By Marco Poggio
President Donald Trump has ordered a review of the influence of proxy advisory firms on investments in the fossil fuel industry, a move that could ultimately help oil and gas companies prevent shareholders from voting on resolutions aimed to address the risks of climate change
The executive order Trump signed last week got the most attention for fast-tracking oil and gas pipelines, but the order went further: it also seeks a review of existing laws allowing investors to weigh in on environmental, social and governance issues that affect their investments.
The order addresses retirement plans subject to the Employee Retirement Income Security Act (ERISA), a federal law regulating private-sector pensions. Under the law, shareholders and proxy advisory firms hired to assist them can bring resolutions for shareholders to vote on concerning various issues. Trump ordered the Department of Labor to review the fiduciary responsibilities for proxy voting “to determine whether any such guidance should be rescinded, replaced, or modified.”
Trump’s move drew immediate criticism from shareholder advocacy groups, which see it as an attempt to scale back investors’ efforts to pressure fossil fuel companies about climate change and its related risks.
“This executive order appears to be part of that ongoing debate over the years over whether investors, who are acting as fiduciary and are investing on behalf of their clients, are supposed to maximize returns,” said Rob Berridge, an expert on climate risk at Ceres, a sustainability nonprofit organization that helps investors engage with companies.
In recent years, shareholders have been the target of pro-oil trade groups, such as the National Association of Manufacturers (NAM), which has been lobbying Congress for tighter regulations on proxy firms, arguing the advice they give is politically motivated.
“The debate is over whether [shareholders] are allowed to include environmental and social issues in their investment decisions,” Berridge said, adding that the order casts climate change as a moral and political issue, not a financial one.
But with abundant evidence that climate change poses immediate and long-term financial risks to many companies—much of that evidence supplied late last year by the federal government’s own Fourth National Climate Assessment—that will be a difficult argument to make, he said.
“The horse has left the barn,” Berridge said. “Climate change is a financial risk. Everyone knows it’s a financial risk.”
Investors are increasingly aware of the physical impact of climate change, such as rising sea levels, wildfires and heatwaves, which imperil the financial stability and threatens the viability of some companies.
In a dramatic example, California’s largest utility, Pacific Gas & Electric, filed for bankruptcy earlier this year after two years of catastrophic wildfires that were made worse by climate change. Fueled by rising temperatures and drought, the fires caused billions of dollars in damages. PG&E faced liability in several of the large fires and faces multiple lawsuits seeking to recoup millions in losses.
“The risks to these companies are real, and asset owners are very concerned. A president who doesn’t understand or deal with reality, issuing an executive order, doesn’t change that reality,” said Robert Litterman, former head of risk management at Goldman Sachs and current board member of the Climate Leadership Council, a conservative-backed lobbying group that supports a carbon tax in exchange for the elimination of climate liability suits.
Investors in the fossil fuel industry have increasingly pushed companies to be more transparent about climate risks and have asked them to change their business plans to address climate change.
Shell announced in December it would support shareholder resolutions asking the company to align its business plan with the Paris Climate Agreement and pledged to reduce the carbon footprint from its energy products, not just its direct operations.
While the announcement drew praise from investors, seven environmental groups recently filed suit against the Dutch oil giant for not aligning its business model to meet international climate goals. The groups contend that a reduction in the company’s carbon footprint is not the same as a reduction in emissions.
Under the Obama administration, the Department of Labor allowed climate change-related issues to be considered financially relevant in the creation of private 401(k) retirement plans and pension funds—an acknowledgement that investments in fossil fuels are increasingly risky, in part because of climate change.
Trump’s executive order now seeks to change that.
“For an investor to a private pension fund, or people who manage 401(k)s, for them to say ‘we’re going to divest from fossil fuels, or reduce the carbon intensity of our portfolio,’ I think that there are serious financial risks that that strategy addresses,” Berridge said. “The administration is trying to say that this kind of investing is done for political reasons, for moral reasons, and not for financial reasons.”
Danielle Fugere, president of As You Sow, a shareholder advocacy organization, thinks the executive order will not have that effect.
“Shareholders have been focusing on oil and gas companies and asking them to address climate change, asking them to think about what their future is,” Fugere said. “What we’ve come to see is that ESG—environmental, social and governance factors—absolutely affect the bottom line.”
“The Department of Labor could look at this but I don’t think that they will be able to conclude that ESG should not be considered, that investors should not spend time on it,” she said.
Trump’s order also calls on various departments to loosen existing regulations that would make it easier to transport fossil fuels across the country. The order also weakens environmental protection against air and water pollution, and other hazards associated with oil and natural gas infrastructure.
He ordered the Environmental Protection Agency to review portions of the Clean Water Act and asks the Department of Transportation to allow liquefied natural gas to be transported by rail, which is currently banned.
“The Federal Government must promote efficient permitting processes and reduce regulatory uncertainties that currently make energy infrastructure projects expensive,” Trump said in the order.
The executive order seeks to streamline the permitting process for fossil fuel infrastructure, including pipelines and drilling facilities. In the order, Trump touts the “dominant” role of the United States in the energy market.
“The Trump administration is trying to push through oil and gas projects. And this is a time when the world is moving away from fossil fuels and moving toward a low- carbon economy,” Fugere said. “Not every state wants to have pipelines.”