Editor’s Note: This post originally appeared on the Clean Yield Asset Management blog.
By Shelley Alpern
As more and more institutions face pressure to divest from fossil fuel companies, some are looking to shareholder engagement as an alternative. Decades of such engagement, however, have produced strikingly little result.
As a long-time shareholder activist, I’ve spent more time than I can calculate filing shareholder proposals and engaging in conversation with fossil fuel companies, often in collaboration with major pension funds with large positions in such companies. I’ve engaged with ConocoPhillips, BP, Anadarko, Apache, Royal Dutch Shell, Energen and ExxonMobil on topics including carbon emissions, hydrofracking, biodiversity and human rights.
My takeaway from these efforts, along with a lingering concussion from too much cranial contact with brick walls, is that the time for polite conversation is over.
The Intergovernmental Panel on Climate Change has warned that without a game-changing effort over the next 15 years, we will face catastrophic climate change. We must learn to live within a “carbon budget” that is now exceeded by nearly fivefold by the proven oil and gas reserves on the books of global oil companies. Most of these reserves must be left in the ground.
It’s time for investors to shake off their cognitive dissonance, admit that the core business model of fossil fuel companies has to be abandoned and take meaningful action. There was a time when shareholders who filed proposals and asked tough questions at shareholder meetings were at the cutting edge of a stodgy field. But the ground has shifted in two critical ways.
First, groundbreaking analyses by the Carbon Tracker Initiative (CTI) have shown in illuminating mathematical detail exactly how untenable the business models of fossil fuel companies are. CTI is the group that first popularized the concepts of carbon budgets and unburnable carbon. Its latest analyses identify which gas and oil projects are vulnerable to stranding when their high costs cannot be recovered, as is now happening due to the collapse of oil prices. As they discuss here, stranded assets are no longer hypothetical; Total, Shell and Statoil shelved massive oil sands projects in the past year, and BHP Billiton and Rio Tinto rejected new thermal coal projects. In December, Goldman Sachs identified almost $1 trillion in assets at risk with Brent crude prices below $70 per barrel.
The second change is the emergence of a broad-based climate change protest movement powerful enough to turn out 400,000 in the streets of New York City last September. This growing movement has shifted the political calculus on fossil fuel divestment. Only three years ago, choosing not to invest in fossil fuel companies was an act of conscience with no social, political or market impact. But as a collective strategy, it has proven the single most effective means of keeping climate change on the literal and metaphorical front pages where it belongs.
Shareholder engagement works, except when it doesn’t
Institutional investors and asset owners owe it to themselves to understand when engagement works and when it doesn’t.
On the whole, shareholder engagement has an admirable track record. Its practitioners can take credit for many achievements: increased disclosure of corporate political spending; reduced waste, pollution and water usage; greening supply chains; broad adoption of inclusive nondiscrimination policies; and greater diversity on corporate boards. Not to mention the anti-apartheid campaigns of the 1980s.
Engagement succeeds when we can make a persuasive case that change will enhance shareholder value, reduce business or reputation risk, or both. Ethical imperatives rarely carry the day on their own.
Engagement will fail when a company with flawed policies or practices perceives them to be unalterable. As engagement with tobacco companies demonstrated, it also will not work when the goal is to change the core business model of a company.
It once could be argued that fossil fuel companies’ core activities were, on balance, beneficial to society (particularly if the person making the argument lived upstream). But with the two-minute warning having been sounded in the climate endgame, fossil fuel companies are now as lethal as tobacco companies. It’s simply inconceivable that fossil fuel executives will – within the urgent time frame – come to see the write-off of 80 percent of their collective assets as an enhancement of shareholder value or an act that will reduce business risk.
Harvard president Drew Faust has argued that divestment is a hypocritical act because society relies upon fossil fuels for energy. But while it is a given that we are all addicted, only the fossil fuel companies have a continuing and vested interested in the addiction. Financing the addiction for the sake of short-term profits amounts to collusion in our self-destruction.
Not a lot of there there
Let’s look at the track record of shareholder engagement with fossil fuel companies.
It’s been 23 years since the first climate change proposal was filed at a fossil fuel company. Using conservative estimates based on records kept by the Interfaith Center on Corporate Responsibility, at least 150 such proposals have been filed at fossil fuel companies since, and at least 650 climate proposals and dialogues on climate change have taken place at non-fossil fuel companies.
Space limitations preclude a detailed inquiry into these engagements, so let’s take a snapshot look at the most recent efforts and where things stand as of right now.
In late 2013, 77 institutional investors with more than $3 trillion in assets called on 45 companies to assess the potential for operational assets to lose value if carbon regulations become stricter and if competition from renewables takes market share.
Most coal and electric power companies didn’t provide the written responses requested. Most oil and gas companies did respond, but none acknowledged the existential threat to their activities or the need to scale them back. As former SEC Commissioner Bevis Longstreth observed, ExxonMobil not only denied that any of its reserves could become stranded, but also stated that it is “confident that future reserves, which it intends to discover and develop in quantities at least equal to current proved reserves, will also be unrestricted by government action.” With this report, Longstreth concluded, “ExxonMobil has thrown down the gauntlet after slapping it hard across the collective face of humanity.”
Two successive waves of “carbon asset risk” shareholder proposals followed this initiative, but have done nothing to budge the denialist positions held by their targets.
Consider the results of a 2014 Ceres study analyzing the greenhouse gas reduction activity undertaken by 29 leading oil and gas companies. Only five disclosed any direct investments in renewable energy technologies. Almost half disclosed efforts to reduce GHG emissions from their own operations, but little progress has been made in reducing emissions from their core products, which dwarf operational emissions, because little can be done. For fossil companies, this may be the weirdest plot twist in the history of commercial activity, but there is no way around it.
In contrast, the Ceres study found that 71 percent of non-fossil fuel companies have taken steps to reduce emissions. This remains ripe ground for engagement, with good likelihood of success.
For investors, a third way
Some asset owners are keeping divestment advocates at bay by arguing that selling off fossil fuel stocks will cause them to lose their “place at the table.” Setting aside for the moment that many making this argument have little or no track record of engagement, this position is simply incorrect.
Beyond the binary choice of engagement or divestment, there is a third way: Institutions can substantially divest and still keep a seat at the table. Only a very small amount of stock is required to file a shareholder proposal, and little effort is required to co-file a proposal submitted by another shareholder. Divesting of fossil fuels while retaining just enough to keep filing proposals was the approach adopted by the Unitarian Universalist Association in 2014. This is also the approach long taken by my firm, Clean Yield Asset Management. It is the clearest way we know to unequivocally reject the moral failure and investment risks inherent in fossil fuel extraction, without losing all voice.
But let’s be clear. In the dire situation we face, the opposite of voice is not an absolute silence. Divestment is a silence that speaks volumes.
Image credit: Flickr/fibonacciblue