Forceful Stewardship

What is forceful stewardship?

Forceful stewardship involves cooperation among large shareholders to win votes at companies’ Annual General Meetings (AGMs). Institutional investors (large funds such as pensions and university endowments that manage many people’s money) own about a third of the global market. In the US, they own 67% of all stocks.1 If these investors were to band together as a group in order to win votes, they could change companies’ policies and practices. Most shareholder engagement on environmental issues to date has focused on reporting and disclosure of climate change risk or carbon emissions – which is great, but not sufficient to prevent catastrophic climate change.

Why would shareholders vote against their own interests?

They wouldn’t, and they don’t have to. Most companies serve the needs of short-term shareholders; institutional investors typically invest long-term because investors pay a penalty every time they sell a share, which adds up over time. They should therefore push for changes that will pay off in the long term. Institutional investors are often universal owners – they own a slice of most or all companies in the market. Only 8% of shares listed on the stock exchange are fossil fuel stocks, so it doesn’t make sense to put the other 92% at risk of climate change for the sake of that 8%. If any industry does well at the expense of too many other stocks, this is a problem for universal owners.

Could forceful stewardship work?

Yes. Shareholders have not been sufficiently coordinated or ambitious to date, but highly respected institutions have the clout to pull together a large coalition of investors. Fossil fuel companies might also be especially suited to forceful stewardship - recent studies have shown that they fit the profile of the sorts of companies for which shareholder engagement is actually successful.2,3

What are some examples of forceful stewardship strategies?

Investments in especially dirty and expensive fossil fuel projects are risky for investors. The recent unexpected drop in oil prices is a great example of how quickly and easily these projects can get into trouble. Most fossil fuel reserves will have to stay in the ground if there is action on climate change (even if any legislation is enacted, some reserves will be abandoned). Investors could push for a halt to all company expenditures into new exploration and development in the Arctic, the Canadian oil sands, and other extreme energy sources. These projects take a long time to set up and become profitable, and assets could be stranded by new legislation before any profit is made. Using capital meant for risky projects to instead pay higher dividends (payouts to shareholders of company profit) could help win support from both long- and short-term shareholders.

Because some fossil fuel reserves must remain unused, fossil fuel companies now have a sound basis for abandoning reserves whose exploitation would be especially dirty and inefficient. Shareholders could push these companies to adopt business plans consistent with 2℃ of warming. The companies could reach their profit targets while avoiding risky extreme energy projects. They could focus instead on conventional (cheaper, less risky) oil and gas while those fuels remain legal, and on transitioning into renewable energy (including research), or other responsible business activities in which they have expertise. Most large fossil fuel companies have a renewable energy division. BP once had 6% of its investments in renewable energy. Shell and Chevron both have approximately 2.5% of investment directed toward green energy.4

Shareholders could also halt fossil fuel companies’ lobbying against carbon taxes and/or climate change legislation. In some ways this could be more effective than any other measure, in that it makes the necessary legislation more likely to happen by removing its most significant barrier - vested interests in the fossil fuel sector5.

Initiatives with great potential in this area include The Forceful Stewardship Programme and The Red Lines Voting Initiative.

 

References

1. http://finance.wharton.upenn.edu/~keim/research/ ChangingInstitutionPreferences_21Aug2012.pdf
2. Dimson, Elroy, Oguzhan Karakas, and Xi Li. 2013. “Active Ownership.”
3. Ansar, Atif, Ben Caldecott, and James Tilbury. 2013. “Stranded Assets and the Fossil Fuel Divestment Campaign: What Does Divestment Mean for the Valuation of Fossil Fuel Assets?” Smith School of Enterprise and the Environment, University of Oxford.
4. http://m.rollingstone.com/?redirurl=/politics/news/ big-oils-big-lies-about-alternative-energy-20130625
5. Covington, Howard, and Raj Thamotheram. 2015. “The Case for Forceful Stewardship Part 2: Managing Climate Risk.”