Capitalism Reimagined | December 6, 2021

Three ways climate-committed shareholders can flex their power in 2022

Eli Kasargod-Staub
Guest Author

Eli Kasargod-Staub

While too many global investment firms filled the halls of Glasgow with more hot air, leading early-movers in shareholder action were finding new ways to confront the roots of the crisis: corporate strategies that sacrifice long-term sustainability for short-term gain. 

These leading investors know that more dialogues and disclosures will not be enough to mitigate the escalating risks that climate change poses to long-term portfolios – and to the global financial system itself. 

The limits of pledges and posturing became clear as soon as heads of global financial houses stepped away from the stage at COP 26. Despite the jaw-dropping headline commitments from the Glasgow Financial Alliance for Net-Zero (or GFANZ) – $130 trillion pledged to the clean transition! – veteran advocates were quick to note that the pledges by the largest financial institutions in the world were far less than met the eye. 

For example, the Net-Zero Asset Managers Initiative – which is part of GFANZ – counts BlackRock, Vanguard, and other investment giants among the 220 firms “committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner.” Yet as of COP 26, only a paltry 7% of the $57 trillion managed by Initiative members are “being managed in line with achieving net-zero by 2050.” 

Even worse, consider the Net-Zero Banking Alliance, another GFANZ affiliate, which succumbed to bank industry lobbying and decided its members didn’t even need to set decarbonization targets for underwriting activity. That’s a devastating, if not surprising, omission for an industry that has facilitated trillions of dollars in fossil fuel expansion financing since the Paris Agreement was signed in 2015. 

While the industry pathways to a 1.5°C-aligned energy system have never been clearer, far too many companies keep obstructing climate action, both by failing to match “net-zero” pledges with the deep decarbonization the energy transition demands, and by backing elected officials and lobbying efforts that undermine climate policies. 

Beyond disclosure

As shareholders in public companies, investors collectively have the power to demand that corporate directors take immediate and comprehensive action to lead their companies toward true net-zero pathways — or vote them out and replace them with leaders who will. 

Fortunately, a growing cadre of investors are stepping up to do exactly that. 

Proxy voting for climate accountability. In Massachusetts, State Treasurer Deb Goldberg joined her peers in Illinois, Connecticut, and Vermont in advancing a new proxy voting policy that would use the power of the state’s $98 billion pension fund to vote against directors responsible for systemic climate risk. This year Majority Action launched an initiative – “Proxy Voting for a 1.5° World” – to equip asset owners and fund managers with the proxy voting policies and resources they need to hold directors accountable for failure to align their companies’ targets, capital expenditures, and policy influence activities to 1.5°C pathways. 

Through these bold policies and votes, state pension funds are joining leading foundations, endowments, and asset managers to redraw the lines of what counts as responsible corporate governance, posing a new challenge to corporate directors that want to maintain business as usual. 

Shining a spotlight on directors. And leading investors are going beyond upgrading their own voting policies, pushing the largest power brokers in the corporate governance ecosystem to take their climate responsibilities seriously. 

This November a coalition of investors with over $2.2 trillion in assets issued an unprecedented public challenge to ISS, the world’s largest proxy advisor, over its track record of irresponsibly rubber stamping boards of high emitting companies that are demonstrably not aligned to a 1.5°C pathway.  Proxy advisors like ISS have enormous influence over how institutional investors vote their shares, with trillions in assets under management looking to ISS for guidance on how to vote on the thousands of ballot items they must cast every year. 

This coalition – supported by the investor engagement team at Majority Action – called on ISS to overhaul how it evaluates board directors at climate-critical companies, so its influential recommendations stop exacerbating the climate risks to the very clients it purports to serve.  

Demanding more from asset managers. Ultimately, transforming corporate behavior will require the largest asset managers in the world to join leading investors in ousting directors that fail to align their companies to 1.5°C pathways. Just 3 asset managers – BlackRock, Vanguard, and State Street – vote over 25% of the shares in the S&P 500, giving these giant firms outsized power to set standards for corporate boards. 

But while these “Net-Zero Asset Managers” have pledged climate action, Majority Action’s most recent analysis of large asset manager proxy voting – Climate in the Boardroom 2021 – demonstrated that these largest firms overwhelmingly backed incumbent directors in the U.S. oil and gas, electric power, and banking sectors, shielding them from accountability for exacerbating the climate crisis. 

But we know that when their clients talk, these asset managers listen – and since they touch nearly every 401(k), pension fund, university endowment, state or city reserve fund, and foundation in the country, that means everyone has a chance to speak out and demand they use the voting power entrusted to them to preserve our future and protect long-term portfolios. 

If we do, then shareholder season in 2022 could be transformational.