Many of the world’s biggest investors have long supported calls for companies to spell out their carbon emissions. But a growing number of large asset managers are going a step further, warning they will actively punish board executives at companies that do not improve their pollution disclosure.
This month Christopher Hohn, the activist hedge fund investor, said he would vote against the re-election of directors at companies held by his $28bn TCI fund that fail to provide details of carbon emissions to CDP, a climate non-profit.
Several traditional asset managers, such as the UK’s Legal and General Investment Management and France’s BNP Paribas Asset Management, have taken similar steps in recent years as investors become increasingly concerned about how climate change will affect their portfolios.
BNP Paribas was one of the first to change its voting policy to consider carbon emissions, updating it in 2016 to align with the goals of the Paris climate accord. The €436bn asset manager abstains or votes against resolutions such as approving a company’s financial statements when companies do not report properly on their carbon footprint.
Michael Herskovich, head of corporate governance at BNP Paribas AM, said that more asset managers should use their vote when it came to carbon emissions.
“Voting is a key component of our ongoing dialogue with companies, and our policy of opposing management proposals where we have concerns around carbon disclosure is designed to push directors to incorporate climate change considerations into their business strategy.”
LGIM, the UK’s largest asset manager, has also advocated a tougher approach. It voted against 17 company chairs or boards in the first half of this year over environmental concerns.
Sacha Sadan, director of corporate governance at the £1.1tn group, said investors played a “significant role in pushing companies to ensure they address the risks of climate change”.
Sarasin & Partners, a London-based fund house with £14bn in assets, said it voted against at least one director at 86 per cent of companies where it identified a material climate risk and against the auditor at 91 per cent of these companies this year.
Natasha Landell-Mills, head of stewardship at Sarasin, pointed out that none of the world’s biggest asset managers — such as BlackRock and Vanguard — were fully using their votes to get companies to disclose climate risks, and argued that this needed to change.
“We need a wake-up call,” she added. “We need all the big houses to be doing this, as well as the small ones.”
LGIM, BNP Paribas and TCI’s stance is much tougher than across the rest of the industry. For the majority of big asset managers, the focus is still on so-called engagement — where investors speak with companies about issues, rather than using a vote to signal upset about a lack of carbon disclosure.
According to several asset managers one of the reasons they take this approach is that the voluntary framework for disclosing climate-related risks — known as the Task Force on Climate-related Financial Disclosures — is relatively new, having only been finalised in 2017.
“The TCFD is very young. It has many companies reporting under it, but it is not an easy exercise,” said Eugenia Unanyants-Jackson, head of ESG research at Allianz Global Investors.
She said AGI was unwilling to vote against directors over carbon disclosure yet, fearing that doing so could push companies to provide carbon disclosure without doing the foundational work that was needed to fully understand the extent of their emissions and other climate risks.
“I think it is a bit unfair [to vote against directors over carbon emissions disclosure] right now. Three years down the line, we might change our position because at that stage the companies would have had enough time to carry out proper analysis,” she added.
Some asset managers, including Aviva Investors, DWS, HSBC Asset Management, Axa Investment Managers and Schroders, said they were already using their vote at annual meetings to voice displeasure over a lack of progress on climate-related issues, typically after an engagement fails.
However, a recent study by InfluenceMap, an environmental non-profit, found investors globally were misaligned with the goals of the Paris agreement in significant portions of their portfolio holdings, often due to large exposures to carmakers, utilities and fossil fuel producers.
The study was critical of big groups such as BlackRock and Vanguard saying that they repeatedly voted against resolutions related to climate change at annual meetings even as they called on companies to consider climate risks, but it also praised Allianz Global Investors, LGIM and UBS Asset Management.
Vanguard, the world’s second-largest asset manager, said it was involved in many environmental initiatives and focused on engagement — which typically involved speaking with, or writing letters to, company executives on issues.
“It is important that boards appropriately oversee climate matters as they would other material issues, and we regularly engage with companies on our shareholders’ behalf and believe that engagement and broader advocacy, in addition to voting, can effect meaningful changes,” a spokesperson added.
BlackRock said that climate risk disclosure was “essential”, adding that the group advocates for companies to provide information in line with the TCFD.
“Since the TCFD recommendations were finalised in 2017, we have engaged hundreds of companies materially exposed to climate risk to encourage enhanced reporting. Where progress is slow, we have and will continue to vote against directors.”
The hedge fund sector has been far less vocal about its stance on environmental issues than traditional asset managers, which makes Mr Hohn’s intervention more remarkable.
Lansdowne Partners, one of Europe’s biggest equity hedge funds, frequently talks to company management on carbon emissions, said a person familiar with the group’s thinking, as part of its broader investment research.
Many interpreted Mr Hohn’s move as a criticism of large passive or quasi-passive funds, which currently buy stocks with poor environmental, social and governance ratings just because of their inclusion in an index.
“At the end of the day, he is trying to expose passive investing for what it is currently facilitating — owning environmentally bad companies doing bad things,” said one hedge fund manager.