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

The Sustainable Shareholder

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.

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

This year, a new advocacy approach by As You Sow and other activist shareholders featuring carbon bubble resolutions requests that the nation's largest coal producers report to investors how much of their coal assets would be left "stranded" in the ground if the United States were to pass sweeping greenhouse gas regulations. SRI investors see the companies as majorly overvalued in a carbon-regulated world, and this "carbon bubble" one day could pop, posing a risk to shareholder value.

Yes, we are all guilty of using fossil fuel. It facilitates power, manufacturing and agriculture around the world and fuels most of our transportation systems. But as fossil fuel companies are not choosing to spend their $100 million a day budget on renewable energy research and development, McKibben argues that they must be forced to acknowledge the long-term business risk of continued investment in this space alongside the argument that there cannot be a healthy company or global economy and society on a planet whose temperature continues to rise.             

Despite the ever-present evidence, politicians haven’t responded seriously to the severe nature of this imminent threat. The U.S. blocked the Kyoto and Copenhagen rounds of talks to set carbon reduction targets, the U.S. Chamber of Commerce and other groups file lawsuits against the federal government when it adopts regulatory policies that protect citizens from harm and Congress passes laws that protect oil and chemical companies.

Hence, the people are speaking out and demanding fast action. With atmospheric carbon determined to have reached the unprecedented level of 400 parts per million, it is not surprising that fossil fuel divestment is the single most important issue for the younger generation. It explains why, in only a few months, there are now 380 colleges with students actively seeking fossil fuel divestment. Five universities and two cities already have done so.

The truth is that industry can be incentivized to address carbon emissions if a serious price on carbon is set and tax rates are established. The people must demand that politicians do so because, as McKibben noted, “not pricing carbon is a biggest market failure in history,” and divestment movements are an effort to force the politicians to act. Of course, companies don’t have to wait for that, and in fact those that see this coming have the opportunity to get out in front of it and obtain what soon will become a competitive advantage. Many companies are indeed moving off-grid or to other renewable energy sources and leading the eco-efficiency charge in this country.

One would think that the severity of recent fires, floods, hurricanes and tornadoes would prompt quick action, but there is still a disconnect among people in this country that humanity’s addiction to cheap oil and gas is causing these extreme weather conditions. People don’t assume, as McKibben pointed out, that ”when people own oil, they are owning extreme climate events like hurricanes and droughts.” Meanwhile, while the populace is largely silent and numbed into its escapes and distractions, Chevron made the single largest political contribution in U.S. history in the last election cycle in order to help preserve the Republican House majority and protect big oil’s economic interests.

The most recent legislative plan, the Climate Protection Act of 2013, was introduced in February by Sen. Barbara Boxer (D.-Calif.) and Sen. Bernie Sanders (I-Vt.) and is referred to as “cap and dividend,” a smarter approach than “cap and trade” because it is revenue neutral. It simply requires several thousand coal, oil and gas producers to pay a $20-per-ton carbon fee in the first year and increase by 5.6 percent per year, generating $1.2 trillion over the next 12 years.

Yet it hasn’t been taken seriously, as the Republicans care more about shaming the Obama Administration than solving the world’s biggest ecological and economic problems. And while other countries set ambitious targets to become fossil fuel-free nations, we continue to make excuses and consider approving pipelines such as Keystone and fracking in the Marcellus shale to accelerate the burning of more fossil fuels. We do so in the name of domestic energy independence, failing to realize that freedom from foreign oil is merely death by another means.

“We have to make it clear to asset owners that fossil fuel assets are toxic," McKibben said. "This is an outlaw industry, not in terms of breaking the laws of the land but in terms of ignoring the laws of physics.”

He’s right. The moral argument trumps the economic consequences in this instance. This is not the time for slow deliberation on a crisis situation; it is the time for bold action that reverses an increasingly dangerous global warming trend.