Old Mutual Investment Group and Mergence Investment Managers have indicated that they will vote in favour of the Standard Bank climate change resolution that has been proposed by shareholders. However, Africa’s largest privately owned investment management company, Allan Gray, plans to vote against one element of the two-part resolution. With no indication how the bank’s two biggest shareholders — Industrial and Commercial Bank of China and the PIC — will vote, the decision could go down to the wire.
This is the first time that a South African company has tabled a resolution on any climate-related issue, in particular, one proposed by shareholders. (The Companies Act permits shareholders to table resolutions for voting at the company’s AGM.) While the Standard Bank board has recommended that shareholders vote against the resolution, its decision to table the resolution, which was proposed by the Raith Foundation and shareholder activist Theo Botha, with support from Just Share, is significant.
This is in stark contrast to Sasol, which would not table a climate risk resolution proposed by Raith and Botha in 2018. Sasol’s refusal was based on a legal opinion it had commissioned, but wouldn’t share, to the effect that climate change issues do not constitute matters that shareholders are entitled to exercise voting rights on.
Around the world, shareholder resolutions have become one of the most powerful tools for raising awareness about climate change risk, and for driving the business and financial sectors to take action to understand, mitigate and avoid that risk.
South Africa is one of the world’s biggest carbon emitters. Many of the biggest companies listed on the JSE are extremely carbon-intensive in that they emit huge quantities of greenhouse gases. It follows that many of the financial institutions that invest in these high carbon emitters and lend money to them are themselves listed companies. It also follows then, that as funders, they are at risk of climate change events.
Increasingly the expectation is that banks should take into account the emissions of the many businesses and projects they finance.
Thus the resolution proposes that:
10.1 Standard Bank disclose the greenhouse gas emissions of the bank’s lending portfolio and the amount of funding the bank provides to carbon-related assets. Specifically, this would be the amount and percentage of carbon-related assets relative to total assets, and a description of any significant concentrations of credit exposure to carbon-related assets.
10.2 The bank adopt and disclose a policy on lending to coal-fired power projects and coal mining operations.
In defence of its “no” recommendation, the board acknowledged that climate change is a global issue facing governments, communities, businesses, and individuals. It also recognised that the most material risks and opportunities relating to climate change result from bank lending to clients with significant greenhouse gas emissions.
However, the board added that the bank already has various measures in place to manage environmental, social and governance (ESG) risk in its lending. The details of these are set out in the company’s ESG report. It adds that additional steps have been taken to identify, assess, manage and disclose climate change risk in the group’s lending portfolios.
However, executive director of Just Share Tracey Davies notes that the board’s recommendation to vote against the resolution is counter to the recommendations of the international Task Force on Climate-Related Financial Disclosures (TCFD), which an increasing number of banks around the world are using to frame their climate-risk disclosures.
When the TCFD was established in December 2015, a key motive was to “enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks”.
“It makes sense for Standard Bank to carry out such an assessment, given its own acknowledgement that ‘climate change, coupled with the related issue of water scarcity, has emerged as a leading risk for business and society’, according to its 2017 ESG report,” she says.
Old Mutual will support the resolution, but governance and engagement manager Rob Lewenson notes that contrary to popular opinion, voting yes was not a given.
“The decision to support resolution 10.2, which proposes that Standard Bank adopt a public disclosure policy on lending to coal-fired power plants, was simple as the bank has already adopted a policy and is in the process of extending the policy to coal mining.”
Voting in support of resolution 10.1 is significantly more technical, he says.
“The devil is in the detail. The resolution calls for two things — measurement of the bank’s own greenhouse gas emissions as well as its exposure via lending to climate change risk. To truly understand and quantify the impact of climate change on the bank’s lending portfolio is a huge undertaking. This is not necessarily something the bank can do at a reasonable cost and within the timetable stipulated in the resolution,” he says.
Old Mutual will support the resolution, but with the proviso that the time frame is too ambitious. The bank needs to understand how its various assets are exposed to a climate change event.
“Consider the risks of cyclones or hurricanes to assets like Richards Bay coal terminal or a gas-fired power station in Mozambique? How does one quantify and measure these risks?”
While the cost of this exercise is high, Lewenson points out that not understanding the risks could be equally high. The bankruptcy of Californian power company Pacific Gas & Electric is arguably the world’s first climate-change bankruptcy. The firm will file for bankruptcy in June 2019 in the face of potential liabilities of $30-billion or more resulting from wildfires that swept its service area in 2017 and 2018. The extensive damage was due in large part to extremely hot, dry conditions that spawned more frequent and intense fires.
Climate disclosure is not simply a fad. In the UK in April, the Bank of England announced that it would disclose its assessment of how it manages climate-related financial risk in the 2019/20 annual report and other financial institutions are following suit. But that doesn’t make it easy.
The problem with the type of disclosure that is being requested, adds Allan Gray chief investment officer Andrew Lapping, is that it is potentially vast.
“When we think about climate change, we think immediately of energy and extractive industries like coal-fired power stations and coal mining. But what about the cement industry? It’s a massive contributor to emissions. And what about lending into the agricultural sector? Lending to agriculture is a social good, but it’s risky from a climate perspective. Add to that the fact that feedlot farming is a massive contributor to CO2 emissions. There are so many climate risks.”
The point he is making is that if the bank had to quantify the climate risk associated with each and every investment, the report would run into hundreds of pages. And this is in addition to the disclosure that the bank already makes.
“We believe that what adds value to shareholders is not 500 pages of detailed lending information, but a broad policy statement that shareholders can digest. It’s easier to hide stuff that matters in vast amounts of data.”
The bottom line, says Mergence Investment Managers, is that while the notice of the Standard Bank Annual General Meeting states that the climate-risk-related resolution was proposed by “shareholders holding less than 0.001% of the company’s issued ordinary share capital”, it addresses an issue that affects 100% of Standard Bank’s shareholders.
Shareholders will vote at 9am on Thursday 30 May 2019. DM
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