Out of the Desert and into the Sun

If the first month of the Trump administration is any indication of official U.S public policy relating to climate risk, this looks like a doomsday scenario. Donald Trump has signaled he intends to back out of the Paris Climate Accord, has surrounded himself with climate deniers in positions where they can do real damage, and has already begun to set the stage for weakening and outright gutting the Clean Power Act, and other environmental regulations around CO2 emissions. Abetted by a Republican-led Congress under a tactic known as the Congressional Review Act, plans are underway to eliminate rules that restrict methane leakage from oil and gas drilling operations on public lands and the dumping of coal mining waste into streams. It’s really hard to imagine a worse domestic backdrop in the fight to limit global carbon emissions. But here’s the thing: On the other side of this battle are ever-growing legions of investors and businesses, as well as civil society, that believe climate risk is the greatest threat facing humanity. Whether the lens is portfolio risk, profitability risk, generational risk, or something else, it really doesn’t matter, because all of these groups in their own ways are working to forge a sustainable economy.

So maybe there is a reason to be optimistic because a majority of U.S. businesses have come to accept that climate risk is business risk and are not only taking steps to mitigate this risk but are accelerating their adoption of sustainable business practices. And for the businesses that lag their industry peers around everything from climate risk disclosures to transparency of political and lobbying expenditures, investors (and others) will continue to exert pressure and exact concessions.

This all reminds me of song lyrics by a now-defunct indie band called, The Format. Somewhere in one of their songs was the line “…now it’s time to get out of the desert and into the sun.” Maybe there is a lesson in these words for advocates of low carbon economies, in that whatever damage Trump attempts to inflict to COP21, EPA, Clean Power Act, etc. can’t stand up to the collective determination of civil society, active investors, and businesses, large and small.

To Be Sure, Policy Tailwinds Would be Helpful, but Progress Can Come Without Them.

A good example is rooted within The Dodd-Frank Act, signed into law by President Barack Obama in January of 2010. Buried in the middle of all of this was Subtitle G, which provided that “SEC may issue rules and regulations that include a requirement that permits a shareholder to use a company’s proxy solicitation materials for the purpose of nominating individuals to membership on the board of directors.” Why the need? Because activist shareholders were increasingly focused on board performance in large part relating to climate risk and the right of shareholders to replace those directors who were perceived to underperform.

The SEC took up the charge and later that same year proposed a proxy access rule which would allow large shareholders in public companies to nominate board members using a company’s own proxy materials without having to go through the considerable expense of mounting their own proxy fight in order to nominate directors. Opposition lawsuits were subsequently filed by trade associations, and ultimately the U.S. Court of Appeals for the District of Columbia vacated SEC’s proposed rule.

End of the Story, Right?

Actually it’s just the beginning because five years later in 2015 the New York City Comptroller’s Office led a campaign to engage institutional investors in achieving proxy access rights. This is detailed in US SIF’s recent report “The Impact of Sustainable and Responsible Investment”, and to summarize, 120 proxy access proposals were filed that year, 75 of which came from New York City Funds. Of the 94 proposals that went to vote, 60% were adopted, which sparked other activist shareholder proposals and by the end of that same year over 20% of companies within the S&P500 had proxy access rules in place. Fast forward to August of 2016, and 39% of the S&P500 had adopted proxy access rules, compared to only 1% three years earlier.

Wouldn’t this have been easier if the changes were driven by policy? Maybe, but if you consider that the Trump administration is in the process of relaxing (well…eliminating) Dodd Frank, aren’t we better off with a lasting solution arrived at through direct negotiation between public companies and the investors that own them?

Climate Progress Can Also Come in the Face of Significant Policy Headwinds.

Trump has already repealed the Obama administration’s Stream Protection Rule, a policy maneuver designed to allow coal companies to have an easier time dumping mining waste into streams. Claiming Obama’s rule would have killed jobs, the coal industry has lobbied for this, somehow missing the point that jobs are being killed off anyway through a combination of cheaper alternative energy sources, importantly including renewables, and automation. As Brad Plumer wrote recently in Vox, even if Trump repeals Clean Power Act in its entirety, the Energy Information Administration (EIA) estimates that domestic coal production will only rise to 2015 levels, which by the way are only slightly higher than today’s levels, before continuing their decline.

Investors too have considerable influence on climate progress. Consider that of the $40 trillion that is professionally managed in the U.S., $1 out of every $5 is now linked to strategies that have environmental, social, or governance (ESG) screens or mandates. This includes faith-based screens and filters, all of which advocate sustainability. It’s hard to overstate investor appetite for improved corporate behavior as it relates to climate risk given that the transition into this investment approach is growing at over 33% per year over the past few years, and has increased 14-fold since 1995.

Beyond investors, consumers are now empowered to jump into the fray through #grabyourwallet and other initiatives. While not always specific to climate risk, an important self-reinforcing relationship is emerging between consumers, investors, and corporate America. Several weeks ago a financial analyst downgraded Under Armour in part because its CEO has been praising Donald Trump. Think about that for a moment. Certain brands perceived to be affiliated with the new administration may suffer both in reputation and stock price and conversely, brands such as Nordstrom that fight back are perceived to be worth more. In response to the downgrade, Under Armour clarified and strengthened its commitment to the importance of immigration and you can bet the company will now get engaged in combating Trump’s immigration proposals. Enlightened self- interest? Probably, but does it really matter?

There’s no question that U.S. Governmental policy tailwinds would be nice to have right now as the world’s leading economies focus on the transition to a low carbon future, but frankly, we already have much of what we need which is collective and growing momentum of corporations, investors, and consumers all with an eye on the prize, which is a sustainably prosperous world.

Time to get out of the desert and into the sun.


Bill Davis
Founder and Portfolio Manager
Stance Capital