Why companies must take shareholder petitions more seriously this year

The investor pressure on Big Tech continues to mount. Yesterday, a group of Alphabet shareholders hit the Google parent with a welter of proposals around human rights and governance risks ahead of its annual meeting this summer.

The 11 proposals reflect a range of concerns surrounding Alphabet and other tech groups. One says Alphabet should provide more transparency about how its algorithms target users with advertising. Another asks for an audit on its operations’ adverse impacts on people of colour. A third demands a detailed report on how Alphabet’s lobbying aligns with the Paris agreement.

As is often the case with such proposals, the investors behind them are mainly smallish funds with an explicit focus on sustainability and social impact. For the resolutions to pass, the support of larger investors will be crucial — especially the giants with trillions under management such as BlackRock, Vanguard and State Street. The relentless tide of shareholder votes on environmental and social issues is forcing these behemoths to consider their willingness to use powerful voting positions to accelerate corporate change. And, as we noted in a recent edition, their relatively low rate of support for such proposals is attracting growing scrutiny.

That’s the focus of Patrick’s lead item today, an interview with State Street Global Advisors chief executive Cyrus Taraporevala. Tell us if you think Taraporevala’s plans will be enough to relieve the pressure.

Also in today’s newsletter, I take a look at the latest thinking on climate-related disasters from reinsurer Munich Re, Tamami reports on new developments in Indonesia’s giant coal sector and Kristen highlights a useful breakdown of carbon emissions across business sectors. — Simon Mundy

State Street demands specifics for ‘bloody hard’ carbon transitions

The world’s largest carbon-emitting companies will need to disclose more specifics about their transition plans this year — or face opposition to individual board members, State Street Global Advisors said in an annual letter to companies.

Ahead of the 2022 annual general meetings season, State Street said it would push the largest emitters in oil, gas, utilities and mining to disclose carbon-weaning strategies and funding for this transition among other specifics. Failure to do enough would prompt State Street to consider voting against certain board directors in 2023, the asset manager said.

With more than $3tn of assets under management, State Street is one of the giant investors that have become gatekeepers for companies on environmental, social and governance (ESG) issues. Asset managers will be under pressure again this year from environmentalists who see their voting power as a vital cudgel in the fight against global warming.

In an interview with Moral Money, State Street chief executive Cyrus Taraporevala said one of the biggest problems his firm could address this year would be encouraging a transition from “very dark brown” assets such as coal to natural gas.

“We want to be supportive of the fact that they don’t need to dump all of their brown assets tomorrow morning,” Taraporevala said. “We don’t believe in the simplistic ‘green is good and brown is bad’,” he said, acknowledging that these transitions “are going to be bloody hard”.

State Street also has an eye on gender equity. The firm that placed the statue of a “fearless girl” in front of the iconic Wall Street bull in 2017 will again this year push companies globally to add women to boards. Beginning in 2023, State Street said it wanted big companies in the US, Canada, Europe and Australia to have at least 30 per cent women directors. The push could add an estimated 3,000 to 4,000 more women to boards.

Taraporevala also responded to criticisms, raised by ShareAction in December, that US asset managers lagged far behind European counterparts in their support for shareholder resolutions on environmental and social issues. “Look at it over multiple years,” he said of SSGA’s voting. “I find it very interesting when you see someone go from zero to 40 per cent [support] in one year. What happened here?” The ShareAction report found that State Street voted in favour of 32 per cent of ESG-related shareholder resolutions last year. That compared with 40 per cent for BlackRock, and over 90 per cent for European peers such as BNP Paribas Asset Management, Amundi and Aviva Investors.

Still, with the big US asset managers now starting to pay serious attention to ESG issues, companies can no longer shrug off shareholder petitions, and must scramble to get ahead of investor scrutiny. (Patrick Temple-West)

Insurers grapple with rising climate risks

When Ernst Rauch joined Munich Re to study climate change risks in the late 1980s, the global reinsurance giant had already been investigating that field for more than a decade as one of the first major companies to wake up to the emerging threat. Following last year’s disastrous floods in Germany, the danger is getting alarmingly close to home for Rauch, who now heads up climate research and strategy for the €59bn-revenue company.

Rauch and I caught up as Munich Re published its estimate of losses from natural disasters in 2021. Insurers had to cover damage worth $120bn last year — second only to the annus horribilis of 2017, when the total came to $146bn. And a big chunk of the insurance companies’ own losses, in turn, were covered by reinsurance groups like Munich Re.

As has often been the case in recent years, the single biggest loss last year came from a monster storm in the north Atlantic: Hurricane Ida, which devastated parts of the south-east US in August. But the summer floods in Europe, which killed more than 200 people and caused damage worth €46bn, were a dramatic departure from anything the insurance industry is used to.

In response, Munich Re has decided to invest in developing higher-resolution climate models to help it anticipate the next such disaster, Rauch told me. As concern grows in Europe about the growing threat of climate change, he said, the continent’s traditionally low levels of disaster insurance are set to rise substantially. Only about a quarter of last year’s German flood losses were covered by insurance.

An increase in European demand seems promising for Munich Re, which has an uncomfortably high level of exposure to US catastrophe risk. “Our appetite is there — we’re interested in having a balanced risk portfolio,” Rauch said.

But their protection will come at a price — as was starkly visible from the price movements this month, when reinsurance contracts were renewed. The rates for coverage in some disaster-hit areas of Germany went up by 50 per cent. And it wasn’t just in Europe that reinsurers were getting leery. Globally, property reinsurance prices rose 9 per cent, according to insurance broker Howden — the biggest jump for well over a decade.

As climate risks push up insurance prices globally, governments will need to decide whether to spend more to subsidise the protection of vulnerable property — or encourage people to move away from risky areas. In the US, the National Flood Insurance Program, which has provided subsidised insurance since 1968, has started to increase its rates for property in the riskiest coastal areas — to fierce criticism from some politicians.

In Germany, meanwhile, the recent floods have spurred calls for the government to offer hefty subsidies for property insurance where the market price is too high, Rauch said — a worrying development, in his view.

“It’s getting harder for some people to afford natural catastrophe insurance,” he said. “But if subsidies are increased, property owners would no longer understand what the real risk price is. It could lead to a risk bubble.”

Whether costs are borne by homeowners, taxpayers or insurance company shareholders, the price of worsening natural disasters will be impossible to avoid. (Simon Mundy)

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

After China and India suffered power disruptions caused by coal shortages, Indonesia took swift action to avert the same fate. Jakarta imposed a one-month ban on coal exports to protect the domestic power supply earlier this month.

While officials are discussing the possibility of resuming exports, the ban — so far — has prevented a major blackout. But the shockwave created by the decision highlights the risk of coal reliance for Indonesia and the entire Asian region.

Coal miners in Indonesia are required to sell 25 per cent of their output on the domestic market. But as the price of coal has surged in the global market, some suppliers have ignored the requirement. This has pushed coal stockpiles for domestic power generation to a “critically low” level.

Analysts argue that the fear of a shortage should be a wake-up call to reduce Indonesia’s dependence on coal. The country generated more than 60 per cent of its electricity from coal in 2020.

“Even if you have abundant fossil fuel resources in your own country, there is always the market price risk, commodity risk, and other transportation, logistics and political risk looming over,” said Elrika Hamdi, Jakarta-based energy finance analyst at the Institute for Energy Economics and Financial Analysis.

Top importers should heed the alarm bell, too. Japan, South Korea, and the Philippines have been calling for the world’s largest thermal coal exporter to drop its export ban, because of local energy shortage concerns.

James Guild, adjunct fellow at the S. Rajaratnam School of International Studies in Singapore, explained that the recent episode showed the Indonesian government could demonstrate power to tame market forces with its large domestic coal reserves. “It’s going to take quite a shift in the incentive structure for them to give up that ability by moving from coal into renewables,” Guild said.

Chart of the Day

In most sectors, the majority of organisations’ emissions come from their supply chain, those commonly known as Scope 3 emissions, HSBC found in a breakdown of companies in the S&P Global 1200 index.

But there were some interesting differences between industries. Scope 2 emissions, related to energy purchased, in the communications sector accounted for a far bigger share of the total than for other industries, reflecting the huge electricity consumption of data centres.

To quantify the full climate risk of their portfolios, investors are scrutinising corporate emission reduction targets and net zero strategies, HSBC wrote. And investors are evaluating if companies are adequately using their influence to push the needle on greener supply chains.

The bank noted that Scope 3 disclosures were lagging behind those of Scope 1 and 2, posing a problem for investors seeking to acquire data on their portfolios. (Kristen Talman)

Smart Reads

• Climate activists have a new target in their sights: communications companies accused of spreading climate misinformation on behalf of their clients. In this excellent piece, Andrew Edgecliffe-Johnson details how leading PR firms, including Edelman, have responded.

• For a provocative take on the US energy transition, don’t miss the latest Lunch with the FT with Harold Hamm. The legendary oilman compares the climate movement to a “religion” and pours scorn on BP’s efforts to move towards renewables — but also calls for tougher global climate agreements to speed the demise of coal.