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Why engagement trumps divestment in the battle against climate change

Home / Hermes EOS Blog / Why engagement trumps divestment in the battle against climate change

It was just another AGM resolution that received overwhelming shareholder support. Yet when the chair of oil major BP announced that resolution number 25 had passed with more than 98% of shareholder support, there was an incongruous burst of applause.

This was, of course, the resolution filed by shareholders on climate change portfolio resilience, which commits the company to enhanced action and disclosure on its preparedness for the challenge presented by climate change.

Resolutions
Similar resolutions are pending at its peers Shell and Statoil, signalling that these have become part of a new approach to engagement on climate change. But resolutions are only part of a long period of engagement that encourages the board of a company to acknowledge the risks of climate change, support the resolution and subsequently support ongoing compliance. Collaboration between shareholders and companies is essential. This is achieved by developing a relationship of trust, based on the understanding that shareholders and company directors and executives share the common purpose to responsibly deliver long-term value to investors and their beneficiaries. Boards appear to appreciate the benefits of an AGM resolution, which reinforces and legitimises their focus on delivering long-term results.

The case for engagement
Hermes EOS has been engaging extensively with a wide range of carbon-intensive  businesses. In addition we have collaborated with other investors through discussions with the Aiming for A coalition and the Carbon Asset Risk Group of the Institutional Investors Group on Climate Change. This has included intensive dialogue with of the chairs of BP and Shell, as well as other board directors and senior executives.

Many asset owners are debating whether to divest from or engage with fossil fuel companies. At Hermes EOS, we have enjoyed a number of discussions with clients on this issue, which have helped us write a draft paper consolidating our thinking so far. Divestment clearly has a role to play, especially if a company or sector is overvalued or bears undue risk. It also sends a strong message to policy-makers about the strength of opinion on the issue. However, divestment alone does not reduce the level of investment in fossil-fuels.

Decarbonising the global economy is a complex challenge without a simple solution. Even in the lowest carbon scenarios, more capital expenditure is required by all fossil fuels over decades to come. Only engagement can increase dividends and reduce capital expenditure to genuinely curb future investment or support increased investment in low-carbon alternatives. It can also help to lead a change of lobbying strategy to move climate change up the public policy agenda, without which fundamental change is likely to be impossible.

EOS debates
We will debate these issues and more at the Business and Climate Summit in Paris on 20-21 May and the Investor Summit on 22 May. We are also hosting a dinner for clients on 21 May to discuss the options with guest speaker Helen Wildsmith, who leads the Aiming for A investor initiative. I look forward to reporting back on the ideas that have developed and progress made in this vital year for action on climate change.

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Bruce Duguid Bruce Duguid is a director at Hermes EOS and leads engagements with environmentally-exposed companies across the mining, oil and gas and utilities sectors, as well as corporate governance engagements in the UK. He is the lead author of the Institutional Investors Group on Climate Change’s 'Investor Expectations of Mining Companies – Drilling Deeper into Carbon Asset Risk’. Prior to joining Hermes EOS, he was head of sustainability at the UK Green Investment Bank, where he spent four years working on the project to establish the bank and then building its sustainability function. Before working in sustainability, Bruce worked in corporate strategy as a management consultant at the Boston Consulting Group and as head of strategy at Visa Europe. He is also a qualified lawyer in England and Wales and holds a degree in Natural Sciences from Cambridge University.
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