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Protest, Punish, or Participate?
Big Oil can be bought.
This is the third and last in my series of posts about the role of financial strategies in shaping climate policy and the energy industry. The first article was a quick overview of how divestment and investment mechanics operate in influencing corporate behavior. The second was a critical look at how divestment strategy has played out. Now, in this article I make the case that the best way to accomplish our climate goals is with active, vigorously engaged investment rather than by protest, reliance on ESG promises, or divestment.
I apologize for a long read, but just jump to the end to get some action items if you’re ready to start leveraging money to get more direct control over the fossil fuel industry.
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· Neither agitating for divestment nor vaguely defined and unaccountable ESG investing strategies have moved the needle when it comes to getting fossil fuel corporations to demonstrably change.
· The entire financial and political world, in response to the loud and clear message that the public wants change, is now in an escalating culture war with investment dollars as the primary weapon in the fight for control of corporate behavior.
· Divestment can be a useful strategy, if the right companies are targeted: smaller entities that are nevertheless in the critical path of larger and highly destructive projects and plans. Insurance companies, smaller banks, PR and accounting firms, and professional technical service companies might be influenced by divestment - whereas giant banks and oil companies view calls for divestment as political, PR and marketing annoyances.
· ESG investing is a noisy chaotic unregulated marketplace. There are investment funds marketing ESG to chase assets they manage for a fee, regulators and politicians trying to blunt its effectiveness, data brokers cooking their own sets of ESG ratings books and trying to sell them to the fund managers, lawyers making sure the fund managers have no liability or accountability when it comes to effecting real change, and targeted companies dressing up their websites and token project portfolios to get ESG points.
This article describes a different way.
Now Here’s an Idea
News happens fast. Just since starting to write this piece there have been major events that affect and shape the climate destruction discussion. In Davos, Al Gore exhorted the panel that the world isn’t doing enough and we’re moving too slowly. The points I made in the previous article about protest and divestment provide some clues as to why this might be the case.
But before Davos, a surprising example of how an aggressive use of money can change the shape of an entire industry unfolded: Elon Musk’s takeover of Twitter. Ignoring the accompanying theater and ruckus, when all was said and done a major social media enterprise was restructured, refocused, and reinvented according to the desires of a small group of stakeholders. The transformation began the moment ink was dry and major disruption followed.
As a thought experiment, then, consider: Occidental Petroleum has a total market value of about $55 billion. According to Wikipedia, “Occidental had 2.911 billion barrels of oil equivalent (1.781×1010 GJ) of oil equivalent net proved reserves, of which 51% was petroleum, 19% was natural gas liquids, and 30% was natural gas. In 2020, the company had production of 1,350 thousand barrels of oil equivalent (8,300,000 GJ) per day.”
What would happen if a consortium of “climate preservation” interests raised sufficient capital to take Occidental private, and reinvent the petroleum company? It’s only 10% of the size of Exxon-Mobil but a takeover of Occidental would be a seismic event that would change the petrochemical industry forever, with implications far larger than just a change in the management structure of a middling fossil fuel company. That’s real leverage.
Continuing the thought experiment, if Occidental’s fossil fuels were left in the ground, the cost of sequestering the associated greenhouse gasses would be about $44/ton assuming the company were just liquidated. According to the International Energy Agency, carbon capture can cost anywhere from the neighborhood of $15/ton for some pure CO2 streams, to more than $100/ton. The Center for Climate and energy Solutions estimates forest sequestration costs to be in the range of $30 to $90 per ton. In other words, the radical notion of buying oil companies for the purpose of not pumping the oil is competitive with the costs to continue using the atmosphere as a sewer while trying to clean up after the mess.
Far-fetched? Sure. Gargantuan forces would need to be marshaled to accomplish such a task. Also, we can’t wait for a hypothetical Elon Musk to show up and start to reconfigure the fossil fuels industry (although, when you consider the trillions of dollars in climate damage occurring – direct costs and investment in mitigation – $55B is a drop in the barrel and might seem cheap to some visionary.)
This thought experiment is fanciful, but the truth is that the globe operates on a version of “The Market,” using money to determine outcomes. We haven’t done enough fast enough because money hasn’t been used effectively to move the levers of corporate control. The Internet did not come to dominate the globe because of divestment from AT&T or protests in front of FCC offices. IBM didn’t come to dominate the computer industry for a generation because they were punished for their punch-card machines. Transformation requires investment, vision, and collaboration.
Consider the outcome of the world’s efforts so far: political backlash against “ESG Investing,” the head of a fossil fuel company leading the next COP, GM building gigantic trucks that still require excessive energy resources to power, and the petroleum industry dressing up every one of their websites with lovely green pictures.
In contrast, there are real groups, with real boots on the ground, engaging directly with fossil fuel companies and new energy market innovators to exert influence and drive change by direct financial and managerial involvement. While this approach leverages the market’s financial machinery, it is more direct and efficient than ESG investing.
ESG Investing developed over decades to try to address social concerns about how companies operate. Partly because of the conversations and awareness generated by climate activism, demand arose for ways people could invest money and not feel bad about where their investment dollars were going.
It is a market-driven fund and portfolio management strategy with many different implementations. There are overlaps with INvestment strategies focused on putting money into “green” businesses, DIvestment strategies that sell stock to punish miscreant companies and, aspects of how funds vote in shareholder elections.
But the innovation of this noble-sounding branding of money management practices comes with multiple caveats. ESG problems include:
- Very noisy data about corporate behavior
- Lack of standard metrics and definitions
- Susceptibility to greenwashing
- It’s yet another front in the culture wars
- The same tactics can be used to further oppositional goals
Scores and metrics are used to supposedly summarize how a fund or stock aligns with shareholder desires but there is no uniformity, regulation, oversight, or history of best practices to define a disciplined methodology for calculating scores. ESG ranking is an immature industry filled with competing players jockeying for power and financial gain.
ESG investing is indirect, unregulated, and in many cases ineffective, very often primarily concerned with attracting money, which the funds charge to manage, rather than truly effecting change. Fund managers want investors to feel good, and invest in their products rather than those offered by a competing fund. Caveat emptor. The investor is left with the job of trying to analyze and vet the ESG claims of different funds – an impossible task for most.
For example, the widely used MSCI benchmark, discloses in its methodology document that its ESG rating only ranks the financial risk to a company and its investors with respect to environmental, social, and governance practices. In other words, it answers the question “If this company pumps a billion barrels of oil is there risk that its financial health will be negatively impacted, e.g. by a lawsuit or regulation? Will I lose money?”
Vanguard’s ESG disclaimer for their ESG-labeled funds is a shining example of the thesis that much of this is really a marketing play. It says, in part, “companies deemed eligible by the index provider or advisor may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics.”
There is also existential risk that comes with ESG investing as with glossy activities like COP. Big Oil has received the message that they must at least appear green enough to get positive ESG rankings. They will work to create an image that just passes ESG muster at the lowest possible cost. For example, a company could use ESG rating as a pretext to chase money-grab investments in moonshot geoengineered adaptation, or as recently has been proposed, utilize captured CO2 under pressure to pump petroleum, and score points.
The culture wars have been playing out on the ESG battleground. Axios has reported several times on the active resistance from pro-oil interests and “conservative” stakeholders against ESG initiatives. According to this report “GOP committees are already planning to haul in the CEO’s of investment firms…for public lashings…” Another Axios report profiles Vivek Ramaswamy, who hopes to displace the large fund managers because of their ESG practices. He is actively wooing state officials to convince them to move asset management to his firm and wrest corporate voting power from the funds voting for progressive and climate-favoring action. Ramaswamy has backing from powerful GOP lawmakers.
For all this effort and angst, as is also true with divestment strategies, data doesn’t indicate that the ESG investing movement has altered the course of the fossil fuel industry. As with divestment, basic statistics such as oil production, greenhouse gas emissions, and financial returns of polluting companies demonstrate that so far there is nothing to show that ESG is working to change the trajectory of climate destruction.
Direct Engagement & Impact Investing – a Necessary Future
There is an alternative which does not get as much press and does not generate the agitation or attention that accompanies divestment and ESG themes.
A growing number of organizations are embracing the use of financial market investment mechanisms to engage directly with corporate decision makers. Money buys close contact with corporate boards and seats at the governance table. Sometimes called “impact investing” or “activist investing” their engagement strategies are based on core principles of market functioning and give these organizations an express lane to influence and change. A few are highlighted here.
As You Sow
As You Sow bills itself as “the nation’s non-profit leader in shareholder advocacy” and concisely articulates the thesis that active engagement is the best path to change:
“Corporations are responsible for most of the pressing social and environmental problems we face today — we believe corporations must be a willing part of the solutions. We make that happen. As shareholder advocates, we directly engage corporate CEOs, senior management, and institutional investors to change corporations from the inside out.”
They target an array of corporate responsibility issues, not just those related to climate destruction. This page discusses their energy and environment work, which includes the petrochemical sector as well. By introducing shareholder resolutions, and fighting legal battles against regressive attempts to throttle active corporate engagement, they are on the front lines of a fight to ensure that corporate behavior can be influenced by shareholder votes and that executives are held accountable for their policies. Their “Invest Your Values” page allows investors to drill into objective data from Fossil Free Funds and get clear metrics about fund involvement in polluting and misbehaving corporations.
As You Sow also hosts a page on how shareholder resolutions and voting work, an essential introduction to the mechanics. “Vote Your Values” is a program for connecting shareholders to proxy voting, similar to what large fund managers are starting to do as described in the next section on Blackrock.
Blackrock & Large Funds
Blackrock and other giant investment management companies such as Fidelity and Vanguard are also on the front lines of the fight for how corporate finance can be used to influence corporations and force strategic shifts. This is ground zero where the forces of divestment, ESG, and impact investing all detonate together because of the massive size of these funds.
Because they offer funds containing huge blocks of shares in multiple companies to investors, they have a significant say in the corporate resolutions submitted and outcomes of shareholder votes. With these group, or index, funds, investors participate in the financial gains and losses of a large selection of stocks but do not directly have shareholder rights. Instead, the fund managers vote the shares and have been increasingly more vocal in proposing and backing environmental policy changes.
Blackrock is working on changes to bring investors in their funds closer to the voting process, and reports “tremendous interest.” Vanguard has also just announced a similar effort. This is a more direct connection between the investor and voting outcomes which is positive for advocates of change but just as positive for advocates of status quo or increasing fossil fuel exploitation. These moves are also a response to the political pressure to diffuse the power of the fund managers, as mentioned above. It’s complicated in one sense but in another it’s simple: large numbers of investors, large and small, must enter the fray and cast their votes at shareholder meetings.
The Guardian just reported that Norway’s sovereign investment fund, the world’s largest, has made it clear to its portfolio companies’ board members that “it will vote against their re-election to the board if they do not up their game on tackling the climate crisis, human rights abuses and boardroom diversity.” With $1.2 trillion dollars under the fund’s control companies have to pay attention.
Engine No. 1
Engine No. 1 runs two funds that are specifically designed to work with companies to create change collaboratively.
This article tells the story of how Engine No. 1 won seats on the board of Exxon. After that expensive experience and shifting to a more cooperative engagement strategy, they were able to persuade ConocoPhillips and others to join the UN Oil & Gas Methane Partnership which is “the only comprehensive, measurement-based reporting framework for the oil and gas industry that improves the accuracy and transparency of methane emissions reporting in the oil and gas sector.”
Engine No. 1 offers investors commitments on how the funds’ proxy votes will be cast. This means that an investor in their funds participates in the investment returns and knows with assurance that the fund shares will be voted to either support Engine No. 1’s more general principles (“VOTE” fund) or specifically focus on environmental transformation (“NETZ” fund.) They emphasize that their goals are to create economic benefit by persuading companies to be responsive to demands for more progressive governance.
Because Engine No. 1 directly engages with the companies most in need of change, their third-party ESG ratings are low – another case where ESG investing shortchanges those seeking real change. Engine No. 1 holds positions in fossil fuel companies, but they do so specifically in order to buy those seats at the governance table, not as a side effect of building large diverse sector or index funds such as Blackrock’s or Vanguard’s.
The difference between Engine No. 1 and the large funds trying to vote their influence is that their strategy is laser focused and transparent, active, and pulling investment dollars directly into transformational change action at their portfolio companies.
There are few roadblocks or controversies following this strategy. Nothing stands in the way of this bee-line to fostering change within the core of corporations except the attainment of critical mass. Large numbers of investors selecting funds specifically focused on changing corporate behavior, rather than relying on vague and gameable ESG scores via the major fund managers, can effect real change.
The counterpoint, of course, is that there is nothing to stop pro-petroleum and regressive funds from following the same strategy, as Vivek Ramaswamy is doing. There will be no escaping the culture war entirely.
Follow This provides an option that allows people who aren’t otherwise investors to buy a single share in an oil company, becoming a shareholder of record. With a large number of shares sold to a constituency demanding change, Follow This’ leaders have the same path to corporate decision makers as other fund managers. They have been filing shareholder resolutions at major oil companies since 2016 and the results of shareholder votes page shows the organization’s effectiveness.
Investors who already own shares in oil companies can join Follow This and have those shares counted along with the other supporters buying shares or donating money. This doesn’t constitute direct voting power but increases Follow This’ credibility and clout at the bargaining table. Investors would still have to cast their own ballot in the corporation meeting elections for their shares to count in official resolution vote tallies.
Follow This also reaches out to the giant fund managers and contributes input on resolutions. This is a more direct route to influencing fund managers than investors trying to vote their dollars via selecting loosely defined ESG funds, and it’s a path for people who don’t directly invest to exert influence they would not have otherwise. In 2022 Follow This wrote a letter directly to large fund managers to invite a collaboration on resolutions for 2023 corporate voting.
Any attempt to change incumbents who do not want to change will face resistance. Direct engagement, shareholder advocacy and proxy voting all face challenges. Rules have recently been put into place to push back on activist shareholder resolutions at corporations’ annual meetings. Legislation has been introduced to inhibit large fund managers from voting the blocks of shares in their index funds, in a display of sudden and inexplicable interest in shareholder democracy. The same mechanisms of direct engagement are being put into place by pro-petroleum and regressive special interests.
There is no single magical market dynamic that will solve our problems of environmental destruction, but we are obligated to use the best and most powerful tools available to further our aims despite the challenges.
Use The Money
The good news is that there is a group of committed organizations focusing on the bullseye: active and direct involvement in multiple corporate governance processes. They focus investor dollars straight into the boardroom to exert pressure, persuade, and advocate for change. There is no need to march, throw eggs, get arrested, and go to jail; that mission has been accomplished, that part of the war is over, the streets and museums are no longer a useful battleground.
As You Sow, Engine No. 1 and Follow This can point directly to cases where their engagement was instrumental in effecting change at the highest levels of fossil fuel corporate management. And anyone can become a part of that process with a few clicks.
If everyone calling for divestment or parading in front of Wells Fargo bought a share of BP through Follow This for $13.00 instead, or if investors in Blackrock’s funds moved to Engine No. 1 or bought/pledged shares with Follow This it would send a signal almost as loud and clear as Musk buying Twitter: We Demand Change, Change is Coming.
Your Call to Action
Anyone and everyone can use investing as a powerful force for undoing the process of climate destruction.
If you do not participate directly in investing, weigh in through Follow This and buy a share which buys another vote for a survivable climate. If your 401K offers a selection of funds, investigate the fund using As You Sow’s independent and progressive scoring tools and use their retirement plan action page. If you are an investor, consider moving to Engine No. 1 from other broad index and ESG funds, or get involved in your fund manager’s proxy voting initiatives.
Attention needs to shift in very large numbers to the corporate boardroom and executive suite. Money must be mobilized as the tool of choice for fixing climate abuse. The market system is specifically engineered for purchasing corporate influence and control by investing in company stocks, and that is the mechanism that will create true transformation.
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