Moving Beyond Maximizing Profits

For much of the latter third of the twentieth century, corporate law was dominated by the idea best summarized in economist Milton Friedman’s influential 1962 book Capitalism and Freedom that “Corporations have no higher purpose than maximizing profits for their shareholders.” In the last decade, however, shareholders have begun to push for more responsible corporate citizenship, particularly with regards to climate change.

The climate movement has been relatively successful at using shareholder engagement to secure emission reduction goals and greater corporate transparency about environmentally destructive practices and lobbying. Just this year, shareholders were able to get Chevron to adopt a policy that it would disclose how its lobbying efforts aligned with the goals of the Paris Agreement, the 2016 international treaty on global warming mitigation. Shareholder pressure on Exxon, among the biggest laggards in the fossil fuel industry when it comes to climate, led the company to add an activist investor to its board last week.

Such shareholder actions are in part inspired by growing public concern about the threat of the climate crisis. But the efforts can also create more profitable business models and change the long-term outlook for the fossil fuel industry. Between 2016 and 2020, oil and gas producers saw their market value contract by a total of $400 billion.

“I wish that investors were divesting from fossil fuels or demanding that companies change their business plans out of the goodness of their hearts, but a big reason is that the oil, gas, and coal industry is a total dumpster fire right now,” said Jamie Henn, director of Fossil Free Media who cofounded the environmental nonprofit 350.org.

The Trump administration, which spent its four years attacking climate science and scaling back environmental oversight, took a hostile view of such shareholder actions. Led by Trump appointees, federal agencies worked to reverse the trend with a series of new regulatory guidelines. The end goal was a full-blown return to the rapacious form of capitalism envisioned by Friedman and his acolytes, untethered by social or environmental concerns.

Silencing Shareholder Voices

In September 2020, Trump’s SEC voted three-to-two along partisan lines to add hurdles to filing shareholder proposals. While the previous rule allowed investors who held $2,000 of stock for at least one year to propose a shareholder resolution, the new rule raised the amount to $25,000 or $15,000 for two years. As a token gesture, the minimum remained $2,000 for investors who held their stock for three years.

“The SEC’s attempt to silence shareholder voices comes from a basic dislike of democracy,” said Andrew Behar, CEO of the nonprofit As You Sow, which aims to boost corporate responsibility though shareholder advocacy. “They don’t even want the actual owners of the company to have a voice in what the company does.”

The following month, the Trump Labor Department finalized a new rule making it more difficult for pension funds to divest from oil and gas interests. Such divestment campaigns have been successful at shifting investment away from the fossil fuel industry.

Globally, pension funds, philanthropies, and other institutions worth $14.6 trillion have committed to divestment, and the movement has strong roots in the US. Cities like New York City, San Francisco, and Washington have made moves to sell off fossil fuel assets, as have a number of schools. Last May, the University of California became the latest and largest school in the country to divest from fossil fuels, selling off more than $1 billion in assets and reinvesting in clean energy projects. Under the new Labor Department rule, however, private sector retirement funds could not make divestment decisions based on social considerations, and instead had to act only in the financial interest of retirees.

The rule proved to be surmountable. In December 2020, New York’s $226 billion pension fund announced that it would fully divest from fossil fuels within the next five years based on economic concerns. The move built on the state’s June announcement that it would divest from coal.

“New York State’s pension fund is at the leading edge of investors addressing climate risk, because investing for the low-carbon future is essential to protect the fund’s long-term value,” said state comptroller Thomas DiNapoli in a statement.

DiNapoli had long been a proponent of shareholder resolutions rather than divestment as a way to pressure companies into climate accountability. But according to the New York Times, the comptroller was frustrated by ExxonMobil continually rebuffing attempts by pension fund shareholders to push for a more environmentally friendly business stance.

Even before the rule changes, Trump’s SEC had been helping companies shut down climate resolutions. Corporate management can request that the SEC bless their efforts to omit shareholder resolutions from their annual proxy voting by issuing “no action” guidances on the matters, meaning the commission will not intervene. Over the past few years, the SEC has proven to be especially open-handed in issuing such guidances for corporate attempts to shut down environmental actions

“Nearly two-thirds of the climate-related shareholder resolutions filed with publicly held energy and utility companies this year have been contested before the U.S. Securities and Exchange Commission” noted a May 2019 report from Inside Climate News.

“So far this year, the SEC has sustained 45 percent of the challenges, the highest percentage in the last five years,” continued the report.

Trump’s Final Gifts to the Fossil Fuel Industry

In Trump’s final weeks in office, his appointees in the Office of the Comptroller of the Currency (OCC) finalized a rule prohibiting all banks with more than $100 billion in assets from refusing to lend to any corporation without providing a quantitative financial assessment for doing so.

The move was an attempt to bar financial institutions from halting loans to entire categories of controversial companies, including oil drillers and other fossil fuel firms, something that became a fixation of Republicans after all major US banks said they would no longer fund Arctic oil exploration last year.

In the preamble to the proposed rule, the OCC highlighted examples of the banking actions that the change would prohibit, including banks’ refusal to lend to fossil fuel companies for drilling in the Arctic.

The OCC called the policy the “Fair Access to Financial Services” rule, a name Yevgeny Shrago, policy counsel for Public Citizen’s climate program, said is misleading. “This rule is not about the safety and soundness of bank policies or about fair access to customers,” he said in an interview. “It’s 100% a political giveaway to some favorite industries by the [OCC’s former] acting commissioner.”

In another last-minute move, Trump’s Labor Department, led by Eugene Scalia, announced that it had finalized a new rule prohibiting retirement plan fiduciaries from casting corporate-shareholder proxy votes to advance social justice goals, unless those goals are aligned with retirees’ financial interests.

Scalia previously worked for the American Petroleum Institute, Chevron, and the US Chamber of Commerce, which lobbies on behalf of Big Oil. The rule also imposed a cost-benefit analysis on proxy voting.

Like continuous subsidies to fossil fuel industries and government bailouts for polluters, the moves were a last-ditch effort to throw a lifeline to the dying fossil fuel industry at all costs, at the expense of the planet.

“They say they’re trying to preserve the free market,” said Collin Rees, a campaigner with Oil Change US. “But we’ve continuously seen over the course of the fossil fuel cycle, that there is no such thing as a free market. There is only a heavily regulated market rigged in favor of business.”

Cleaning Up the Mess

Shareholder advocacy organizations are planning to legally challenge the previous administration’s attempts to clamp down on corporate climate action, and the Biden administration is not expected to let many of Trump’s financial policies stand.

Shrago said he expects that Biden officials will be able to easily withdraw many of the last-minute rules, since they had not been published in the Federal Register, and the Biden administration has issued a freeze on all rule changes in the pipeline.

The Biden Labor Department, meanwhile, is reportedly planning to toss out Trump-era rules that limited investments based on environmental and social factors. The Office of the Comptroller of the Currency paused another rule limiting banks’ abilities to deny services to fossil fuel companies. The administration has also ordered a review of similar rules made by the Trump-era SEC.

But experts say federal officials should go even further to address the economic risks posed by climate change.

For instance, while officials have the ability to invoke the Congressional Review Act to reject recently enacted rules and regulations from the prior administration, they haven’t yet taken that step. And as the American Prospect recently noted, while Treasury Secretary Yellen has said her department may be able to facilitate stress tests for banks and insurance companies to determine if they’re capable of withstanding climate change pressures, such tests would likely be structured to be largely toothless, unlike existing stress tests for non climate-related matters.

As chair of the Financial Stability Oversight Council, which works to shield the economic system from crashes, Yellen also has the ability to push all federal regulators to enact strong climate policies, such as strict limitations on fossil fuel investments. The council could also take the aggressive steps to take any other actions it deems appropriate to address climate risks, even banning fossil fuel investments altogether.

“These regulatory bodies have power,” said Rees, “and we need Democrats to be willing and able to step up to the plate and wield it.”