Why shareholder engagement with fossil-fuels companies won’t work

Last week, climate activist Bill McKibben (co-founder of 350.org) was the featured speaker of the Finance for a Sustainable Future conference in Chicago, the annual gathering of sustainable, responsible and impact investment professionals and investors organized by the industry trade association USSIF: The Forum for Sustainable and Responsible Investment.

Given that most actors within the SRI industry have not embraced McKibben's call for divestment from fossil fuel companies, it was both meaningful that he was invited to speak -- and essential that investors ascertain the best tactics to reduce atmospheric carbon.

During the last 40 years, the SRI industry has used three primary strategies to foster change: engagement as shareholders to influence company and industry policies and practices; advocacy with regulators and policymakers to rein in abuses to protect share value; and divestment (what the industry refers to as environmental, social and governance portfolio screening). The challenge SRI investors always face is determining which strategy is appropriate for which circumstance.

Historically, the SRI industry has preferred engagement, because one can use ownership to encourage companies to, for example, adopt ecological practices, embrace fair labor standards and improve diversity.

And it works: With sweatshops and workplace safety in the apparel industry, for example, the SRI industry has a long history of engagement with companies. They've gotten them to embrace higher standards and provide greater supply chain transparency on ESG issues to investors.

However, the core purpose of certain sectors – alcohol, tobacco, weapons, gambling, even nuclear power – have been widely accepted exclusions by SRI investors for their inherent harm or potential harm they cause to humanity. These are moral decisions, and while they are subjective, sometimes consensus can be formed on an issue that just seems wrong. Take divestment from companies doing business in the South African apartheid regime. This was the last generation’s primary divestment issue in the 1980s, and the pressure it applied was a contributing factor to the evolution of that country’s political system.

And this was precisely the point McKibben made to the SRI industry: In this particular case, at this perilous moment in the history of this planet, engagement simply doesn’t achieve the desired outcome (at least, not fast enough). Past efforts to move fossil fuel companies into renewable energy or get fossil fuel companies to report on the impact of climate change on profitability largely have failed.

BP had its infamous “Beyond Petroleum” campaign and was once the poster child for the shareholder engagement approach, but it was abandoned and BP then faced a slew of governance problems resulting in the environmental disaster in the Gulf of Mexico. Biofuels research by Chevron, Shell and others are merely toe-dipping efforts, while the industry spends $100 million a day on exploration and development of new sources of fossil fuels. Even though it is very clear that burning all the fossil fuels we know are available to use would raise the Earth’s temperature by at least 4 more degrees, taking the planet beyond the point of ecosystem stability and thereby assuring the global decline of human civilization, corporate engagement can’t stop this from occurring. "Their business model isn’t amenable to modest changes because the flaw is their business plan,” McKibben told me during an interview at the conference.

Next page: A new approach: carbon bubble resolutions

Photo of locked gate and chain provided by Alexander Bark/Shutterstock