A growing band of investment activists led by the Church of England is out to prove that where governments fail, faith (and money) can prevail
BY PETER MCKILLOP AND KERRIE SINCLAIR
For months the warning signals went ignored. Then at 1:00 pm on January 25, 2019, a vast dam holding iron ore sludge collapsed, swamping the small Brazilian town of Brumadinho with a 26-foot wall of mud, leaving 270 people dead or missing.
After a few token gestures of concern—a ministerial visit, a few arrests and a $4.7 million fine against the dam owner, Brazilian metals and mining giant, Vale S.A. – Brazil and the $324 billion metals mining industry looked forward to moving on.
It was to be business as usual until a group of influential institutional investors stepped in.
Outraged at the corporate irresponsibility, they vowed to use their combined $14 trillion in financial clout to demand more corporate accountability and oversight of 1,700 mine tailing dams around the world.
Leading the charge was one of the world’s most progressive institutional shareholders, the Church of England Pensions Board, led by its charismatic director of ethics and engagement, Adam Matthews. Along with the Swedish National Pension Funds, Matthews created a coalition of investors that successfully pressured the mining industry to impose new and far-reaching rules on how the industry monitors mine tailings dams around the world.
“It shouldn’t have happened, and we made a concerted effort, with others, to try to ensure it doesn’t happen again,” Matthews told Climate & Capital Media.
With $3.1 billion in assets, the Church of England Pensions Board is a relatively small player by institutional money standards. (BlackRock, by comparison, manages $7 trillion in assets.) But, what the Church lacks in assets is more than made up for by Matthews’ passion to mobilize the once-sleepy world of institutional asset managers.
His efforts are on the vanguard of a growing trend among activist institutional investors who are no longer waiting for governments to tackle the world’s most important environmental and social issues, particularly climate change.
Church and state
Most governments continue to ignore the most ambitious Paris Agreement goal to achieve 1.5 degrees Celsius warming limit, instead fast-tracking the Earth’s average temperature to rise by more than 3 degrees Celsius, which would make the planet all but uninhabitable for humans. Taking their cues from years of government lip service, the world’s largest energy companies have continued to not decrease but increase fossil fuel investments.
Activist institutional investors say that tide must turn and so now is the time for radical engagement. With governments dawdling on the sidelines, Matthews is determined to unleash what former Goldman Sachs economist Bob Litterman calls the “awesome power” of the finance industry. By demonstrating what can be done, investors hope it would encourage reluctant governments to step up and follow the lead of institutional money.
“If government could see that there’s the commitment and intent,” says Matthews, then the role of finance “may be dominant in the equation,” referring to the role of business and finance in solving climate issues.
This is a far cry from the days when institutional fund managers were often part of the problem, not the solution, content to sit back and clip coupons for its pensioners. When they did engage, it was often on the wrong side, invoking their so-called fiduciary duty to push CEOs to maximize returns and reduce costs, regardless of the impact on the environment and the climate.
Now, Matthews and his growing band of activist institutional investors have a new climate agenda. They are demanding emission cuts, seeking changes in business models, supporting climate shareholder votes, and if necessary, threatening to starve companies of capital if they don’t commit to an acceptable future carbon path.
Net Zero Asset Owner Alliance
Their approach is working. Last year, when Royal Dutch Shell announced it would use investor funds to raise oil and gas production, investors rebelled. Asset manager Sarasin & Partners, in a very public letter, warned Shell’s actions threatened “planetary stability.” Matthews and the Church of England Pensions Board, a Shell shareholder, joined the most ambitious climate investor alliance yet, the Net Zero Asset Owner Alliance, which is working to limit warming in its portfolios to 1.5C—a stronger commitment than the Paris Agreement. Matthews also played a central role by engaging with Shell on behalf of Climate Action 100+, an alliance of over 450 investors.
The pressure worked. Within months, Shell dramatically reversed course. It announced it would strive to be a net zero carbon business by 2050. Where it had once pledged to deliver $125 billion in dividends over the next five years, it now announced its first dividend cut since World War II, reflecting what it described as a fundamental shift to become a net zero business. It now aspires to be the world’s largest electricity company.
A climate crusade
Investor pressure also forced the Minerals Council of Australia to adopt the “net zero” goal last month. And while the mining body notorious for killing off any meaningful climate action in Australia refused to issue emission-reduction targets, the investors that own its members, soon will. The Net Zero Asset Owner Alliance later this year will specify targets for net-zero-aligned cuts to be achieved by 2025 by all companies in their portfolios, including the miners.
“We are in a completely different situation now that causes us to revisit some fundamental assumptions, and I think you’re beginning to see companies grapple with that,” says Matthews.
Matthews believes the energy industry is beginning to see a differentiation between those companies committed to diversifying themselves and taking on new roles as low-carbon energy providers and those “companies that will just be paying back to their shareholders,” says Matthews. “Some will just hold out and that’s where the investment community can be challenged to decide: walk away or try and replace chairs and directors at these companies.”
“We are in a completely different situation now that causes us to revisit some fundamental assumptions”
Not surprisingly, he has intensified his focus on the US oil and gas sector which he says is “hugely behind” its European peers. This spring, the Church of England joined with the New York State Retirement Fund and Legal & General Investment Management to support a shareholder suit opposing the re-election of Exxon CEO and chairman Darren Woods.
Another key element of his engagement strategy is to target the demand side as well as fossil fuel suppliers in order to reduce demand for these fuels and push key industrial sectors to net-zero pathways. This, he says, “means identifying and rapidly overcoming” any blockages in public policy, financing and technology. The key, he believes, is to bring together industrial buyers and sellers and incentivize them through investments to work together to reduce their collective carbon footprints.
Post Covid-19 Economic Recovery
A critical milestone for climate progress will be accelerating efforts to pressure governments to integrate climate-related initiatives into any post Covid-19 economic recovery plan. Investors are particularly concerned that even the more progressive efforts, like those in the EU, still fail to include formal conditions ruling out member states’ spending on fossil fuels.
The pandemic transition “requires ambitious policy, combined with corporate leadership, combined with investors,” Matthews says.
Brian O’Callaghan, researcher at the Smith School of Enterprise and Environment told Climate & Capital Media: “As always with policy design, the devil is in the details. It is vital that policymakers get this right. The stakes are high.”
One tactic the Church has avoided is divesting bond and equity holdings in fossil fuel companies. “Divestment is not the answer. As an asset owner, we always retain that right, but it won’t solve the climate crisis,” said Tom Joy, the Church of England Pensions Board chief investment officer, shortly after joining the 26-member Net Zero Asset Owner Alliance.
The position puts the Church and other activist asset owners at odds with more aggressive climate activists like Greta Thunberg, who are pushing for an immediate divestment of all fossil fuels holdings. But climate-conscious investors say they have no choice: So long as governments run from their climate policy-making responsibilities, activist investors cannot divest.
“If everyone who has good ethics divests, only those with bad ethics control the companies,” says Garry Weaven, the former chair of fund manager IFM Investors which manages around $108 billion-worth of assets for 27 Australian industry pension funds.
Investors with a mission
Rather than divest, investors believe that the only way to rouse somnolent governments is by demonstrating that private coalitions of business leaders, prodded by private financial capital, can successfully push companies towards net zero. These actions would then act as a catalyst by setting an example of effective engagement. This, in turn, will make it easier for opportunistic politicians, particularly in the United States, to challenge the stranglehold the oil and gas industry has on governments. Finance, says Matthews, “has got to be absolutely at the table pushing the low-carbon agenda.”
Matthews is a third-generation fan of Liverpool Football Club. Last week his beloved Reds won their first Premier League title in 30 years. Liverpool’s theme song, “You’ll Never Walk Alone,” sums up Matthews’s and the Church’s determination to never let the vulnerable walk alone in the darkest moments. To the mining industry’s surprise they stepped up after Brazil’s mine tragedy. Now they are determined to do the same with climate change.
Featured photo by Shell International