Feature | ESG
Institutional investors set to triple divestments from fossil fuels
Global institutional investors are plan- ning move one sixth of their portfolios out of fossil fuels as the pace of divest- ment is picking up.
The main beneficiary of this shift could be the renewable energy sector, as global investors plan to increase their allocations to renewable energy infrastructure to 5.2% over the year, and double their share of investments to 10.9% by 2029, according to a poll among investors with $5.9trn (£4.5trn) of assets by asset manager Octopus. This could see $920bn (£714bn) of assets moved out of fossil fuels over the next 10 years and an additional $643bn (£492bn)
allocated into the renewable energy sector, Octopus highlights.
UK institutional investors displayed the highest levels of optimism, with nine out of 10 respondents in the UK confident that their allocations could make a material dif- ference. However, the poll also highlights significant obstacles to the renewable energy transition, with one in five invest- ment firms not having made any climate change adjustments to their portfolios yet and 16% of institutions not having any allo- cation to climate saving sectors. Energy price uncertainties are seen as a key obstacle for 45% of respondents, followed by a lack of renewable investment skills,
which is holding more than a third of inves- tors back, lack of liquidity is also a concern for 19% of investors.
In order to become carbon neutral by 2050, the UK would need to remove up to 130 mil- lion tonnes of carbon dioxide from the air, which would require investments to the tune of £20bn, according to a report by think tank Vivid economics. But cost estimates for the individual carbon reduction mechanisms vary widely, the research highlights. The most affordable measure of carbon reduction would be to restore natural habitats, at a cost between £8 and £78 per tonne, 5 million of carbon could be absorbed every year.
Shareholders crank up the pressure on executive pay
Asset owners are cranking up the heat on executives, a growing number of share- holders are voting to oppose pay propos- als, research shows..
Over the past three years, some of the big- gest institutional investors have more than doubled their interventions on executive pay, MSCI research shows. Examples include Hermes EOS, which pro- vides shareholder engagement services for institutional investors such as £14bn pool LGPS Central. Hermes EOS opposed more than 70% of executive pay proposals last year up from 25% three years ago. Similarly, Californian Pension Scheme CalPers rejected more than half of all pay proposals, compared to less than 20% three years ago. This chimes with earlier research by MSCI which shows that companies with the low- est executive pay levels outperformed com- panies with the highest pay on a 10 year basis. The research also showed that com- panies which over-paid executives for per- formance tended to have a larger market cap, resulting in potentially bigger ramifi- cations for investors.
Increased shareholder activism is starting to have an effect: FTSE100 executive pay
36 | portfolio institutional | November 2019 | issue 88
dropped by 13% between 2018 and 2017, according to the High Pay Centre. Firms that have recently felt the heat of campaigning shareholders include emerg- ing market bank Standard Chartered, where some 40% of shareholders voted against executive Bill Winter’s salary, resulting in a five month dispute between Winters and investors, which ultimately led to him agreeing to a pay cut in October.
Executives who refuse to budge to share- holder demands might find themselves
having to change jobs, as Namal Nawana, former Johnson & Johnson executive expe- rienced. He resigned from his role as chief executive of medical firm Smith & Nephew in October after being unable to find sup- port for his salary demands. But executive pay is still 117 times higher than the average pay in the UK, which is currently set at £29,574. Moreover, the High Pay Centre also highlights that the gap between executives’ salaries and those of their workers is still significantly higher than it was 20 years ago.
Changes in percentage of negative say-on-pay votes 2017 – 2019 “No” votes on executive pay increased among selected asset owners
10% 20% 30% 40% 50% 60% 70% 80%
0% TIAA 2016–17 2017–18 NYSCRF CalPERS Florida SBA Proxy Insight, covering U.S. listed companies for which such data was available. Hermes EOS 2018–19 Source: MSCI ESG Research, based on data provided by
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