Comment: the rules of engagement

Channels: SAA/ALM, Outsourcing, Risk, Governance, Regulation

Companies: Aviva, Allianz Global Investors, Allianz SE, Manulife, Axa Investment Managers and Legal & General Investment Management

The same day a report highlighting investors’ shortcomings in coal investment policies was published, investors with a combined $32trn in assets demanded governments increase action on climate change. Vincent Huck tries to reconcile the news


The two important pieces of news were widely covered in the press, but they have been scarcely correlated. Attempting to compare the two reveals the “good, bad and ugly” aspects of how investors are addressing climate change. 

The good

On 9 November, 415 investors with a combined $32trn in assets signed a statement that asks governments to strengthen their Nationally Determined Contributions to meet the goals of the Paris Agreement.

It has been called the single largest policy intervention from investors on climate change. 

“The global shift to clean energy is underway, but much more needs to be done by governments to accelerate the low carbon transition and to improve the resilience of our economy, society and the financial system to climate risks,” the group of investors said.

The statement requested governments to phase out thermal coal power, put a meaningful price on carbon and phase out fossil fuel subsidies. It also asks that they help accelerate private sector investment into the low-carbon transition and commit to improve climate-related financial reporting.

Signatories included insurance household name such as Aviva, Allianz Global Investors, Allianz SE, Manulife, Axa Investment Managers and Legal & General Investment Management.

The bad

Published the same day, a report by InfluenceMap, a UK non-profit organisation, found that big investors with a combined $40trn in assets had increased their holdings in thermal coal reserves by a fifth between 2016 and 2018.

The research, based on the Thomson Reuters Lipper financial database, introduced the thermal coal intensity (TCI) metric, expressed in tons/$m assets under management (AuM), and found that BlackRock held the most coal-dense portfolios among the 10 largest managers of listed funds.

Allianz, registered the lowest TCI with just 80 tons/$m AuM. Axa, on the other hand, more than doubled its thermal coal holdings between March 2016 and June 2018. 

“Most of this increase stems from Axa’s majority-owned subsidiary AllianceBernstein (AB) acquiring stakes in Peabody Energy and Arch Coal,” the report read. 

“We cannot confirm the accuracy of all the data in the file, as we don’t send our data directly to Thomson Reuters Lipper,” an Axa spokesperson told Insurance Asset Risk. “we do not use ‘reserves’ as a criterion for building our coal exclusion list, but instead use the Global Coal Exit List developed by NGO Urgewald. This explains why the issuers you have identified are not necessarily in the scope of our exclusion list. The ‘coal reserves’ criterion does not capture well the more forward-looking approach embedded in the GCEL. It is difficult to compare both approaches.” 

Axa’s investment restrictions apply to the insurer’s general accounts assets, the spokesperson continued, while the exposure identified in the report originate from exposure to third-party assets, on which the firm cannot impose ESG convictions top-down.

“However, Axa Investment Managers was one of the first asset managers to restrict coal investments for its third-party clients in 2017,” the spokesperson went on. “And for AB, after the IPO of our US businesses (Axa Equitable Holdings) in the spring, the Axa Group has announced its intention to fully sell down its ownership in EQH, hence in AB: these coal assets will therefore no longer be in Axa’s scope.”

At AB, Insurance Asset Risk was told that the firm foremost goal is to achieve the best risk-adjusted returns for its clients. 

“We believe it is their decision to define which sectors don’t align with their beliefs,” a spokesperson said.

The ugly

The ugly lies in the grey area in-between those two stories. Blaming others is not new and has always been easier than taking actions. 

At a recent event, a panel of insurance investment professionals, praised - as they would - the stewardship role of institutional investors over what they characterised as the simple, and somewhat naïve, idea of divesting. 

Considering that oil and gas companies have spent only 1.3% of total 2018 capital expenditure on low-carbon assets this year and $22bn in alternative energy since 2010, despite all the engagement efforts by institutional investors, I asked: “So when do you say enough is enough and divest.”

“When it becomes too hard or impossible to engage,” was the answer. But when I asked to define what “too hard” meant, little came out of the response. 

I wouldn’t claim to know if divestment works better than engagement, but calling on someone to do something that you are not doing yourself doesn’t seem to be the right solution either.

To paraphrase Bob Dylan, when we cease to exist, then who will we blame?