The energy sector has historically borne the brunt of investor pressure to decarbonize, but shareholders are now turning their attention to the financial sector to cease fossil fuel financing at its source[[B]].

Among U.S.- and Canada-headquartered financial institutions, shareholder proposals concerning climate change are becoming increasingly common, with nine filed in as many months this year. That is the same number as in 2020 and 2021 combined, according to Insightia Voting data.

In Europe, financial institutions are also being held to account on their net-zero commitments through the “say on climate” initiative, which provides shareholders with an annual advisory vote on a company’s decarbonization plan. As of September 30, seven European financial firms have held “say on climate” votes, averaging 90.1% support, compared to three plans receiving 99% average support one year prior.

Naming and shaming

The shift in investor focus from energy companies to financial institutions was brought about by repeated claims from ESG advocates that the sector is failing to make good on its climate commitments.

“We’ve seen a lot of commitments from companies around achieving or working toward net-zero and now investors are asking how will these issuers achieve this,” Emmanuelle Palikuca, managing director, head of sustainability advisory at Alliance Advisors, told Insightia in an interview. “There is a lot more scrutiny being placed on companies making these commitments but not providing clarity on how they are going to achieve these goals.”

In March, a report co-authored by seven environmental advocacy organizations, including Sierra Club Foundation and BankTrack, revealed that fossil fuel financing from the world’s 60 largest banks has reached $4.6 trillion in the six years since the adoption of the Paris Agreement, with $742 billion in fossil fuel financing in 2021 alone.

Investor coalitions dedicated to bringing emissions down are also facing claims that they amount to little more than greenwashing. A scathing report by the Two Degree Investing Institute (2DII) in July revealed that “the majority – if not all” the 317 financial institutions forming part of the Partnership for Carbon Accounting Financials (PCAF) are failing to align with baseline reporting requirements related to emissions and investments.

Divide and conquer

In Europe, environmental advocacy organization ShareAction led the charge against financial institutions this season. Barclays’ “say on climate” plan faced 19.2% opposition at the U.K. bank’s April 5 annual meeting, following criticism from ShareAction that its thermal coal phase-out targets were riddled with “loopholes.”

“We have seen a significant increase in the number of shareholders willing to vote against insufficient climate plans put forward by banks,” Jeanne Martin, head of banking at ShareAction, told Insightia in an interview. “Financial institutions are perhaps surprised at how quickly shareholders have become interested in this topic – leapfrogging the disclosure element and jumping straight into calling on banks to take concrete action.”

Fellow U.K. bank HSBC was evidently eager to avoid similar backlash, updating its fossil fuel divestment targets and committing to a coal phase-out shortly after a $2.4 trillion investor coalition led by ShareAction claimed its net-zero plan “makes a mockery of any claims to take the climate crisis seriously.”

Earlier this month, the Advertising Standards Authority (ASA) banned HSBC’s U.K. billboard adverts for allegedly making misleading statements about the bank’s climate credentials.

In the U.S. and Canada, As You Sow’s proposal asking Travelers Co. to report on how it intends to “measure, disclose, and reduce” emissions associated with its underwriting won 55.8% support at the company’s May 25 annual meeting, while Mouvement d’éducation et de défense des actionnaire’s (MEDAC) proposal asking the National Bank of Canada (NBC) to hold an annual advisory vote on its climate plan won 46.5% support.

Time is running short

With time running out to align global energy goals with the Paris Agreement, investors expect financial institutions to take increasingly more ambitious steps to reduce fossil fuel financing and will not hesitate to take voting action where companies are failing to align with minimum expectations.

Oppositional votes are no longer directed solely at net-zero plans and shareholder proposals, with directors facing pushback for a lack of ESG engagement. Globally, 1.6% of director re/election proposals have received under 70% support this year as of September 30, compared to 1.3% and 1.4%, respectively, throughout 2020 and 2021.

“The number of banks publishing emissions reductions targets has increased but the scope and ambition of these targets really varies from one bank to another,” Martin said. “Investors need to apply more scrutiny toward what these targets really mean, and the goals financial institutions are setting.”