Does shareholder engagement work?

This post is by Brett Fleishman, senior analyst at 350.org.

Big investors like the California Public Employees’ Retirement Fund (CalPERS) are faced with a difficult choice. They can divest completely from fossil fuel companies to make a public statement about climate change. Or they can hold on to them and attempt, as shareholders, to influence the companies’ business plans in a climate-friendly direction.

Important questions

When it comes to shareholder engagement, there are two basic elements to consider. First, what do you want to accomplish — what is your goal? Second, how long do you want to pursue this goal — what is your timeline? This is shareholder engagement 101. The unsettling issue when it comes to engagement with fossil fuel companies is that we haven’t heard from the largest institutions on the planet, which claim engagement is the solution, as to their goals and timelines.

In the case of CalPERS, shareholder engagement has, by and large, been about disclosure. To quote the CEO of CalPERS: “What gets measured gets managed, and what gets disclosed gets done.”

On August 16 last year, CalPERS CEO Anne Stausboll published this article describing the fund’s response to climate and carbon risk within its portfolio. Essentially, the CalPERS team is focused on requesting transparency with companies on carbon risk issues — such as emissions, stranded assets, and stress tests of climate change implications on production. It’s called “disclosure.” The team has done some fairly significant and progressive work changing the rules so that companies will have to disclose climate risk or carbon output with the Securities and Exchange Commission (SEC) — which is a good thing. However, as Stausboll noted, their efforts have fallen short: “The breadth and quality of the disclosures with the SEC are still lacking.”

But there is a bigger issue here than the quality of disclosure. What is the CalPERS plan to address climate risk? If these companies provide information regarding their emissions, stranded asset vulnerability, or even their belief in climate change, how will CalPERS respond? Will they divest from companies that disclose high stranded asset risk? What about companies that disclose blatant neglect of the issue?

Unfortunate answers

Stausboll provides a partial, discouraging answer to those questions: ExxonMobil and Shell are“unfortunately” unwilling to address carbon risk and stranded asset risk. The disclosure pressure from CalPERS has met a stone wall.

Thus far, CalPERS has responded — also unfortunately — by increasing its investments in companies that have disclosed their intention to burn as much coal, oil, and gas as they possibly can. Over the last 10 years, CalPERS has roughly doubled the potential emissions it finances. In 2004, it held 90 coal, oil, and gas companies on the Top 200 list; today it holds 149.

What can we conclude? Does the goal end at disclosure? Does CalPERS want to protect itself from the companies who are “unfortunately” ignoring the climate crisis? How long should dialogue continue with these companies?

Let’s take this a step further. In a statement posted on its website last July, CalPERS claimed it engaged with more than 100 companies annually. But it invests in 149 fossil fuel companies.

We also know that CalPERS holds much more than the minimum investment for shareholder engagement. SEC rule 14a-8 states that the threshold for filing a shareholder proposal is holding $2,000 worth of a company for one year. So the billions CalPERS has invested over the $2,000 threshold are unaccounted for in their efforts to address climate risk.

We are past the point where disclosure can be a helpful approach to the climate crisis. And even if disclosure were a viable solution, how long do we want to pursue it? And if disclosure is finally achieved, what is the fund’s appropriate response to the disclosure?

The CalPERS approach to shareholder engagement is not working. So far we are seeing only business as usual on an infinite timeline, and that’s not a viable solution. CalPERS should commit to total divestment from fossil fuels, now.