Climate change: Active stewardship vs. divestment

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At RBC Global Asset Management (RBC GAM), we believe that climate change is a material and systemic risk that has the potential to impact the global economy, markets and society as a whole. In 2020, we took steps to formalize our work to address climate change with the launch of Our approach to climate change. A cornerstone of this approach is active stewardship.

In this article, we will explain what active stewardship is and how it can be used to address concerns about climate change. We will also discuss the role of active stewardship versus divestment in achieving climate change objectives.

What is active stewardship?

Active stewardship refers to the actions that investors like RBC GAM can take to better understand and influence the activities of companies in which they invest (called issuers). We often express our views through:

• Engagement with issuers, either directly or together with other like-minded investors. Engagement allows us to learn about how issuers are approaching opportunities and key risks in their business due to climate change.
• Proxy voting on management and shareholder proposals. Proposals from shareholders often relate to climate change.

What is divestment?

Divestment refers to selling or avoiding investments in companies, sectors, or countries based on specific activities. It may be a direct alternative to active stewardship for investors seeking to effect change or to avoid sectors or areas where they perceive outsized risks.  Fossil fuel divestment can focus on the exclusion of all fossil fuels, specific types of fossil fuel, or specific extraction methods.

Investors who choose to divest from fossil fuels are often motivated by a desire to address climate change and/or to minimize financial risks. Global institutional investors have committed approximately US$11.48 trillion to divesting from fossil fuels as of 2019.¹

Is divestment effective?

In this article we lay out common motivations driving investors’ fossil fuel divestment strategies, and explore whether divestment can succeed in achieving those objectives. Here’s a quick look at the four goals investors are typically trying to achieve:

Goal #1: To minimize financial risks from asset stranding

Stranded assets are investments that a company has made but which will stop earning an economic return at some time before the end of their economic life.² Examples include the investments needed to find, extract and produce oil, coal or gas. These assets are at risk as governments pursue policies to reduce global warming under the Paris Agreement.³

While a fossil fuel divestment strategy may avoid exposure to asset stranding risk from the fossil fuel sector, it does not take into consideration the exposure to this risk across other sectors, nor does it differentiate between those companies that are proactively and effectively mitigating the risk versus those that are not.

Goal #2: To reduce greenhouse gas (GHG) emissions

Addressing climate change will require a significant reduction in GHG emissions. Most fossil fuel divestment focuses on excluding energy companies involved in extracting or producing fossil fuels, but fails to address the fact that most emissions are generated by the use of their products (e.g., for transportation, buildings, electricity).⁴Divesting also removes the investor’s influence with the company, and may shift ownership of the emissions to a less discriminating investor. Reducing GHG emissions in the real economy requires structural changes that cannot be achieved through divestment.

Goal #3: To accelerate the transition to a low-carbon economy

Transitioning to a low-carbon economy will require GHG emission reductions across sectors, as well as structural changes to our fossil-fuel based energy and transportation systems and our energy-intensive manufacturing and building sectors. A divestment strategy that targets an entire industry or sub-industry eliminates the ability of investors to direct their investment dollars towards the climate leaders within that industry, and away from its laggards. As such, this can remove the incentive for these companies to strive towards climate leadership, and miss out on opportunities to maximize long-term risk-adjusted returns.

Goal #4: To send a signal to companies and regulators.

For some investors, the objective of a fossil fuel divestment strategy is to drive change by sending a signal to companies and policy makers. Divestment campaigns have successfully played a part in changing the discourse around the legitimacy, reputation, and viability of the fossil fuel industry. However, this strategy does not work with state-owned oil companies that control at least US$3 trillion in assets and produce most of the world’s oil and gas.⁶

Moving forward

While RBC GAM offers divestment solutions, we believe that the best approach to support the transition to a low-carbon economy is through active stewardship.

We support this belief by continuing to invest in companies that are taking actions to reduce their greenhouse gas emissions and that position themselves in line with the goals of the Paris Agreement. We also use our influence as active investors to make sure that companies have in place robust governance oversight of climate change and report transparently on the actions they are taking to integrate climate change into their strategic, financial and risk management processes. We make investment decisions on a case-by-case basis and use stewardship activities to motivate companies to implement strategies and take actions that enable climate mitigation and adaptation. We recognize the importance of our role as an active investor and we will continue to be an active part of the climate change conversation and the transition to a low-carbon economy.

Read the full article or learn more about our initiatives as an active steward.

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1. $11 trillion and Counting, Go Fossil Fuel Free, 350.org, Divest Invest, September 2019 2. IEA. 2013. “Redrawing the Energy Climate Map.” World Energy Outlook Special Report, p.134. 3. Mercure, J., Pollitt, H., Viñuales, J.E. et al. Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change 8, 588–593 (2018). 4. MSCI ESG Research, July 2020 5. Global emissions, Centre for Climate and Energy Solutions, accessed November 26, 2020. 6. Data-driven Insights into National Oil Companies, April 2019, Natural Resource Governance Institute

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 Publication date: February 4, 2021