Public policy plays a critical role in regulating and framing the relationship between companies and their investors and, in turn, the relationship between companies, investors and wider society.

Responsible engagement on climate policy

Policy sets the rules of the game; it defines roles, responsibilities and accountabilities, it creates risks and opportunities, and it mediates between competing interests.

In the context of climate policy, investors, companies and governments need to work together on ambitious solutions to achieve the Paris Agreement. Governments need the insights and support of companies to understand the economic costs and benefits of policy options, as well as influence others within their industry, supply chain or customer base. Companies need clarity and certainty from governments to invest and act on risks and opportunities in current and future markets.

There are a number of ways in which companies can impact the outcome and pace of emerging efforts by governments to shape policy in response to climate change. In 2013, the UN Global Compact published a Guide for responsible corporate engagement in climate policy which describes corporate influence on policy as entailing a range of direct and indirect activities. Some examples are outlined below.

 Direct influenceIndirect influence 
 
  • Providing testimony, endorsements or participating in government agency working groups
  • Political contributions
  • Participating in public-private partnerships
  • Participating in national or international forums on trade and technologies
  • Engaging government officials
 
  • Information and PR campaigns targeting customers, suppliers and the public
  • Contributions to external, non-governmental organisations
  • Funding of NGOs, research institutes and academia
  • Membership in or links to trade associations and business groups
  • Former employees taking jobs as government officials or the corporate hiring of former government officials
  • Engagement in international or national business alliances or initiatives
  • Calls to action and example setting with customers, suppliers, competitors and the public
  • Participation in research activities

Why climate lobbying matters

Since the creation of the United Nations Framework Convention on Climate Change (UNFCCC) in 1992, policies and programmes for climate action have continued to develop across the globe with ever-increasing corporate requirements. The rate at which policy and legislation is implemented across nations remains varied. These developments are targeted by a variety of organisations either lobbying to support or halt this progress.

The think tank InfluenceMap notes that very few of the largest and most politically influential corporations are positively engaging on climate policy globally, with most being neutral and negative influencers outweighing supportive ones by around three to one. Companies opposed to climate lobbying are, unsurprisingly, concentrated in the fossil fuel and energy intensive sectors (energy, utilities, chemicals, automotive), while a smaller but growing group of supportive firms are generally from the utilities, consumer goods and technology sectors.

The impact of negative climate lobbying is stark. Only 10% of global greenhouse gas emissions are covered by any binding carbon pricing scheme (a carbon tax or carbon market) and those that are suffer from woefully low effective prices. For example, the EU emissions trading system (ETS), currently the world’s largest carbon pricing scheme, failed to exhibit an effective price above US$10/tonne between 2011 and 2017 and, at the time of writing, hovers around US$13/tonne. This is despite the High-Level Commission on Carbon Prices conclusion that a price level of US$40-US$80/tonne is needed by 2020 to achieve goals in line with the Paris Agreement. Intense lobbying by steel and chemical interests in the EU to water down the effectiveness of the EU ETS has been well documented.

Similarly, in the US, the Environmental Protection Agency’s Clean Power Plan, which was issued in 2015 to help reduce carbon pollution from power plants, was held up by corporate lawsuits. In Japan, the powerful cross-sector industry federation, Keidanren, has historically opposed binding climate policy, and with its steel, electric power and engineering sector members, it appears to have supported Japan’s ongoing use of coal power generation. Similar situations have played out in other countries including Australia, South Africa and Canada.

The role of trade associations

Trade associations can play a critical role in public policy debates by engaging policy makers on a range of business-relevant issues, and, in turn, encouraging a more supportive regulatory environment for corporate profitability. Companies often benefit from belonging to trade associations because they offer a cost-effective way to pool resources and engage on issues of importance to the industry. Equally, a trade group stating that it represents a broad segment of the economy may be a more compelling influencing force compared to a single company.

However, in the context of climate policy, investor concern arises where such associations act for short-term gain at the cost of long-term risk to shareholder value.

Climate policy lobbying is often carried out by powerful trade associations, industry bodies and think tanks funded by member companies with various interests in the course of climate action (and ultimately shareholder capital). However, recent research found that the majority of trade groups active in climate policy engagement are opposed to positive regulatory climate action. Of the 50 most powerful trade groups, organisations opposing climate policy outnumber those supporting it by seven to one. This research shows that a range of powerful groups like the US Chamber of Commerce, BusinessEurope and Japan’s Keidanren have opposed binding climate policy in line with the Paris Agreement in their respective jurisdictions. They are countered on the supportive side by a much less influential and smaller group of trade associations representing the clean energy sectors.

The reason why corporate climate lobbying is often seen as obstructive may be because companies often only lobby strategically where issues seem material to them. Furthermore, trade associations tend to adopt positions of the most vocal members or largest financial contributors on a given topic. So while trade groups representing the fossil fuel economy might be expected to lobby against climate policy, powerful cross-sector trade groups like the US Chamber of Commerce are also part of this opposition group. Companies that deem these issues as less relevant to their operations often remain silent.

The result is that the groups which actively lobby for pro-climate policies can often be outweighed by those opposing such policies.

With a perceived lack of progress by governments to implement a meaningful policy framework for a low-carbon energy transition, recent shifts in attitudes suggest a more positive story. For example:

  • 129 companies have signed up to commitments stipulated by the UN Global Compact guide.
  • The Corporate Carbon Policy Footprint research noted above identifies a recent trend in that utilities like ENEL, Iberdrola, SSE and National Grid are pushing strategically for more ambitious climate policy. Companies like Apple, Amazon, Google and Microsoft are also becoming more active by committing to procuring renewable energy for their increasing power needs globally. These companies are now valued at many times the aggregate value of the entire fossil fuel production sectors and continue to grow their operations and investments. This represents significant political clout which, if directed towards low-carbon energy policy, could likely outweigh the negative lobbying influence of the fossil fuel economy. Indeed, InfluenceMap’s ongoing analysis shows that strategic and positive lobbying by these and other users of renewable energy has increased significantly since the Paris Agreement.
  • Investors, concerned by the trends described above, are now becoming more active on climate lobbying. As demonstrated by initiatives such as the Investor expectations on corporate climate lobbying statement, The 50/50 Climate Project, the PRI’s collaborative engagement, investors are motivated by associated company and portfolio risk issues.

Corporate policy engagement as a positive force 

It is important to note that a number of companies across sectors already take positive action, using their influence to engage with policy makers on strengthening and driving climate-related legislation.

For example, Ceres’ Business for Innovative Climate and Energy Policy (BICEP) network (of over 45 companies in the US including Unilever, Nike and eBay) continues to advocate for stronger climate and clean energy policies at the state and federal level (and beyond). As outlined by the Ceres 2018 Policy Outlook, the network has established areas of focus including:

  • engagement on the US Environmental Protection Agency’s ideas to repeal and replace its Clean Power Plan; and
  • continuing to engage with policy makers at the state level to influence legislation across areas including renewable energy and infrastructure, carbon reduction regulations and grid modernisation.

Another interesting example of tactical and climate-supportive policy engagement is the establishment and growth of the trade group Advanced Energy Economy, set up in California and now active in many states, as well as at the US Federal level. Its members are a coalition of companies that want to decarbonise their energy procurement (Apple, Microsoft, Google) as well as renewable energy and efficiency technology providers. Rather than operating on the NGO level, it acts as a trade association established to fill a gap in the area of lobbying for policy, enabling a pathway to decarbonising the energy system. As a key tactic, the group avoids specifically messaging about climate change for political reasons but is clearly supportive of ambitious climate goals at the heart of its members’ strategies.

The case for shareholder concern

 Risk Examples

Encouraging short-termism within individual companies and/or sectors: Corporate influence that delays the inevitable introduction of more robust climate policy may delay the low-carbon transition for an individual company or sector, which may impact its viability and risk-return profile in the long term.

Corporate spending on negative climate policy (ultimately using shareholder capital) could also result in missing out on financially viable innovations and investment opportunities associated with alternative and low-carbon energy production.

In Germany between 2010 and 2015, where the financial performance of utility incumbents E.ON and RWE was negatively impacted as a result of changes brought about Energiewende (Energy Transition) policy since it was first introduced in 2000. The companies had been attempting to preserve their business models by lobbying to control the pace and ambition of the implementation of the policy.

As public sentiment shifted, the companies were no longer able to do this and their financial performance was affected. Investors may have been able to predict this by comparing the intensity of RWE and E.ON’s lobbying and positions, as compared to the ambitions of the climate-motivated Energy Transition policy.

Reputational risk: Companies may face backlash from their consumers, investors or other stakeholders if there is a clear direct or indirect link to blocking climate policy.

Companies including Microsoft, Google and Shell have had to respond to public campaigns in the US due to past association with the American Legislative Exchange Council (ALEC), a group widely known for disseminating climate denial and disinformation to undermine effective US climate policy.

The universal owner’s portfolio: Strategic and negative climate lobbying by a minority of companies in a portfolio holds back the implementation of the Paris Agreement and an orderly solution to climate change, increasingly regarded as a key existential challenge to global society. This presents systemic long-term risks, including uncertainty and volatility, to the portfolio and its beneficiaries, in whose interest trustees have a fiduciary duty to act.

 

The Government Pension Fund Global of Norway adopted criteria in late 2015 allowing it “to exclude companies whose conduct to an unacceptable degree entail greenhouse gas emissions”, which includes climate lobbying.

In June 2017, the AP7 pension fund of Sweden announced it was divesting from six companies for violation of the Paris Agreement, including Exxon and Southern Company, for climate lobbying. (See the AP7 case study).

Legal risks: Discrepancy of corporate public statements related to climate and associated lobbying practices, as well as climate-related litigation risks are outlined in “understanding the legal risk” below.

Recent lawsuits filed in California and New York rely on the alleged activities of trade associations in promoting climate science denial and claim this amounts to fraud.

As an indicator of mainstream business risk: As “emerging” climate regulations become ratified, strategically opposed or misaligned climate lobbying could be a red flag for lack of readiness or even non-compliance. Sectors where climate-motivated regulations are now in force and key drivers for business are established include the automotive and utilities sectors, with numerous strands of policy radically altering the business landscape globally.

Automaker VW cheated on NOx testing as it was unable to meet both US climate-motivated efficiency and NOx rules simultaneously. In retrospect, a study of its lobbying on these regulatory strands may have signalled to investors contradictory behaviour.

A study of lobbying behaviour by the utilities sector reveals which companies are behind a low-carbon transition (ENELIberdrola), which have been playing both sides (E.ONNextEra Energy) and which companies have been lobbying to maintain their business model (Southern CoRWE).

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