Institutional investors, backed by Europe's largest asset manager Amundi SA, have filed the first climate-related shareholder resolution against a European bank, Barclays PLC, signalling that investors are less prepared to tolerate long-term climate risks to their portfolios posed by banks lending to coal, oil and gas companies.

A group of institutional investors managing a total of £130 billion in assets is calling on U.K.-based Barclays to phase out its financing of fossil fuel firms that are not aligned with the Paris Agreement on climate change, which aims to limit the rise of global temperatures to "well below" 2 degrees C above pre-industrial levels. The proposal received a boost Feb. 13 when Amundi said it would support the proposal.

Barclays is the world's sixth-largest financier of fossil fuels, and Europe's largest, according to BankTrack, a watchdog group that monitors lenders' exposure to fossil fuels.

Investor activist group ShareAction is coordinating the action. A Barclays spokesperson told S&P Global Market Intelligence that the bank continues to engage with ShareAction and other shareholders and will make a further statement at the appropriate time.

Increasing pressure

Investor pressure on climate change has been growing.

As deadlines tied to the Paris Agreement draw nearer, investors are becoming impatient with banks' financing of fossil fuels and looking at "all kinds of vehicles to express their concerns and in some cases dissatisfaction" with the lenders' response, according to Lauren Compere, managing director at Boston Common Asset Management, a U.S. investor that previously invested in Barclays.

The influential U.K. Investor Forum, representing the U.K.'s largest investment firms managing £18.5 trillion in assets, is also putting pressure on Barclays to act on the climate, according to the Financial Times. The forum declined to comment.

Risk

Institutional investors and asset owners have a fiduciary duty toward their beneficiaries and no longer wish to subject their investments to climate change risks, according to Danielle Fugere, president of nonprofit organization As You Sow, one of the shareholders behind the resolution.

The increasing risk can be seen, for example, with U.S. utility PG&E Corp., whose 2019 bankruptcy filing was related to California wildfires.

"It is those catastrophic impacts that are harming the entire economy and decreasing the potential for portfolios," Fugere said.

Research shows climate change will have an impact on key sectors of the economy. Dozens of regulated electric utilities in the U.S. are at a high risk of climate change-related physical or financial impacts due to rising average temperatures and more intense and frequent storms, rainfall and floods, according to Moody's.

As You Sow has been involved in several shareholder resolutions in the U.S., including against major banks Wells Fargo & Co., JPMorgan Chase & Co. and Goldman Sachs Group Inc., some of which were withdrawn after agreement was reached with the bank in question. That means the bank agreed to comply with shareholder demands, and no vote will be held at a shareholder meeting.

Even resolutions that are not successful are "critical" at focusing banks' attention on their responsibilities, Fugere said.

Tool

Shareholder resolutions have been relatively rare in Europe, as high ownership requirements restrict their use as a tool to voice dissent in many countries, but this is changing.

According to the EU Shareholders' Rights Directive, which EU members were due to transpose into national laws by June 2019, shareholders must hold 5% of a company to propose resolutions, although national differences exist. For example, according to a Jan. 7, 2019, paper in the Harvard Law School Forum on Corporate Governance, investors can file a proposal with just 1 share in Scandinavian markets, and Germany allows investors with an investment of €500,000 to do the same.

Meanwhile many European banks such as Crédit Agricole SA, BNP Paribas SA, ING Groep NV and Banco Bilbao Vizcaya Argentaria SA have published clear plans and deadlines around phasing out fossil fuels, and institutional investors in Europe prefer to use dialog as a means of bringing round management on issues such as climate change, with a resolution usually being a last resort.

"If [investors] have this feeling that after repeated engagement the company is not listening, only then will they take the public route and put something on the agenda for the shareholder meeting," said Zacharias Sautner, professor of finance at the Frankfurt School of Finance and Management.

Sautner co-authored a research paper to be published later in 2020 on the importance of climate risks for institutional investors, which includes a survey of investors. Out of 406 replies, 43% said they had held discussions with management about the financial implications of climate change over the past five years, while 30% had voted against management on climate change proposals at annual shareholder meetings.

Resolutions are increasingly being used as a tool in Europe. In the U.K. alone, the number increased to 21 in 2019 from five in 2018, although their success rate is low, with only one being successful in 2019 and two in 2018 among the top 350 British companies, according to proxy voting firm Minerva.

In the U.S. shareholder resolutions have become common practice. Data from investor lobby group Ceres shows there were almost 300 resolutions in 2019, with nearly 10% of those made against banks. There were 60 shareholder resolutions against climate change in 2019, five of them against financial institutions.

New norms

Hao Liang, assistant professor of finance at Singapore Management University who has conducted research on companies and corporate responsibility, said U.K. corporate law is closer to the U.S. legal structure, putting more emphasis on shareholders rather than stakeholders, which can include employees, customers and government, whereas it is the opposite in continental Europe.

He predicted institutional investors would have an increasing say in climate change-related resolutions in Europe.

"The influence not as strong as in the U.S. but the trend is more and more institutional investors joining forces," Liang said.

Resolution could also be an indirect way of telling other banks to step up their game.

"It is also sending a subtle message to the other banks saying it could be that we are going to engage you next, these are the new standards we are holding everybody to," said Peter Cziraki, assistant professor at the University of Toronto, who has conducted research on shareholder proposals in Europe.

Regulation

Not all are convinced resolutions are the most successful instrument in tackling climate change.

"When it comes to these major issues, the only thing that is going to work is enforceable strong regulation," said Bobby Banerjee, professor of management at Cass Business School.

Banks also need to come up with firm numbers regarding their plans to exit fossil fuels, he said.

But a resolution can be a way of getting a bank to make that plan.

"Resolutions are more blunt instruments," said Ceres CEO Mindy Lubber. "You can start the discussions around the big issues that then force a plan calling out a company to set out goals."

ShareAction, the group coordinating the Barclays resolution, says investor pressure on banks can reap rewards.

An investor-signed letter in April 2019 calling on UniCredit SpA to improve its fossil fuel disclosure led to the bank adopting a new policy on coal, said Sonia Hierzig, the group's joint head of financial sector research and standards.