Unprecedented floods, storms and wildfires have ravaged communities across the United States in the past two years and sapped the economic vitality of regions. Puerto Rico was devastated by Hurricane Maria while southeast Texas is struggling to recover from Hurricane Harvey, and communities in California are still reeling from deadly wildfires. The U.S. federal government’s most recent National Climate Assessment predicts more climate-fueled weather disasters will come - and more frequently - exacting a heavy toll on the economy.
The implications for investors involve both the cost of each event as well as the increasingly urgent need to address the underlying causes of climate change.
The 2017 and 2018 California wildfires and related accidents killed nearly 150 people and destroyed entire communities. Pacific Gas & Electric (PG&E), a giant publicly-traded company and the primary gas and electricity supplier to the northern half of California, filed for bankruptcy on January 29th due to well over $20 billion in potential liabilities associated with the wildfires -- what the Wall Street Journal called “The first climate-change bankruptcy”. (The utility estimates it will cost an additional $75 to $150 billion to comply with a judge’s order related to fire safety.) Utilities tend to be viewed as safe investments, but shareholders of PG&E have significant value at risk -- as of February 27th, shares were down 56 percent over the last year. While California has especially strict liability laws related to wildfires, these developments warrant attention by investors.
Ceres Analysis
As the 2019 proxy season gets fully underway, Ceres releases today its annual analysis of mutual fund proxy voting on climate-related shareholder proposals, focusing on the 2018 season. (See the data table below.) The purpose of this analysis is to shed light on which mutual fund companies take climate risks seriously, as revealed by their proxy voting on climate-related shareholder proposals. While the results show a huge range in voting practices, the trend clearly indicates that more asset managers are voting “for” climate-related proposals.
With good reason. Major new studies point to a diminishing window of opportunity to address climate change before large-scale runaway climate impacts become inevitable. The United Nations Intergovernmental Panel on Climate Change (IPCC) Special Report, released in October, underscored the necessity of a 45 percent reduction in greenhouse gas emissions by 2030 in order to protect against the worst risks associated with climate change. A month later, 13 U.S. federal government agencies released the National Climate Assessment warning that unless we sharply reduce greenhouse gas emissions, the United States can expect a significant blow to economic growth, public health and agricultural output.
An increasing number of institutional investors understand this urgency. In early December, 415 institutional investors with $32 trillion in assets under management submitted a letter to the government leaders in connection with the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change in Poland (COP24). The investors urged leaders of the nearly 200 countries represented to dramatically increase their efforts to meet the Paris Agreement goals, noting that more needs to be done to improve the resilience of our economy, society, and the financial system to climate risks.
Institutional Investors Display Varying Levels of Awareness of Climate-Related Risks
Among other things, these developments should lead investors to ask which asset management firms understand and act upon climate risks and opportunities. The new analysis from Ceres and FundVotes (acquired in October 2018 by Morningstar), shown in the table below, is one important indicator of the range of climate change awareness displayed by the largest asset managers operating in the U.S.
The shareholder proposals analyzed ask companies to take action by, for example, setting GHG reduction goals, annually disclosing climate-related risks, and establishing mechanisms for rigorous board oversight of these risks. For a complete, sortable list of climate-related proposals at U.S.-based companies, see: www.ceres.org/resolutions.
As the table below shows, voting records range from an astounding zero percent support to 100 percent. However, when compared to last year’s data, there is evidence of strong growth in support for climate-related proposals. For example, during the 2018 proxy season, 46 percent of asset managers voted for over half of climate-related shareholder proposals tracked by Ceres, up from approximately 33 percent in 2017. In addition, only one asset manager failed to vote “for” any climate-related proposals in 2018, down from five asset managers in 2017.
Fiduciary Duty
One factor driving this trend is the fiduciary legal duty that asset managers have to their clients to vote on shareholder proposals. Managers are required to vote based on consideration of whether each proposal helps to protect the economic interests of their clients. Climate change presents a rapidly growing set of economic risks for companies in nearly every sector, from oil and gas to utilities, insurers, manufacturers, retailers, and beyond. The business risks fall into several categories: physical, transition, regulatory, reputational, competitive, and legal among them. (Barron’s published a cover story in January focusing on physical risks to S&P 500 companies from climate change.)
In addition, each company contributes in its own way to systemic risks from climate change. For example, all companies emit greenhouse gases, and some contribute to deforestation or lobby against public policies to address climate change. Widely diversified investors, such as index funds and pension funds, benefit from reducing systemic risks, like those associated with climate change, that can harm the global economy and drag down portfolio-wide returns. As a result, each company that takes meaningful action to reduce climate risk or contribute to credible climate solutions (by, for example, sourcing renewable energy) helps to protect long-term returns for widely diversified investors.
Leaders on Climate-Related Proxy Voting
Some asset managers have been aware of the profound financial and societal risks related to climate change for a number of years. One way they have demonstrated this awareness is through their proxy voting. For example, Deutsche Asset Management (now DWS) voted “for” 97 percent of climate-related proposals it faced in 2018 and 100 percent in 2017. Nicolas Huber, Head of Corporate Governance at DWS, explained that:
“In 2018, we have continued our efforts on environmental and climate change issues. In our role as fiduciaries we strive to safeguard and enhance the sustainable long-term economic value for our clients. We believe the long-term value of companies is also linked to having sound governance which would allow them to be in a better position to effectively manage material environmental and social (“E&S”) factors relevant to their businesses and potentially improve their risk-return profiles. Therefore, our focus on climate change-related proposals has yet again been robust this year and we will continue advocating the consideration of societal impact with the companies we are invested in.”
Similarly, Pacific Investment Management Company, LLC (PIMCO), an asset manager with approximately $1.7 trillion under management, decided to vote in favor of each of the climate-related proposals it faced, reaching 100 percent favorable votes in 2018, up from 49 percent in 2017.
Leaders Who Don’t Appear in the Data
A number of smaller asset managers with very strong voting records do not appear in our data due to our focus on the largest firms. Some of these firms are also leaders in their engagement activities with companies in their portfolios -- including asking other investors to improve proxy voting on Environmental, Social, and Governance (ESG) issues such as climate change. Both Walden Asset Management and Zevin Asset Management are in this category.
According to Tim Smith, Director of ESG Shareowner Engagement at Walden,
“Increasingly investors are examining the proxy voting records of their managers or mutual funds where they invest. They question whether a manager is carefully scrutinizing the opportunities to conscientiously cast their votes on important issues that affect shareholder value. While many managers and funds vote vigorously in favor of corporate governance reforms, some of these same firms still ignore the vital importance of climate risk to their portfolios by voting regularly against climate-related resolutions. It is likely a fund manager’s climate voting record will increasingly become part of their customers’ regular reviews of the services their managers provide.”
Firms Showing Large Increases in Voting Support
Support by Eaton Vance jumped from 47 percent in 2017 to 85 percent in 2018. The firm acquired Calvert Investments (one of the largest socially responsible investment firms in the United States) at the end of 2016.
Fidelity Geode’s support for climate-related proposals more than doubled in 2018 to 33% compared to 2017. Geode was spun out of Fidelity in 2003 and is now hired by Fidelity to manage and vote on Fidelity’s index fund products. Fidelity and Geode, which together are likely to own well over 1 percent of many publicly-traded companies, are important voters due to their size. Fidelity itself voted in favor of only 16 percent of climate-related proposals, down from 17 percent in 2017.
Firms With Low Levels of Voting Support
In our opinion, firms that vote for a low percentage of climate-related proposals raise red flags due simply to how important climate risk is for the bottom line of many companies and investment portfolios. Firms at the bottom of our ranking are Amundi Pioneer, Dimensional, Putnam, T. Rowe Price, BlackRock, Vanguard, American Century, American Funds/Capital Group, Fidelity, and JPMorgan Chase (all supported fewer than 20 percent of climate-related proposals).
For some laggards on our chart, things may not be as bleak as they seem based on the voting data alone. For example, BlackRock’s CEO Larry Fink included the importance of climate risk in his 2018 annual letter to CEOs, titled ‘A Sense of Purpose.’ In addition, BlackRock reports dialogue with 232 companies on climate change between July 2017 and July 2018. It also strengthened its proxy voting guidelines regarding climate change in January of 2019.
Even the Only Firm With Zero percent Support is Beginning to Address Climate Risk
When a firm like Voya (managing $543 billion and striving to be “America’s Retirement Company”) fails to vote for a single climate-related proposal in 2018, customers may seek an explanation.
While only time will ultimately tell, a promising sign that Voya may be positioning itself to move away from its position as a laggard on climate-related votes is that Voya Investment Management updated its proxy voting guidelines during 2018 to allow for many ESG proposals to be evaluated on a case-by-case basis.
Voya should be commended for supporting the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which provides a framework for climate-related financial disclosures and is supported by more than 500 organizations according to TCFD’s 2018 Status Report. Voya Financial’s CEO stated: “We understand the significant risk that climate change poses and we are proud to align ourselves with the Task Force – and its mission to change the way the business community approaches climate-related financial disclosure.”
Given this positioning, issued in October 2018 (after the 2018 proxy season was over), it is hard to imagine Voya will vote against a preponderance of climate-related shareholder proposals during the 2019 season. This is especially true given that Voya also announced its membership in the Principles for Responsible Investment (PRI) in January of 2018.
How Can Institutional Investors Improve Their Voting?
The bottom line is that climate change presents a wide variety of material investment risks and opportunities, and asset managers have a duty to consider these factors and vote their proxies accordingly. They can improve their voting on climate-related proposals by ensuring that their proxy voting guidelines include language that encourages votes ‘For’ climate-related shareholder proposals that address important risks and opportunities for companies. A helpful, free database of proxy voting guidelines is offered by FundVotes.
Customers of firms with poor voting records may wish to contact their money manager to express concern and suggest a change in voting policies and practices. As the famous investor Jeremy Grantham suggests in his sobering and deeply insightful 2018 white paper on climate change, The Race of Our Lives Revisited, “lobby your investment firms to be a bit greener and encourage them to lean on their portfolio companies to do the same. Push them hard.”
After all, while companies have a decent chance of surviving under the protection of bankruptcy laws (despite what may happen to their shareholders) there is no option for humanity, or the global economy, to file for bankruptcy protection from climate change.