration and deployment of unknown duration. This process is unlikely to occur quickly enough to prevent runaway climate change. There are, however, proven renewable energy technologies available for deployment today. Why wait for a miracle in the future when institutional investors can also make a miracle happen now? We need Bill Gates and other energy miracle makers to show — by example — how institutional investors can adopt fit-for-purpose stewardship guidelines and actively engage companies on climate risk.

Thomas Murtha, a former portfolio manager at T. Rowe Price Associates, and John Rogers, the former CEO of CFA Institute, are both senior advisers to Preventable Surprises, a London-based nonprofit created to help investors and others avoid predictable disasters.