“There will be blood” – Proxy season opens to a new push against funding fossil fuels

Climate Economy

“There will be blood” – Proxy season opens to a new push against funding fossil fuels

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Big Oil is fighting to the last man to continue new oil and gas projects as activist proxy resolutions surge.

Editors’ note:

Welcome to shareholder proxy season — corporate America’s annual exercise in participatory corporate democracy. The Interfaith Center on Corporate Responsibility reported there were 376 member-sponsored proxy resolutions, with climate change, DEI, and human rights capturing about two-thirds of the resolutions. Topics range from coal phase-out policy to workplace safety to the continuing abuse of Uyghurs in China.

Given the voluminous scope of issues, Climate & Capital chose perhaps the most contentious issue in the battle to control global warming — the transition away from fossil fuels and climate systemic risk. And at the center of that issue is whether banks should continue to lend for new fossil fuel field development. And who better to discuss this with than Paul Rissman, a Board Member of the Sierra Club Foundation, a co-founder of Rights CoLab, and an active investor engaging companies on systemic risks to get the scoop.

Climate & Capital’s Billy Gridley sat down with Rissman to better understand the revised 2023 shareholder resolutions on bank lending for new oil fields.

Some background:

The fight over whether to fund and explore new oil and gas is reaching a fever pitch. In March the Biden administration surprised climate activists when it gave ConocoPhillips the go-ahead for its “Willow Project” in the Arctic. While the project was scaled back, climate activists were not pleased. The fossil fuel transition will be a key bone of contention at the UN annual climate conference (COP 28) in November in Dubai. Investor activists are forging ahead with a slew of  “no new field resolutions” calling upon large U.S. banks and other members of the Net Zero Banking Alliance (NZBA)to limit financing for new supply, amongst a variety of “net-zero” pathway issues, including target-setting, energy transition business plans, and asset retirement obligations.

All these efforts are aimed at putting teeth to the landmark report published by the International Energy Agency (IEA) two years ago, calling for a host of global priority actions to transition the energy system. 

This interview text has been edited for brevity and clarity.

Billy: Why do companies persist in developing new oil and gas fields when the science says, and the banks know well, that there is a limited remaining unabated and “burnable” global carbon budget?

Paul: The oil and gas companies all have adopted a last-man-standing approach. But they can’t all be the last man standing. In fact, Saudi Aramco and Qatar will probably be the last ones standing. It seems irrational to me. I’m sure they all have a lot of smart people who are studying game theory. But I don’t know how they’re going to do it. And there will be blood.

Last year, the Sierra Club Foundation and other investor activists filed, for the first time, shareholder resolutions at the 6 largest U.S. banks, asking them to cease expansion into new fields. Did anything good result from these resolutions?

Yes. We received a base of support, greatly appreciated, from many quarters: asset owners like the New York State Common Retirement Fund and many of the New York City retirement funds, several states (Illinois, Oregon, and Vermont), and a number of overseas pension funds and asset managers like Legal & General. In 2022 we received enough support to refile them in 2023. That was big.

Last year, because of changes in SEC rules about “ordinary business,” we submitted a much more prescriptive resolution than we would have otherwise, and we quite narrowly addressed activities that conform to the IEA net zero emissions pathway. Three of the banks challenged the resolutions, and all were defeated. Therefore, we only had a small window of time to “get out the vote”. This year, we assumed that we would get it through the SEC — in fact, no one challenged — and we were able to start outreach work much earlier.

“The oil and gas companies all have adopted a last man standing approach.”

In 2022 BlackRock came out in their May voting bulletin saying that they did not support the resolutions because they were “overly prescriptive.” As a result, the Sierra Club Foundation placed the BlackRock-owned separate managing account (SMA) service provider Aperio on watch, and we were able to start a dialogue with BlackRock.

What is the current state of shareholder activism after the big media events in 2021, like Engine No. 1, Larry Fink’s climate advocacy, and the Shell court ruling, and then 2022, which seemed quiet? Is that fair or just the way the media portrayed it?

2021 was a big deal, no doubt about it. I think 2022 was kind of a pause, but in 2023, the anti-ESG movement supplanted the Ukraine war as a major concern for asset managers.

It also reflected a shift in strategy. In 2022 we saw reduced support for shareholder resolutions because activists wanted to take advantage of a late 2021 SEC rule change by actually asking for what they wanted instead of asking for what they thought they could get.

However, the number of shareholder resolutions is on track to match or exceed last year’s, So I don’t think the activists were cowed. I think that every year that everyone looks at the situation and adapts. Abortion resolutions are new this year, racial resolutions have continued apace, and there are a lot of worker, climate, and biodiversity resolutions, so the variety of resolutions has actually expanded.

How and why have you fine-tuned these “no expansion” bank shareholder resolutions this year?

A To be clear we are targeting finance for general corporate purpose loans and new projects to companies who are expanding, knowing that pure project finance is only somewhere between 5% and 15% of oil and gas debt.

If you look at the opposition statements that the banks put out last year and the things that the banks talked to us about when we were engaging with them, they had two main issues – both of which were false.

First, they said we were demanding that they fire all of their oil and gas clients immediately, which our resolution never called for. Second, they said we were preventing them from providing transition finance, which, again, our resolution never called for. Those themes run through all of the opposition statements and all of the engagements that we had.

This year, we decided to face both of those issues head-on. That’s why we are asking for a “time-bound phase-out” with specific language in the resolutions, encouraging the banks to provide transition financing, but only if the customer is certified to be on a credible 1.5-degree pathway.

“We’re trying to get the banks to take accountability for the fact that they all have these net zero banking alliance pledges, and they’re not fulfilling them.”

What other fossil-fuel-related bank proxy resolutions are you most excited about in terms of content, innovation, and chances of success?

The As You Sow “what is your transition plan” resolution relates to disclosure. Ours is a policy resolution. To the best of our knowledge, the As You Sow resolution has been recommended by the proxy solicitor ISS, but ours has been recommended to be voted against. By definition, both resolutions relate to the dimensional topic of the decarbonization transition. I would not be surprised if As You Sow’s resolution gets majority votes. And then there are the New York State and New York City resolutions calling for absolute emissions targets. I am hopeful about the effective package of resolutions here where we’re trying to get the banks to take accountability for the fact that they all have these net zero banking alliance pledges, and they’re not fulfilling them.

What did you think about JP Morgan CEO Jamie Dimon’s Letter to Shareholders? He argues there is a trade-off between climate action and our bottom line; continued financing of new sources of fossil fuels is necessary for energy security, and banks cannot act meaningfully to combat climate change until they are required to by governments.

Well, first of all, Dimon has to justify the status quo because while the banks would like to transition, they really have no idea how to do it. So he has to think of a way to justify it. And that is how he thought of doing it.

The problem is banks are run by bankers, and bankers are run by their bonuses. And you’re not going to talk an oil and gas banker into having a lower bonus by doing fewer deals because then they will move to some other place, and the bank might lose its clientele. The banks know they have these commitments. They know that greenwashing has become a prominent issue. They know that they can’t figure out how to make their commitments. So they’re going to stall. And that’s exactly what they’re doing. You could have predicted that they would be stalling, and they’re stalling.

The last 12 months have been a bit rocky for BlackRock and Larry Fink. What do you think of his  “Voting Choice” initiative that “passes through” shareholder proxy voting to clients? Larry Fink says it demonstrates the “transformative power of proxy voting” and argues that “if widely adopted, it can enhance corporate governance by getting new voices into shareholder democracy.”

I think that’s a bunch of hoo-ha. Many think that it will generate unintended consequences. There are a number of problems. For example, the Net-Zero Asset Owners Alliance is on record as saying that we need asset managers to vote our shares because they have more stewardship resources, better research, and more dialogue with companies than we do. If the asset managers don’t vote, what’s the point of them even doing stewardship?

Fink’s “voting choice” is a “bunch of hoo-ha”

Are asset managers abdicating responsibility?

Absolutely. The big managers have more votes than anyone else, so they can affect change more than anybody else. All they are really doing is trying to get the heat off of them. The other problem is that retail investors either don’t vote or reflexively vote with management because they are not well-informed and actually don’t know the issues. You can’t give somebody a fiduciary responsibility, which of course, is what voting is, and then not adequately inform them.

Are asset managers shying away from their duty to inform their clients?

Yes exactly. I think they’re violating their fiduciary duty by doing this.

Are there any significant changes in the last year in the overall divestment versus engagement debate?

Yes absolutely. What we are seeing is that divestment proponents continue to be divestment proponents; however, they are broadening their tactics. For example, Stop the Money Pipeline is now one of the strongest enthusiasts for voting on shareholder resolutions and for voting for resolutions against directors. Previously they were complete divestment enthusiasts. So this year, we’ve seen an enormous outpouring of support for shareholder engagement strategies, not just divestment.

I can tell you that fermenting below the surface is an acceptance of “Engage Our Equity, Deny Our Debt”, which originated with Scotland’s Lothian Pension Fund.

“Money rules the world. Money will always rule the world. And money has to be the incentive. “

Equities have voting rights, so why would you give up your voting rights via divestment? Equities are perpetuities. So, if you’re given rights, use them. Debt doesn’t have voting rights, but that debt needs to be rolled over. If you have an opportunity to deny financing, use it.

And, as you know, divestment of equities never was a denial of financing: it was just moving money around between investors. Investors refusing to refinance debt is a real-world consequence. Filing and voting shareholder resolutions and voting for or against directors if you’re an equity voter is a real-world consequence. So just do the things that have real-world consequences and stop being so philosophical about it.

The Sierra Club has now developed a very sophisticated financial advocacy function, growing from one half-time person in 2017 to eight people now. When the Sierra Club talks to companies, they talk to them about systemic risks.

To drill down a little bit: does that engagement work extend to, for example, the work of the Climate Safe Lending Network and BankFWD on the carbon embedded in bank deposits, as presented in their report, The Carbon Bankroll?

That’s very interesting, important work of which we are aware. It is good to have different organizations pushing unique angles.

Now for the magic question: if you had 20 minutes alone with Sultan Al Jaber and Chevron CEO Mike Wirth, and you were able to whisper in their ears and ask: as opposed to continued stalling, what is the most logical and honest energy and decarbonization transition path forward for you, as would be judged and well received by the court of public opinion?

I think the Inflation Reduction Act is brilliant. Nobody got their ox gored. And now we’re merrily on our way to making fossil fuels obsolete. And even the oil and gas companies get to participate if they can think of what to do.

Money rules the world. Money will always rule the world. And money has to be the incentive. And now you’ve got this subsidy battle going on between the US and EU. Everyone wants to get into the act now. And I think Brian Deese was the one who thought of it all. So Brian Deese saved the world. Thank you, Brian.

Socializing the idea of systemic risk is still at a very incipient stage.

Finally, is there are growing gap between U.S. and Europe on whether climate change is a systemic financial risk to global banking?

I would not say that it is widening, but the investor bases are different. Socializing the idea of systemic risk is still at a very incipient stage. In 2022 when the International Sustainability Standards Board (ISSB) put out its rules for comment, we and other investors said: if what you’re really interested in is protecting investors, you should know that investors don’t really care about idiosyncratic single company risk if they’re well diversified, but they do care about systemic risk to all companies that they can’t diversify. ISSB summarized this by saying that “a few commenters” suggested that we should look at systemic risk. But that’s all. And the SEC doesn’t yet formally look at systemic risk.

But investor organizations such as the Net-Zero Asset Owners Alliance and others are talking about the systemic risk of climate change, among others, and how engagement with asset managers must begin to cover the systemic risk. This is coming primarily from asset owners in Europe. They get it in Europe. They don’t get it here in the US yet. But that makes perfect sense.

In Europe and the U.S., what has changed is what everyone is saying publicly. In our “Get out the Vote” campaign on bank lending, I detect more interest among US asset owners and asset managers than I did last year. And there is quite a bit more interest among European and UK asset owners and managers who are actually talking about it because they’re being supported by their governments when they talk about it. But the US asset managers and owners aren’t talking about it because they’re afraid of the anti-ESG blowback.

Written by

Billy Gridley

William "Billy" Gridley is Climate & Capital's climate policy editor. He is a leading climate investor activist and former Ceres policy executive. A lifelong environmentalist, business entrepreneur and former arbitrage investor for Goldman Sachs and Bear Stearns. Like all of us, he is eager to shatter the status quo to accelerate climate action.