Case study by AP7
Investor: The Seventh Swedish National Pension Fund (AP7)
HQ: Stockholm, Sweden
Operations: Asset owner
USD AUM: $52 billion (as at 31/12/2017)
Asset mix: Global equities, private equity and fixed income
AP7 recognises the threat of climate change to its investments and the need for appropriate national and global policy measures to mitigate climate-related risks. In the political process leading up to the Paris Climate Summit in 2015, it became increasingly apparent that the business community’s influence over political decision making was significant.
While we are mindful of each company’s right to participate in public and political debates, we also recognise the need for corporate support of policy measures to mitigate climate risks. We expect that the companies we own do not oppose or otherwise frustrate policies aimed at meeting national strategies to lower greenhouse gas emissions. Thus, to protect the long-term value of our investments, AP7 saw the need to engage on the issue of corporate climate lobbying.
Together with the PRI, AP7 participated in the drafting of the Investor expectations on corporate climate lobbying document in 2015. We then co-filed shareholder resolutions at the AGMs of a few oil majors in the US. AP7 and other investors co-filed resolutions for ExxonMobil’s, ConocoPhillips’ and Chevron’s AGMs in 2016, asking for greater transparency on lobbying activities.
In the engagement with ExxonMobil, it became apparent that the company did not share our understanding on why this information was relevant to its shareholders. AP7, with the other co-filers, therefore geared up for further engagements and continued filing the resolution at the 2017 AGM.
Possibilities enabled by the Paris Agreement
As part of AP7’s active ownership – to put pressure on companies to respect international norms on human rights and the environment – our holdings are regularly screened for norms-related breaches. When a breach of norms is verified and the company after dialogue with AP7 does not take a responsible course of action, AP7 publicly blacklists the company and sells the shares held. The signing of the Paris Agreement in 2015 enabled – for the first time – the UN Framework Convention of Climate Change (UNFCCC) to be included in AP7’s norms-based screening. As of December 2016, AP7’s holdings were screened for companies acting in conflict with the Paris Agreement.
By integrating the Paris Agreement and UNFCCC into the norms-based framework, AP7 contributes to the interpretation of the agreement in terms of corporate responsibility. The business community plays an important role as a positive and constructive force to reach the targets set in Paris. But companies within the business community can also hinder the successful implementation of this agreement. By analysing what constitutes a norms-related breach of the UNFCCC, AP7 attempts to pinpoint what is unacceptable corporate conduct. The analysis aims to define what would constitute a breach of the Paris Agreement. We see this as our contribution in helping to hold companies accountable for their actions with regards to international norms.
In the first analysis of AP7’s holdings including a focus on the Paris Agreement, our assessment concluded that ExxonMobil fell short of aligning itself to the climate goals as agreed by the international community, the recommendations of the IPCC and the 2 degrees Celsius target. The assessment led to AP7 divesting from ExxonMobil in June 2017 and publicly blacklisting the company.
The decision was the result of a balanced assessment of information from various sources, such as the allegations raised by the Attorney General of both Massachusetts and New York that ExxonMobil misled investors on how it accounted for climate change, as well as information from several lawsuits in California.
All told, the analysis concluded that ExxonMobil has not demonstrated that its public policy advocacy and the activities of the industry associations of which it is a member are not in conflict with the goals of the Paris Agreement. Furthermore, it has not demonstrated how its business model will be affected by global efforts to limit the average rise in temperature to below 2 degrees Celsius.
Hoping to be a shareholder again
For AP7, the idea is not for blacklisted companies to remain on the list forever. On the contrary; it is hoped that they will make improvements that will make it possible to invest in them again. AP7 welcomes cooperation with others on blacklisting, but always makes sure it is based on our assessments. Blacklisting is used to caution companies and prompt a change in their corporate conduct. This approach has served AP7 well in the past and we have good experience of companies assuming a responsible course of action after a norms-related breach and subsequent blacklisting, which, ultimately, has led to AP7 investing in them again.
We argue that the implementation of the Paris Agreement into AP7’s norms-based methodology will help us to bring the issue of climate lobbying front and centre of public and corporate view. AP7 and ExxonMobil have engaged since the divestment, both in correspondence and meetings, providing our rationale for the divestment and what we expect ExxonMobil to do to be taken off the blacklist. AP7 continues to be hopeful that ExxonMobil will change its course of action regarding corporate climate lobbying and that we thereby can become a shareholder in the company again.
Converging on climate lobbying: aligning corporate practice with investor expectations
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Case study: ExxonMobil - perspective from AP7