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This is an audio transcript of the FT News Briefing podcast episode: Big investors get tougher with companies over climate change

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, November 10th, and this is your FT News Briefing.

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One of America’s biggest conglomerates is breaking up, and Xi Jinping is making a play for his third term as China’s president. Plus, the strategy of divesting from companies or climate change or selling off investments in fossil fuel producers has finally reached the asset management world.

Attracta Mooney
The last few years, there’s kind of a growing realisation among some big investors that the current model of engagement is not working, is not driving change fast enough.

Marc Filippino
But does it work? We’ll take a look. I’m Marc Filippino, and here’s the news you need to start your day.

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Marc Filippino
One of America’s most famous multinationals, General Electric, is breaking up. Yesterday, the company said it would split itself into three separate companies. One will focus on healthcare, one on aviation, the other on energy. Investors seem to like this. GE’s share price ended the day up more than 2.5 per cent. The FT’s US business editor Andrew Edgecliffe-Johnson says the idea of a sprawling, diverse conglomerate has lost its sheen.

Andrew Edgecliffe-Johnson
It’s become more and more clear that the diversification that Jack Welch championed in his time as CEO in the last decades became its biggest problem. Investors found it very, very hard to see what was going on in this business, and then management found it very, very hard to remedy the underperformance of the business.

Marc Filippino
Edge, what does this say about conglomerates as a business model in general? Does it say anything?

Andrew Edgecliffe-Johnson
This isn’t the only company that’s trying to simplify itself right now. And really, the trend has been for several years away from conglomerates. It has been to a simplification; it’s been towards unleashing individual assets and letting them out to fend for themselves in the markets. And I think this is a pretty profound shift in the consensus in American business, and it’s also happening in Asia, in the UK and different parts of the world. There has been a strong shift away from the idea that central management can never be so brilliant that they can compensate for all of the downsides that conglomerates bring. That’s not to say that opinion won’t swing again. We’ve seen the conglomerate fashions of ebb and flow in the past years. But I think right now this is very much a reflection of the fact that industrial businesses are finding it harder to get the attention of the markets. They’re no longer the biggest companies out there as they used to be. And they have to remedy that by having a much more focused story to tell investors.

Marc Filippino
So you mentioned that this is happening in Asia, and just earlier this week we saw Toshiba in Japan come under pressure from activist investors to split its company into three parts like General Electric. Did GE have an Elliott Management type pushing them to make this move, too?

Andrew Edgecliffe-Johnson
It has very much had activist investors pushing for precisely this strategy. And I would say that Larry Culp, the CEO, has signed off on this strategy. He’s not the first CEO to identify the problem. There has been a willingness to slim GE down, even going back to Jeff Immelt, who was running the business for 16-17 years after 9/11. And it became very apparent to Immelt around the time of the financial crisis that he would have to simplify, particularly the financial services business. But he also made some acquisitions, which turned out to be critically problematic. But this has come about very much because of investor pressure. I have to say the activists that we’ve heard from are pretty pleased.

Marc Filippino
Andrew Edgecliffe-Johnson is the FT’s US business editor.

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We could see a historic moment in China this week. President Xi Jinping has summoned hundreds of top Communist party officials to Beijing for an annual meeting. This plenum of the party’s central committee is expected to approve a resolution that would pave the way for Xi’s third term in power. The FT’s Beijing bureau chief Tom Mitchell explains the significance of this resolution.

Tom Mitchell
The resolution to outsiders, including myself, is going to be really boring. Turgid party-speak, slogging through that thing will be a chore. However, it’s the politics behind it that are interesting, and the politics behind it are essentially this — for most of its existence, the Chinese Communist party, certainly since taking power in 1949, did not have a peaceful transition of power really until 2003, and that’s when Jiang Zemin handed over power to Hu Jintao. So Xi Jinping has decided that after 10 years in power, he is not going to hand over to a successor. So that’s what this is all about. If you are not going to hand over after 10 years as your predecessors have done, you’d better have a good reason. And basically, what this document will do is lay out his case for staying in power. This is a really important historical moment. This is why I will be staying for at least another five, if not 10 years.

Marc Filippino
Tom Mitchell is the FT’s Beijing bureau chief.

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So when Covid-19 was surging last year, top managers at the British asset manager Aviva held a virtual meeting to talk about a big threat to the value of their investments. But it wasn’t Covid. It was climate change, and they did something really unusual.

Attracta Mooney
They told companies, they told about 30 big carbon-intensive companies, if these carbon-intensive companies didn’t pull up their socks effectively then they would start selling out of those businesses across both the equities and the fixed income holdings.

Marc Filippino
That’s the FT’s investment correspondent Attracta Mooney. This meeting she reported on was really unusual for the asset management industry, but it’s part of a growing trend.

Attracta Mooney
It’s really unusual for a big asset manager. So the divestment movement, this idea of selling out of fossil fuel producers, has been gaining momentum over the last decade. And we’ve seen lots of universities come under pressure about it. We’ve seen lots of foundations and religious orders think about doing these things across their investment pots, but traditional asset managers have been much slower to react, especially among mainstream big companies. They, maybe, will set out some of the coal, intensive coal stocks. But they won’t sell out of general fossil fuel producers. And for Aviva to do that and to say it would apply across its entire portfolio is really, really rare.

Marc Filippino
But Attracta, as you’ve reported, Aviva’s decision is a sign of change. What has changed over the past few years?

Attracta Mooney
So there’s a few things that have, that have happened that have made the investment industry quite wary about the risks of climate change. So the signing of the Paris agreement, which aims to limit global temperature rises, that has propelled the fear that climate change could actually become a huge investment risk for asset managers, and that they could be left with stranded assets — that’s assets that are very hard to sell. So over the last few years, we’ve seen asset managers increasingly talk about climate change as an investment risk. The last few years there’s kind of a growing realisation among some big investors that the status quo, the current model of engagement, is not working, is not driving change fast enough. And actually that if we are to meet the goals of the Paris agreement, we’ll have to get much, much tougher. And so what we’ve seen now is that some big mainstream investors are starting to consider this idea of divestment, of selling their stocks in these companies, even when this would not necessarily be their first choice to do.

Marc Filippino
So Attracta, what kind of impact could this have on the companies they divest from?

Attracta Mooney
So it could have a huge impact if more big traditional investors start talking about divestment. It means for companies, their plans will have to become much more robust. So, you know, you’re risking losing very big traditional long-term shareholders, which for lots of companies is not ideal. They could end up being owned by much more short-term hedge funds or private hands, which they might not feel is the right process for them. And so what you change is you change your shareholder base and that shareholder base, if you’ve had a good relationship with your shareholders and you’ve had long-term support from them, and all of a sudden you’ve got a much more short-term shareholder, that kind of changes how you’re being financed effectively.

Marc Filippino
But still, if there’s already market for these shares in fossil fuel companies that asset managers sell, even if it’s short-term investors, doesn’t that raise questions about how effective divesting can actually be?

Attracta Mooney
There’s two issues with divestment. One is that whether we tackle the systemic problem, a problem for the world around climate change. And then there is a more immediate personal issue, which is what does climate change mean for all of our portfolios? If climate change really does have an impact on investment returns, then our retirement incomes and our savings could be put at risk if asset managers aren’t taking action around divestment. And that’s probably the more immediate risk for lots of us in the sense that if the asset managers are too slow to react, we could have hits to our portfolios.

Marc Filippino
Attracta Mooney is the FT’s investment correspondent. Thanks, Attracta.

Attracta Mooney
Thank you.

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Marc Filippino
Before we go, one last reminder about our amazing, got-to-try-it, 30-day free trial of the FT’s social governance newsletter. It’s called Moral Money. Not only do you get the latest inside news about ESG investing, you also get a free month of access to all of FT.com. Everything, sky’s the limit. There’s a lot of great journalism you’re not going to want to miss, so visit FT.com/cop26podcast to get started. We’ll also have a link in the show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.

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