According to a recent article in the Dutch financial newspaper Het Financieele Dagblad about the huge profits reported by Shell and BP ‘The vast majority of shareholders is ecstatic about the high returns generated by oil and gas companies but is keeping quiet.’ And ‘shareholders who are sustainable, are much more vocal and get a lot more media attention’. In other words: for most shareholders short-term profit is still the number one goal, while climate concerns matter less.
You could indeed come to this conclusion given that the share prices of both oil companies rose sharply following the announcement of additional capital expenditure on fossil resources instead of enhancing sustainability. But it isn’t that straight forward. Instead, it probably demonstrates how a lack of ‘green’ knowledge and the power of a handful of mega asset managers has led to an increasing divergence between the reality on stock markets and the climate concerns held by society. As a result, companies such as Shell can continue to raise capital on artificially favourable terms.
Climate concerns do indeed exist on a worldwide scale
So how does the silent majority feel about climate change? Have climate activists indeed become increasingly vocal and is that what the media take their cue from? Or do climate concerns have a broader basis? The results of a recent survey by the International Monetary Fund (IMF) suggest the latter.
According to the researchers, in each of the 28 countries where the survey was held, at least 70% of the population believes that climate change is a serious problem. This group of countries includes relatively rich as well as poorer countries and, interestingly, in most of these countries, income differences do not affect the outcome. If we extrapolate these findings, it should also mean that a significant percentage of shareholders do indeed have major concerns about climate issues.
Limited knowledge prevents climate action
The question is why these concerns do not translate into broad-based support for climate policies. According to the IMF survey, the main culprit is a lack of knowledge: ignorance about the exact mechanism and effectiveness of carbon pricing, about the costs and how they are allocated and about the additional benefits (improved air quality, more jobs, less traffic congestion, etc.) makes people suspicious. The result is insufficient support for strong government policy. Consequently, the social cost of climate change is not passed on to the polluting companies via climate policies and as a result stock market valuations for fossil fuel companies remain much too favourable.
Light green is actually brown
Another consequence of insufficient knowledge is that many people believe that they invest sustainably but are not aware that the so-called green funds that they hold apply a ‘best in class’ principle. This means that these funds still invest in polluting sectors, but only in the best behaving kids in that (polluting) class. And thus, a lot of capital continues to flow towards polluting companies, even though in many cases that is not the investor's intention at all.
The power of mega asset managers
But even if investors do intentionally invest in funds that include fossil companies, their climate concerns are often not considered during shareholder meetings. This is where the world’s mega asset managers play a dubious role. These giants, which include the likes of BlackRock and Vanguard, are large and influential shareholders of numerous companies. Until recently they decided all by themselves whether they would vote for or against shareholder resolutions aimed at improving sustainability. And usually that meant that they would vote against.
Institutional investors (such as pension funds and insurance companies), who together represent 23% of the assets under management at BlackRock, for instance, are now allowed to decide themselves how their votes are to be cast. So far, only a quarter of them have used this opportunity. Private investors do not yet have this option, except under a pilot project in the United Kingdom. This is why the climate concerns that exist in society remain underrepresented at shareholder meetings. Consequently, this again leads to a misrepresentation of the significance of climate concerns on the stock market.
Stock market does not mirror society
The conclusion seems justified that most shareholders do worry about climate issues. The fact that this is not yet evident on stock markets is entirely due to the lack of knowledge among investors, which creates impotence and unwillingness, and to the excessive power of a limited group of mega asset managers. Until this changes, fossil projects will remain profitable. Power can be restricted, knowledge can be expanded.
This is an translation of Joeri de Wilde's column on Financial Investigator, published 21 February 2023.