JPMorgan’s rejection of Paris alignment puts all our capital at risk
In early May, Barclays received overwhelming shareholder support for its proposal to put Paris-alignment into their Articles of Association. This marked a turning point in banks’ acceptance that their future success is intimately tied up with the planet’s continued stability.
Next week, JPMorgan’s shareholders will be similarly asked whether the bank should set out its plans to align with the Paris goals. Unlike Barclays, JPM’s board is arguing against such a commitment. We believe this response is ill-judged and short-sighted. The request by As you Sow is in all shareholders’ – and society’s – interests. It has our support.
The Board’s decision to reject the request raises broader questions over competence. Of particular concern is Lee Raymond’s role as Lead Independent Director – not only does his 33 years on the board mean he is no longer credibly independent, but his views questioning climate science are well documented. In our view, these factors mean we will vote against Lee Raymond’s reappointment.
Supporting the ICCR Covid19 Statement
The World is at war with an invisible killer. Millions people are in lock-down; people are losing their jobs; shortages of basic necessities are causing hardship; and governments are requisitioning productive assets to fight this enemy. The spread of Covid19, which few had even heard about in January, has been terrifying with over a million cases reported globally at the end of March.
Against this backdrop, we are supporting the ICCR Investor Statement on Covid19, which provides an important framework for our ongoing engagements with investee companies.
As long-term investors our priority is to ensure the sustainability of our clients’ companies so they can continue to thrive into the future. We believe this means supporting our companies to act responsibly with their customers, staff, suppliers and indeed local communities. These relationships are part of companies’ critical intangible assets that help succeed. During this pandemic, difficult choices will need to be made to preserve cash and underpin solvency.
Sarasin welcomes Barclays’ commitment to aligning financial flows with the Paris goals
Today, Barclays has committed to aligning all of its lending and corporate finance with the Paris Agreement goals, not just for power and energy, but for all sectors. The message is powerful: continuing to finance activities that undermine planet stability is not in anyone’s interests, and certainly not shareholders. This is ground-breaking and the Board deserves to be commended.
The risk to shareholders and creditors of stranded assets linked to global efforts to deliver decarbonisation should not be downplayed. In December 2019 the Bank of England estimated that loan exposures to fossil fuel producers, energy utilities and emission-intensive sectors amounts to around 70% of the largest UK banks’ common equity Tier 1 (CET1) capital. In other words, an uptick in default rates in these sectors could have a material bearing on bank capitalization. This is not a problem the banks should be kicking into the long grass – they need to start acting today.
What matters now is that Barclay’s Board sets robust nearer-term targets that leave no doubt about its determination to deliver net zero emissions by 2050. Shareholders should underline their support for this by supporting not just Barclays’ resolution, but also the shareholder-initiated resolution at Barclay’s forthcoming AGM.
At a time when the world is grappling with a life-threatening pandemic, we are more aware than ever of our own vulnerabilities. Action to defuse the forthcoming climate crisis - and associated human suffering - must be scaled up quickly. Other banks should follow Barclay’s lead.
Please see Barclays' regulatory announcement here, Barclays' new ESG report here, and further details on their announcement here.
ShareAction's press release can be accessed here.
Chevron announces decision to lower long-term price assumptions
We believe that long-term price assumptions made by fossil-fuel-extractive companies in their reports and accounts need to be carefully scrutinised to ensure that they give consideration to a decarbonising world.
We therefore welcome the news that oil and gas company Chevron has announced its decision to lower the long-term commodity price assumptions used in its accounts, in a press release about its capital and exploratory budget for 2020. It reported that this reduction resulted in a $10-11bn impairment on gas and other assets. Chevron further stated that it would be applying increased capital discipline going forward.
This announcement comes just a few days after the Spanish oil and gas company Repsol set out its decision to cut the long-term commodity price assumptions used in its accounts, resulting in a EUR4.8bn impairment.
These announcements are significant. They reflect oil and gas companies’ growing realisation that they face structural reductions in long-term oil and gas prices, rather than merely cyclical lows. Repsol explicitly linked its accounting adjustment to the need to align with the Paris goals and the new economic reality of decarbonisation.
We have been calling on oil and gas companies to review these long-term commodity price assumptions used in financial statements for the past two years, and believe that these announcements are just the beginning of what is to come. Based on our analysis, oil and gas companies have generally used between $70-85 per barrel for impairment testing. And yet Carbon Tracker, a climate research firm, and Aurora, a market intelligence firm, have both suggested Paris-aligned commodity prices closer to $30-40 per barrel.
It is vitally important that audit committees and audit firms act sooner rather than later to ensure prudent assumptions are used, despite the risk of impairments. Overstatement may encourage excessive investment into new fossil fuels. This will not only increase the risk of assets being stranded in the future but work against efforts to combat climate change.
At Sarasin & Partners, we consider ourselves stewards of our clients’ assets.
- We are long-term in our approach to investment; we look for businesses that will create enduring value for our clients; and we aim to own - as opposed to trade - these companies
- We seek out and support exceptional executive teams, but hold them to account where we have concerns
- We are not preoccupied with short-term market movements, but look at underlying financial performance and its sustainability
Taking a long-term view in our investment process
As long-term investors we believe it is critical to take a holistic view of the underlying financial performance of a company and its sustainability: as we look a decade ahead, the impact of a company on the environment and society matters in our evaluation of its investment prospects. We also consider very carefully the potential impact of a wide variety of trends ranging from climate change to labour conditions and resource scarcity as an integral part of our thematic investment approach.
Active engagement with companies
Investors in companies have an important shared responsibility in holding the board and company executives to account for the performance of the business. On behalf of our clients we closely monitor investee companies and engage with management on issues of concern relating to corporate governance, capital structure and strategy. We carefully vote on matters put to shareholders. Poor governance can adversely affect the returns for investors and – equally – good stewardship can lead to better returns.
Read more about active engagement and voting
Responsible stewardship does not stop with our stock selection and engagement activities. Where we believe we can play a positive role in shaping markets and regulation in a way that contributes to boosting sustainable economic growth, we will engage in policy outreach. We undertake much of our policy work in collaboration with other investors.
Read more about our policy outreach.
UN Principles for Responsible Investment
We are signatories to the United Nations' Principles for Responsible Investment, and are pleased to report that we have been graded A for our stewardship approach.
For more detail, please see the in-depth reports: