Oil companies need to rethink their business approach and support the Paris Agreement on climate targets to remain attractive investments, according to a survey of fund managers.
The survey by the UK Sustainable Investment and Finance Association and the Climate Change Collaboration reveals that 68 percent of respondents see integrated oil companies (IOCs) as attractive investments if they transition to business models aligned with the Paris targets.
Furthermore, 80 percent of fund managers report more interest, or significantly more interest, from clients in fossil fuel-free products compared with a year ago.
When looking at responses from fund managers to well-known climate change-related financial risks, however, a less consistent position emerges.
For example, only 39 percent of fund managers have a public corporate commitment to achieving the targets laid out in the Paris Agreement, with 13 percent having a private commitment and 47 percent having no commitment. And just over a fifth (21 percent) of fund managers have a policy of aligning all the funds they manage with the Paris Agreement, while 33 percent have a policy of aligning some funds, and 46 percent have no policy.
With respect to engagement – the process whereby fund managers discuss risk, strategy and other factors with investee companies on behalf of clients – responses are mixed. This year only 12 percent of fund managers have no engagement strategies in place, compared with 41 percent last year, but only 18 percent have set deadlines for engagement objectives to be realized and 57 percent of managers that hold IOCs have yet to consider what action to take if engagement objectives are not reached.
Sixty-seven percent say they want companies to reinvest capital, while 24 percent want IOCs to return capital to shareholders.
The process of engagement is evidently not an easy one: 92 percent of respondents report sometimes, or often, feeling frustrated when dealing with IOCs. But inconsistent approaches by fund managers to their engagement work with IOCs mean some investors – more likely passive investors or those unaware of climate risks – are more exposed to the financial risks of climate change.
Bronagh Ward, senior associate at London-based KKS Advisors, tells IR Magazine that the research reveals many problematic issues. ‘Increasing awareness on the financial relevance of climate risks is sadly not translating into enough action,’ she explains. ‘There is a disconnect between the actions of many asset managers that are maintaining the status quo and the ambitions of asset owners that are concerned about climate risks with IOCs and want to see more immediate action.’
Ward is also critical on the lack of engagement revealed. ‘The fact that many fund managers do not set clear objectives for engaging with companies on climate risks is a tremendous missed opportunity,’ she says. ‘There is strong evidence investor engagement on sustainability is effective at driving corporate climate action and is also linked to better financial performance.
‘With more ESG disclosure, better ESG investment tools, increased engagement with companies and more public recognition that there’s no time to waste with climate change, we predict asset owners will increasingly demand more decisive actions from asset managers, such as completely screening out IOCs from all of their investments or divesting from companies that do not transition to business models aligned with the Paris Agreement.’
Tomi Nummela, a consultant in the UK Mercer responsible investment team, also notes the importance of engagement: ‘Well-organized, well-executed and outcome-focused engagement has been such a valuable development over the past few years. It shows how quickly investors can move and achieve their targets with a collaborative mindset.’
The survey covered global fund managers with $10.2 tn worth of assets under management.
