With help from Ryan Heath and Zack Colman
This week, we explore how big banks will be held accountable for their environmental promises and dive into new survey data indicating that many corporate boards and investors aren’t factoring climate change into their business strategy.
DISSECTING A NET-ZERO PLAN — Morgan Stanley became the first major U.S. bank to set a goal of net-zero financed emissions by 2050, the latest sign that the financial sector aims to tally its contribution to climate change and mitigate the risks it poses to their assets.
But last week’s announcement was bare boned. It came with no road map for how to achieve that target, no interim milestones to meet between now and the next three decades, and no clarity on whether it plans to phase out investments in the fossil fuel industry or in companies that contribute to deforestation. Morgan Stanley has invested nearly $92 billion in fossil fuels since 2016, according to a report by the Rainforest Action Network. U.S. giants including JPMorgan Chase, Wells Fargo and Citi have all financed more than double that during the same time period.
Morgan Stanley declined to make someone available for an interview or answer a list of questions. So we asked outside experts, including green groups and investor activists, about the significance of the pledge and what it should entail.
Danielle Fugere, president and chief counsel of the shareholder advocacy group As You Sow, said the announcement signals the risks of financing oil and gas. It also might encourage other U.S. banks to make similar commitments.
“They don’t tend to make announcements they can’t keep,” Fugere said of Morgan Stanley. “There’s a significant amount of intention behind it.” At the same time, holding banks accountable is challenging. Disclosing how much loans and investments contribute to climate change is key, as is setting interim targets. “We hear from banks that they are working with clients, and we keep asking, ‘How many? What are they doing?’”
Morgan Stanley is working on disclosure. In July, the bank joined the Partnership for Carbon Accounting Financials, which is developing a methodology for financial institutions to measure and manage their carbon footprint. Shortly after, Bank of America and Citi announced they had joined, too.
Ben Cushing, who leads the Sierra Club’s financial advocacy campaign, said the Partnership is the floor for action. While measuring their contribution to climate change is important, banks don’t need to spend another few years on complex accounting tools before they stop financing all fossil fuel exploration. Banks already know this is one of the most carbon intensive parts of their portfolios, Cushing said.
“Our case all along has been that banks could do fine moving away from financing fossil fuels,” Cushing said, noting that the S&P Dow Jones in August kicked Exxon Mobil off its indices and replaced it with Salesforce. “The banks don’t need them to be profitable.”
In April, Morgan Stanley said it will no longer directly finance oil and gas exploration in the Arctic, nor new coal-fired power plants and thermal coal mines unless they involved carbon capture and storage technology. The bank didn’t rule out financing future tar sands drilling and exploration projects, however, which environmental groups have pressed for. They also want banks to end funding for all future fossil fuel exploration and expansion, and commit to phasing out current investments.
Trust, but verify. Once Morgan Stanley outlines a strategy, it should be verified by a third party, like the Science Based Targets initiative, Cushing said. That initiative ensures climate pledges are aligned with the Paris accord. On Oct. 1, it will release a framework for financial institutions.
Another yet-to-be-answered question: Does Morgan Stanley intend to invest in carbon offsets to achieve its 2050 goal? As Leslie Samuelrich, president of the environmental investment firm Green Century Capital Management, put it: “Can they finance coal plants in India if they go plant some trees somewhere?”
Welcome to The Long Game! Be sure to catch up on our last issue, which analyzes the flurry of recent corporate climate commitments, in case you missed it. We want to know what you think and what we’re missing. We won’t take anything personally, promise. Send tips, critiques and all your sustainability questions — and answers — to [email protected]. Find me on Twitter @ceboudreau. Did someone forward this to you? Subscribe here!
CORPORATE EXECS SLOW TO ADOPT CLIMATE, DIVERSITY STRATEGY — Two new surveys of board directors and investors indicate that even though the majority believe climate change is an important issue, less than half are factoring it into their business strategy. The same can be said of diversity. The vast majority of board directors think companies in general should do more to promote gender and racial diversity, but that sentiment drops substantially when it comes to changing the makeup of the board itself.
The findings come from PwC’s annual survey of nearly 700 U.S. board directors. While 67 percent said they believe climate change should be considered when developing company strategy, 45 percent said environmental, social and governance issues are regularly on the board’s agenda (compared with 34 percent in 2019). Even fewer directors think those issues actually have a financial impact on the company.
PwC’s survey also indicates that board directors support diversity in theory, not in practice. Most (84 percent) support gender and racial diversity but are not willing to stake executive pay on it. Only 39 percent think diversity and inclusion goals should be tied to compensation, and 34 percent said it is very important to have racial diversity on the board itself.
Meanwhile, just 40 percent of global investors incorporate climate change into their analyses, according to a survey by the CFA Institute. That is despite 75 percent of C-level executives in the investment industry saying the issue is important.
The institute has some suggestions for investors and policymakers: Put a price on carbon; increase transparency and disclosure on climate metrics; and asking companies to analyze the physical and financial risks of climate change.
IS BLACKROCK UPHOLDING ITS CLIMATE PLEDGE? The world’s largest asset management firm got a lot of heat last week from environmental and investor activist groups. The left-leaning Majority Action, Green Century Capital Management and Friends of the Earth all accused BlackRock of failing to uphold CEO Larry Fink’s promise in January to more aggressively vote against corporate management teams that don’t make climate change a priority.
Majority Action analyzed how the country’s top two asset managers, BlackRock and Vanguard, engaged with more than 50 major U.S. oil and gas, electric utility, financial services and auto companies during this year’s proxy season — when shareholders vote on a slew of proposals on climate change and other issues.
They found that BlackRock voted against 10 of the 12 shareholder proposals flagged by Climate Action 100+, an investor-led coalition that the firm joined earlier this year, including those related to lobbying disclosures at Duke Energy, Exxon Mobil and top automakers and airlines. The firm also opposed resolutions calling for independent chairs of the board at those energy and utility companies.
Many of the proposals would have clinched majority support if both BlackRock and Vanguard had voted in favor, according to the analysis. BlackRock also voted in favor of board directors proposed by these companies virtually 100 percent of the time.
Farrell Denby, a spokesman for BlackRock, said the 54 companies included in Majority Action’s review are too narrow a group to offer a complete picture of the firm’s proxy activity this year.
“Our engagement stats are up meaningfully across E, S and G,” Denby said in an email referring to environmental, social and corporate governance. BlackRock this year published more voting bulletins than ever before, offering more transparency into its commitment to climate risk reporting, he said.The firm also increased votes against directors, underscoring its focus on accountability.
“It’s worth noting that not all shareholder proposals are created equal, and it would be wrong to equate good governance with voting against management without regard for a proposal’s impact,” Denby said. “Blindly supporting proposals is not a responsible approach to stewardship.”
Denby cited these stats: BlackRock cast more than 5,100 votes against directors this year because progress wasn’t sufficient, mostly on issues like lack of independence and diversity. There were 55 votes against director-related items at 49 companies for not meeting expectations on climate risk disclosure or management.
The firm also identified 244 companies that aren’t making enough progress integrating climate risks into their business, even as they face the greatest “material financial risks” from the transition to a low-carbon economy, according to its latest sustainability report. Of these, BlackRock took voting action against 53, or 22 percent.
Overall, BlackRock increased conversations and engagement with companies on environmental risks, corporate governance and other issues by 48 percent, to more than 3,000, Denby said.
A GREEN RECOVERY FROM COVID — Leaders of the U.K., Canada and the European Commission used a United Nations roundtable last week to commit to turbocharging their economies with green investments, and they urged others to join them. The event during the U.N. General Assembly came as this year’s climate change conference was delayed until November 2021 due to the pandemic.
Here’s a rundown of promises made, in case you missed it.
— European Commission President Ursula von der Leyen said €275 billion of the bloc’s €750 billion recovery plan would be spent on climate and environment initiatives.
— Canadian Prime Minister Justin Trudeau said his government made disclosing climate risk exposure a mandatory condition for companies seeking pandemic-related government funding and loans.
— China surprised climate diplomats by pledging to achieve carbon neutrality by 2060, and peak emissions within the next decade. That came on the heels of reports that China is preparing to loosen environmental regulations to continue its expansion of coal-fired power plants, however.
— Civil rights advocates and minority finance professionals want Joe Biden to name people of color to economic posts in his administration if he wins in November, and to reject demands by progressives to eliminate candidates from Wall Street, POLITICO’s Zachary Warmbrodt reports.
— ESG investors lack standardized reporting practices and transparent rating methods, which — if left unaddressed — could undermine confidence in sustainable finance, according to a new report by the international economic organization OECD.