Danish pension companies own shares in a large part of the world’s most CO2-polluting companies, and the investments are often justified by the fact that the pension companies can make the companies greener through active engagement. But the companies’ green transition is far too slow, and some companies even directly oppose the green transition. Until now, Danish pension companies have overwhelmingly supported the annual election of candidates for positions on the companies’ boards, even when the same board members are responsible for the companies’ lack of green transition. However, the pension companies’ current approach is totally inadequate, and instead the pension companies should strengthen their active ownership by voting against the re-election of board members of companies that do not support the Paris Agreement.
AnsvarligFremtid´s recommendation to Danish pension companies (Summary):
As a shareholder, the exercise of active ownership is considered a key instrument for influencing companies in a more sustainable direction. Thus, most Danish pension companies have a policy for their active ownership in relation to climate, e.g. by voting for shareholder-submitted general meeting resolutions that support a Paris-compatible business model.
However, all Danish pension companies still have equity investments in a number of large CO2-emitting companies that show a lack of commitment to the green transition. Furthermore, the pension companies have shares in a number of fossil fuel companies that establish new fossil projects or new coal power capacity, and the pension companies also have equity investments in many banks that continue to contribute with financing (e.g. lending) to help fossil companies establish new fossil projects or new coal power capacity.
Therefore, pension companies should expand their voting policy at general meetings through:
1) Use of an already developed tool and analysis framework developed by the investor network “Climate Action 100+” and
2) Use the “Net Zero by 2050” framework developed by the International Energy Agency which can be applied to the fossil fuel and banking sectors to assess the compatibility of their business models with the Paris Agreement.
Detailed reasons for the recommendation:
The green transition of the world’s most CO2-emitting companies is far too slow
The investor network Climate Action 100+ with more than 700 of the world’s largest investors, has been formed to establish common standards to achieve a more efficient exercise of active ownership (1). CA100+ has prepared the analysis tool “Net Zero Company Benchmark”. Using this tool, the CA100+ has analyzed the world’s 167 most CO2-emitting listed companies and their climate transition efforts based on 10 measurement indicators, also shown below (2). For a number of companies, these analyses have identified major shortcomings in their information on how to manage climate risks (3).
Despite the Climate Action 100+ network’s initiatives in recent years, only a few of the 167 focus companies have managed to provide convincing evidence that they are on track to establish a business strategy that is compatible with the goals of the Paris Agreement. Even when evaluating the companies on four of the metrics where the companies have made the most progress (indicators 1, 3, 7 and 10), only two companies fully meet all of the four points (Download overview here). With such modest progress, an important conclusion is that there is a great need to increase the efficiency of active ownership.
Fossil fuel companies and big banks are still pouring billions of dollars into fossil energy
A number of independent analyses have unequivocally documented that the majority of fossil fuel companies continue to invest billions in new fossil projects (4). Similarly, the vast majority of large international banks continue to have a problematic practice of financing the establishment of new fossil fuel projects (5). The fact that new fossil fuel projects are still being established is in stark contrast to the fact that the IEA, the International Energy Agency, has stated unequivocally in its Net Zero by 2050 Scenario that no new fossil projects can be established if we are to comply with the Paris Agreement (6). There is therefore a great need for responsible investors to state very clearly that both fossil fuel companies and banks must completely stop investing in new fossil projects, and that they will otherwise divest their investments in these companies.
The traditional active ownership strategy has limitations, and must therefore be supplemented with new tools that can be systematized and implemented across large equity portfolios
Each pension company could in principle prepare shareholder resolutions for increased climate action and submit the proposals at all companies’ general meetings. But for the Danish pension companies, which typically manage an equity portfolio consisting of more than a thousand listed companies worldwide, it is a great challenge to exercise active ownership over all companies. It takes a lot of resources to do a thorough research for each of the many companies’ business strategies, annual reports, etc. Therefore, most pension companies use so-called shareholder voting advisory companies to help them with advice to handle the voting at the companies’ general meetings. Although this advice is important, it is also necessary for pension companies to establish their own clear policies for active ownership, so that their advisors can also provide the optimal advice. One important tool is therefore to take advantage of the pension companies’ access to the objective analyses of the companies’ handling of climate risks that are already available in the form of CA100+’s company benchmark, and combine this knowledge to influence the pension company’s voting at the companies’ general meetings.
Voting advisory firms and a growing number of investors are already taking a systematic approach to voting against company boards
The voting advisory company Institutional Shareholder Services (ISS), which a number of Danish pension companies uses, has formulated voting guidelines that covers the election board member candidates. ISS’s published recommendations appear among the most detailed and well-developed, especially concerning climate (7), and their voting recommendations are based, among other things, on the CA100+ Net Zero Benchmark evaluation of companies. Also, an increasing number of investors have already established policies for voting against boards of directors in the event of inaction on climate change and have applied these policies at the 2022 general meeting season (8), and several large investors such as the Norwegian Oil Fund and Allianz have recently announced that this will be a focus area for general meetings in the future (9, 10). Danish pension companies should also be among the investors with the most ambitious approach to active ownership regarding climate, and following this recommendation will be key in ensuring this.
CA100+ Net Zero Company disclosure indicators:
1) Net zero GHG Emissions by 2050 (or sooner) ambition
2) Long-term (2036-2050) GHG reduction target(s)
3) Medium-term (2026-2035) GHG reduction target(s)
4) Short-term (up to 2025) GHG reduction target(s)
5) Decarbonisation strategy (target delivery)
6) Capital allocation alignment
7) Climate policy engagement
8) Climate governance
9) Just Transition [Beta]
10) TCFD disclosure
The specific recommendations to Danish pension companies
Pension companies should develop a policy for strengthened active ownership. This should be done by aligning votes with the Paris climate agreement at the general meetings of companies in which the pension company owns shares. The preparation of such a policy paper must be done so that it can be implemented by 2024. The implementation must be based on a so-called “comply or explain” approach so that the pension company must be able to justify deviations from the policy upon specific request.
For general meeting votes in the future, it is therefore proposed that the pension company votes against the re-election of the chairman of the board or, alternatively, board members responsible for managing climate risks and opportunities.
1. Applicable to Climate Action 100+ focus companies that fail to act on the following, which relate to their management of climate risks:
a) Setting 2030 targets and 2050 greenhouse gas emission reduction targets. The assessment of this shall be based on criteria set out in the “CA100+ Net Zero Company Benchmark”, indicators 3 and 1 respectively.
b) Partially or fully adequate establishment of a policy for lobbying activities supporting the Paris Agreement based on indicator 7 of the “CA100+ Net Zero Company Benchmark”.
c) Partially or fully adequate publication of climate-relevant information, in accordance with the guidelines of the Task Force on Climate-related Financial Disclosures (TCFD) (11) and based on indicator 10 of the CA100+ Net Zero Company Benchmark.
As the recommendation of the International Energy Agency (6) to not establish new fossil fuel projects is not included in the current “CA100+ Net Zero Company Benchmark”, the voting policy against the re-election of the chairman of the board or alternatively board members responsible for managing climate risks and opportunities should for the time being be supplemented by the following separate points applicable to fossil fuel companies and banks:
2. Fossil fuel companies establishing new fossil fuel projects:
The company plans to establish new fossil extraction projects or new coal power. The policy should apply to all utility companies and companies that extract fossil energy.
3. Banks financing new fossil fuel projects:
The Bank contributes through lending and other financial services to help fossil fuel companies to establish new fossil extraction projects and/or the establishment of coal-fired power plants. The policy should initially cover the world’s 27 largest banks (12) as well as all Danish banks.
The pension companies should also ensure continuous development of the voting guidelines, e.g. based on the following criteria:
a) Inclusion of the other 6 indicators in the CA100+ Benchmark.
b) Extension to cover banks and asset managers that manage investments in companies that plan new fossil fuel projects or new coal power.
c) Extension to cover also other “standard agenda items” at the general meeting.