By Kristen Kleiman
It’s hard to keep up with the news these days. It seems like we go from one sensation to the next, especially when it comes to climate change: Scott Pruitt, Clean Power Plan, Paris Agreement, California’s cap and trade. At what point do we stop really paying attention? I’ve chosen to stop and smell the proverbial roses, looking for non-sensational, climate-relevant investment news. I was encouraged by what I learned.
Capitalists have historically shied away from climate change policies, viewing them as revenue-sucking regulations or fees that increase the cost of production. Focusing on the bottom line, big business and institutional investors have not embraced the notion that paying attention to climate change is a good investment. But capitalists and investors are (by and large) pretty smart people. They like data. They like to analyze data—for actuarial purposes, seeking alpha (higher than average returns), assessing risk. And the funny thing is, after crunching the data, many of the smartest investors, and certainly some of the most influential, have realized that climate risk assessment is essential to their business. As with all investments, where there is risk, there should be reward.
In recent weeks, both Occidental’s and ExxonMobil’s shareholders passed proposals instructing each company to assess the long term impacts of climate change on their business, a first for oil and gas companies. Both boards opposed the move, but shareholders, led by BlackRock, the world's largest asset manager, and Vanguard (near the top) won. Why is that worth talking about?
When dyed-in-the-wool capitalists start defying corporate boards, that's news. These recent events have shed light on how institutional investors’ views on climate change are evolving. In Occidental’s case, BlackRock, Occidental's largest investor, supported a proposal to analyze and report how carbon emissions curbs could affect the company. Last year, when Occidental’s board opposed the measure, BlackRock agreed with them and voted against the resolution. It failed to pass. But this year, BlackRock had a change of heart, defying the board and supporting reporting on carbon emissions. BlackRock issued a statement after the vote saying, "Climate related risks and opportunities are issues we have become increasingly focused on at BlackRock as our understanding of the related investment implications evolves. One of our five engagement priorities is encouraging disclosure on climate risk policies and practices.”
In a similar vein, ExxonMobil shareholders—led by another huge asset manager, Vanguard—BlackRock, and the U.S.’s largest pension fund, CalPERS, overrode Exxon’s board recommendation and passed a proposal that would require the energy company to publish a detailed report on how climate change policies could affect ExxonMobil’s future business. Only last year, ExxonMobil shareholders rejected the proposal with just 38 percent voting in favor. In May 2017, the proposal passed with 52 percent of the vote.
Within that same month, prominent U.S. CEOs expressed their public disapproval of the U.S. withdrawal from the Paris Agreement. CEOs, as a group, are not known for their environmentally-friendly positions, but three notables criticized Trump’s decision to pull out of Paris. The epitome of capitalism, Goldman Sachs’ CEO, Lloyd Blankfein, tweeted his first ever tweet about it, “Today's decision is a setback for the environment and for the U.S.'s leadership position in the world. #ParisAgreement.” GE's Jeff Immelt and JP Morgan Chase's Jamie Dimon also expressed their disagreement. It probably doesn’t come as a surprise that Elon Musk, CEO of Tesla, quit Trump’s business advisory council, but Disney CEO Bob Iger also said he will step down "as a matter of principle" from Trump's Strategic and Policy Forum. “Protecting our planet and driving economic growth are critical to our future, and they aren't mutually exclusive," Iger said in a statement. "I deeply disagree with the decision to withdraw from the Paris Agreement."
One of the primary roles of capitalism is to pounce on inefficiencies—whether in production, distribution, or development. Capitalists identify inefficiencies and invest (or not) depending upon their risk tolerance. Defining climate change as a potential market inefficiency is a glib understatement, but in a purely capitalist sense, that’s what it is. Climate change is already having an impact on our planet and our health, and we are not ready for even the bare minimum of what science tells us is sure to come. Major capitalists from around the world are waking up to the fact that this change is going to either make things riskier: because of warming temperatures, more intense storms, and desertification, or offer more reward by identifying and investing in those ideas that will mitigate those risks. Risk and reward. Behemoths like Calpers, Vanguard and BlackRock are probably on the risk side of the equation—reducing the effects of climate change reduces risk on their portfolios. Goldman Sachs and GE are probably also interested in risk, but the rewards that might come from disruptive technology and nascent markets (like carbon offset investments) also offer opportunity.
The calculus of ignoring climate change is more costly than addressing it. Investment professionals appear to understand that we ignore the risks of climate change at our peril and, capitalists that they are, understand that identifying the risks early means we can find solutions (i.e. investments) that will either combat climate change or adapt to its effects ahead of the competition in a way that creates above-average returns for investors. We now have a significant departure from the typical investment/business line of “climate change action is too expensive” to “climate change inaction is too expensive.”
For investors, today’s value is inextricably linked to the future: future cash flows, future risks, future opportunities. Turning your back on the future is just bad investment policy. And institutional investors, despite the climate change naysayers, are too smart to ignore the climate change data. The climate is changing and we must be ready for it. The truth as it relates to energy and industrial companies may not be easy to face, but that’s risk management: Identify the risks, quantify them as much as you can, and manage them as either threats or opportunities. Since government doesn’t seem prepared to do it, maybe capitalism with all its brutal efficiency can lead the way.
Are institutional investors’ commitments to evaluating the risks around climate change the panacea for moving toward a more proactive approach to addressing climate change risk? No, but they are an important piece of the puzzle. Combating climate change requires scientific research, judicious regulation and smart money. Capitalism’s expanding role in pushing all three gives me hope.
Image credit: Flickr/Tommy Clark
Kristen Kleiman is the Director of Investments for The Climate Trust.