Investors Under Pressure: Divestment Loses Ground

Even before the Russian invasion of Ukraine and resulting tectonic shifts around energy politics, there were signs that the “divest from oil and gas” movement might be losing steam. Investors under increasing pressure to address climate change were starting to fall into two camps: (a) those who would divest and (b) those who would engage with companies to create change. Two big recent big pension fund decisions — one in New York and one in California — have demonstrated that the engage camp is gaining influence. The breakdown of the “oil and gas is not an ESG investment” paradigm presents an opportunity for game-changing oil and gas companies to attract capital.

According to fossil fuel divestment activists, more than 1,500 investor groups have committed to divest $40.43 trillion of their investments in fossil fuel companies. Yet the recent pension fund decisions indicate that even the nation’s largest pension funds are unsure of the best path to realize investor activism goals on climate change. This divergence of thought has made one thing clear: Investors are frustrated about the environmental and social impacts of the corporate sector, but unclear on the best way to make a cause for change. Caught somewhere between ESG-centric thinking and record oil and gas prices, investors must seek sustainable change that still supports their bottom line.

Successful oil and gas companies will demonstrate that their energy transition plans align with long-term profitability so potential investors can make a decision to invest and current investors stay on board.

Both of These Things are True:

  • Investors are under increasing pressure to leverage their investments to influence positive change in the global marketplace.
  • Oil and gas leaders have a unique opportunity to attract concerned investors by anticipating investors’ needs and articulating how their companies are proactively addressing social and environmental risk.

The Situation

The divest-or-engage debate came to a head in February with two interesting decisions. First, the New York State Pension Fund (NYSCRF) announced a $238 million divestment from oil and gas companies it saw to be “unprepared to adapt to a low-carbon future.” This group of companies included about one-half of the oil and gas companies owned by NYSCRF. The decision to divest from select oil and gas companies reflects public-sector investors’ attentiveness to how companies are embracing the energy transition in their strategies, a stance we saw earlier this year in private equity announcements, covered in this Both True.

Environmental and social activist groups applauded NYSCRF’s move as progress towards a greener future. But two of the nation’s largest pension funds — the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) — oppose such moves as less than constructive. “When you divest you don’t solve climate change, you don’t solve the issues,” said CalPERS managing director Simiso Nzima in response to NYSCRF’s divestment.

CalPERS and CalSTRS, which together control over $42 billion  in fossil fuel investments, prefer to “constructive engagement” to communicate their concerns while maintaining maximum return. Recent efforts from the California Senate to force fossil fuel divestment with Senate Bill 1173 has highlighted this divide; CalSTRS voted to oppose the Bill, stating that “Our policy is unequivocal that we oppose bills that force divestment.” They regard divesting as the most drastic step an investor can take, because it severs all influence over a company. An example of constructive engagement: Since 2010, CalPERS has persuaded nearly 200 of the 203 major U.S. companies it engaged on the issue to adopt majority voting for director elections, creating a platform to voice its concerns.

Pension funds are among the largest institutional investors in fossil fuels, and their actions forge a path for smaller investors to follow. NYSCRF and the California funds obviously have different approaches. Yet the core theme remains the same: Major allocators of capital are increasingly focused on how to be stewards of society and the environment through their investment decisions.

Seize the Day

We know divestment is not a proven strategy for change; as in any healthy market, for every seller there is another buyer at the right price. A firm may dump its fossil fuel shares only to see them snapped up by a less climate-conscious investor. But even when it’s not effective financially, divestment damages the public’s perception of the targeted sector: Divesting is a fast-track way to stigmatize an industry and reinforce the perception that our society no longer needs fossil fuels.

Companies can either play hardball or engage proactively and constructively with investors. At Adamantine, we work with our forward-thinking clients to:

  • Analyze your business through an activist lens. CEOs and boards alike can look at their energy transition and ESG strategies through an investor’s eyes. When asked, investors need to answer the question: Why are you still investing in oil and gas? Your company answers this question through its ESG and energy transition materials.
  • Keep an eye on proxy season. Check out Adamantine’s 2021 report Proxy Season Turns Up the Heat on Oil and Gas Companies for a primer on how proxy season drives evolving investor expectations.
  • Communicate openly. Adamantine clients have had excellent results engaging regularly and proactively with their investors, including climate-driven activist groups. Ongoing dialogue allows companies to tailor their strategies rather than guessing what stakeholders may want to see next.
  • Exceed expectations. Investors and companies alike are faced with rapidly evolving pressures from environmental, social, and governance perspectives. Anticipating investor needs and exceeding expectations allows firms to write their own stories about the future of energy. Check out our latest report — Leader, Fast Follower, or Left Behind: Charting Your ESG Position — to understand where the bar is set.

If you don’t articulate meaningful ambition for the energy future coupled with transparent ESG progress, concerned investors may quickly suspect your company is on a business-as-usual trajectory, leaving you in the “not prepared for the energy transition” camp of companies. As BlackRock CEO Larry Fink writes, “Few things will impact capital allocation decisions — and thereby the long-term value of your company — more than how effectively you navigate the global energy transition in the years ahead.” Game-changing leaders are anticipating investor priorities and writing their own stories of leading into the energy future — now.

Adamantine can help you translate your investor expectations into an effective ESG strategy. Reach out for a consultation. If you would like to recommend Both True to a colleague, they can subscribe here.

Here’s to investing in us, the future,

Tisha

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