The fossil fuel divestment movement reports that institutions now committed to divest from the oil and gas industry represent a total of approximately $40 trillion in assets. Renowned climate scholar and activist Bill McKibben has pointed out that this surpasses the combined gross domestic product of the United States and China. According to McKibben, the divestment movement is already having a significant impact, which he anticipates will grow in its ability to cripple oil and gas companies seeking long-term investment capital.
This year marks Prentiss Smith & Company’s 10-year anniversary of our own divestment from fossil fuels among the investments we make on behalf of clients. While we were early to adopt such a strategy, we are cognizant of its relative strengths and weaknesses. Absent the critical mass that, in McKibben’s view, is now being achieved, the direct financial impact of divestment on oil and gas companies has likely been limited. On the other hand, the divestment movement’s ability to amplify the urgency of addressing climate change can hardly be overstated. As pressure has grown from firms like ours to statewide university systems, pension funds, religious denominations and more, the goal of taking away the social license of oil and gas firms to pollute with impunity is well on its way to being achieved.
But alongside the growing divestment movement, another strategy has moved ahead on a parallel track: that of direct shareholder engagement and activism. Proponents of shareholder engagement, also known as active ownership, use a financial stake in companies to campaign for change from within. This strategy, too, appears to be rapidly bearing fruit. The Wall Street Journal recently reported that two-thirds of S&P 500 companies had set a carbon target by the end of 2020, up from less than one-half in 2017 and about 35% in 2010. According to the annual proxy season review put out by Harvard Law School’s Forum on Corporate Governance, the 2021 proxy season may have seen as many as half of shareholder proposals withdrawn when companies submitted to pressure and agreed to set emissions targets. Of the proposals seeking corporate emissions-reduction plans that did go to vote at annual meetings, average support among all voting shareholders was an extremely high 55%.
Of course, many of these commitments and shareholder proposals resulting from active ownership are taking place outside the oil and gas industry. At Prentiss Smith & Company, in the past year alone we have engaged food and consumer products companies on their plans for halting deforestation, technology and manufacturing companies on improving their emissions tracking and sustainability reporting, and a global investment manager on its climate-related proxy voting, alongside other engagements on social issues. Such efforts are hardly less important than those targeting the fossil fuel industry; change must come from virtually every part of the economy if climate disaster is to be averted. And in our own efforts, we have found engagement to be highly effective in moving companies forward.
But what about fossil fuel companies and other large emitters? Is it better to divest, or engage? Increasingly, we believe either strategy can be highly effective. If the divestment movement is truly nearing a tipping point, now is an excellent time to join it. On the other hand, with the SEC undergoing its own evolution toward climate sensitivity (including a letter reportedly sent to dozens of companies in September asking for more climate disclosures), shareholder proposals with large emitters are poised to become much more direct. The 2022 proxy season will likely see a slew of proposals go to vote requesting oil and gas companies to set their own emissions targets, proposals that would likely have been thrown out by the SEC in past seasons. Thanks to this trend, it’s also an excellent time to be an activist owner of large emitters.
At Prentiss Smith & Company, we remain fully committed to 100% divestment from fossil fuels in all the holdings we bring into client portfolios, as we have for the past 10 years. At the same time, we are pursuing alternatives for engaging large emitters, in an effort to do everything we can to take advantage of this moment. But for those who must choose one strategy or the other, we believe there is no wrong answer.