ESG Feature – Divestment v engagement


change campaigners that could speed up the engagement pro- cess is the introduction of a carbon tax. So, corporates would pay a financial penalty linked to the level of their harmful gas emissions. However, details of how this will work in practice needs refining.


The problem with a carbon tax is that it is not always clear how it will be socialised. Who will really absorb that cost?


Margaret Childe, Manulife Investment Management


“The problem with a carbon tax is that it is not always clear how it will be socialised. Who will really absorb that cost?” Childe says. “From an investor’s perspective, it could increase the cost of capital for the oil and gas industry, but you do not know to what extent. You need the carrot and the stick when it comes to the policy side.”


“History cannot be replicated exactly, but it is a notion we con- sider when looking at companies from a transition perspec- tive,” he says.


Lower dividends could be positive for longer-term investors. Companies returning less capital to shareholders could be a sign of them investing in their longer-term sustainability, according to Wade. He explains that companies have achieved low-cost structures on the back of ESG efficiencies, but with rising transparency they are having to invest in becoming more sustainable.


“What it comes down to is, that to invest longer term and pro- tect capital investors may have to suffer lower dividends,” Wade says. “You have to ask if a company is paying an attractive divi- dend from sustainable cash-flows.”


Come together


Engagement works. One widely reported example came in 2018 when the Church of England Pensions Board used its voice as a shareholder to convince Royal Dutch Shell to link emission reductions to how much its executives are paid. But this took more than one meeting to achieve. Patience is needed for those following an engagement strategy as a breakthrough could take years.


One innovation mooted by some economists and climate 28 | portfolio institutional | June 2021 | issue 104


An alternative has been institutional investors coming together to create change by speaking with a larger voice. One such pressure group is Climate Action 100+, which has almost 600 members collectively managing assets worth $54trn (£38.2trn). The group has reported some success. “Although there is still a long way to go, corporates are making some strong commit- ments,” Childe says. However, for Burger, the transition to a low-carbon economy cannot be achieved at the corporate level alone. He points to the variety of key stakeholders within that process, including regulators and investors, who need to come together to ensure that there is an effective transition. This appears to be a popular view. “Climate change is such a systemic risk that it needs to be tackled by all stakeholders,” Childe says. “It is not something industry can do alone; it needs to work with policymakers and the financial sector.” Wade calls for a broad-based alignment between sovereigns and corporates. “It is great to have a seven foot forward in bas- ketball, but if no one can pass him the ball he is not going to score. Everything needs to be aligned. “At the sovereign level there needs to be a favourable regulatory, political or consumer framework that supports companies in what they are trying to achieve,” he adds. “At the corporate level it is about making sure that all key stakeholders are aligned with what you are trying to achieve.” He highlights executive pay as an area where the chief execu- tive’s rewards should depend on the company achieving cer- tain goals. But there is optimism that it will not just be down to providers of long-term capital to facilitate the transition to a net carbon economy. “Crucially, with Biden on board in the US, there is an opportunity to achieve a global consensus and manage climate change, and to accelerate that low-carbon energy transition,” Burger says. Yet the size of the task to achieve carbon neutrality within 30 years should not be underestimated, especially as so many actors need to play their role. “To achieve these goals, which are pretty challenging, everyone needs to be on the same page,” Wade says.


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