May 8, 2020
The most effective way to drive positive change is through owning companies and using the rights that come with ownership to engage management in dialogues that address ESG risks. The rise of the Fossil Fuel Divestment movement might at first seem at odds with that philosophy. But both approaches can work together.
NEI has consistently achieved A+ ratings from the UN Principles for Responsible Investment (PRI) through active ownership – a reflection of our experience and expertise in corporate engagement. Our engagement work goes back 20 years, when, faced with the choice of divesting from an otherwise good company due to a specific ESG concern, we instead reached out and asked management if they’d reconsider their direction. That interaction was the genesis of our corporate engagement program, and the embedding of our core philosophy: that the most effective way to drive change within a company is through ownership and engagement.
It is that philosophy that has driven our investment in fossil fuel-based companies. Through such ownership, we have used corporate engagement – which includes ESG-focused dialogues, proxy voting and the filing of shareholder resolutions – to help them transition towards achieving operational viability in a low carbon future.
We continue to own companies in the Oil and Gas sectors – companies that are often the primary target of strategic divestment. The ‘Fossil Fuel Free’ (FFF) movement has gained considerable momentum recently – especially through the work of climate activist Greta Thunberg. The movement has helped push mitigating the impact of climate change to the top of everyone’s agenda. Retail investors have joined many institutional investors (such as pension plans) in the demand for broad fossil fuel divestment.
The pressure to divest from fossil fuel-based investments would seem to conflict with an approach that favours ownership and engagement. However, we don’t see the approaches as mutually exclusive. We think both positions are useful in reaching the climate goals we share.
Let’s look at our decade-long engagement work with Suncor as an example. This engagement has produced numerous accomplishments – many of them firsts in the Oil and Gas sector. They include:
- The first resolution on using internal carbon pricing – it is now commonplace and has shifted the industry
- The first North American company to commit to producing a low-carbon resiliency report – this will be a future norm, shifting the industry again
- Setting greenhouse gas (GHG) intensity reduction targets(a 30% reduction by 2030), along with targets around water use and Indigenous engagement
Other companies have since followed Suncor’s lead. Shortly after getting Suncor to support a low-carbon resiliency resolution, we leveraged that precedent to get Cenovus to do the same. At our most recent meeting with the company they put a date – 2050 – on their net zero commitment. This made Cenovus the first energy company in Canada to do so.
None of these accomplishments would have been possible had we chosen to divest from Suncor and Cenovus.
The challenge with engagement – any engagement – is that this work takes time. You need to build trust and an understanding of the ESG issues that are driving the agenda for change. The FFF movement has accelerated the timeline of the energy transition agenda. There is more urgency for energy companies to change faster than there was when we first started talking to Suncor, because access to capital will increasingly depend on moving more quickly on the energy transition. That’s where the FFF movement has value. It is creating an important sense of urgency.
That said, we continue to believe that urgency needs to be accompanied by a careful, planned and orderly transition, which is the role of engagement. The two approaches can and should work together.