Is Your Mutual Fund a Climate Change Denier or Climate Champion?
By Rob Berridge and Jackie Cook
New proxy voting data showcasing how mutual fund companies voted on climate change resolutions in 2015 reveals a major divide in their thinking on this mega issue that will have wide-ranging ripples on investment portfolios.
Among 42 mutual fund companies whose voting we analyzed, nine companies, including the world's largest mutual fund company Vanguard, failed to support a single climate-related shareholder resolution in 2015. The other eight are American Funds, American Century, Blackrock, Fidelity, ING (Voya), Lord Abbett, Pioneer and Putnam.
In stark contrast, seven fund companies supported 70 percent or more of the 73 climate-related resolutions that were included in our analysis, including AllianceBernstein, Allianz, Deutsche (formerly DWS), GMO, Oppenheimer, Schroder and WellsFargo.
The resolutions filed by investors request that companies take such actions as: set greenhouse gas (GHG) reduction goals; disclose the risk of assets such as fossil fuel reserves and coal plants being unusable—“stranded" in Wall Street parlance—due to weakening global demand for fossil fuel products; disclose political lobbying expenditures related to climate change; and issue sustainability reports describing material business risks from climate change.
These common sense requests are believed by investors to be financially material to many of the companies receiving the resolutions and to mutual fund companies who have a fiduciary duty to vote in the best interests of their clients.
For example, an electric utility that is upgrading a coal-fired power plant that lasts 40 years (rather than, say, investing in solar projects or energy efficiency programs) is taking on significant risk considering that 196 countries worldwide recently approved an historic climate agreement in Paris aimed at dramatically reducing greenhouse gas emissions. The U.S. has specifically pledged to reduce its carbon emissions by 26 - 28 percent by 2025, with a key centerpiece being the U.S. Environmental Protection Agency's Clean Power Plan aimed at reducing power plant carbon emissions. Under these scenarios, a recently upgraded coal plant will probably have to be retired well before the end of its planned life, which risks financial losses for the utility and its shareholders. Shareholders need to know how power companies are planning to avoid such losses and to adapt their business models to the transition to a low carbon economy.
Further underscoring their responsibilities on these proxy votes, some of the mutual fund companies, such as Vanguard, are members of the UN's Principles for Responsible Investment (PRI), meaning that they have publicly committed to six principles, including: Principle 2 “active ownership," which entails actions such as supporting resolutions on environmental, social and governance (ESG) issues; and Principle 3 to “seek appropriate disclosure on issues by the entities in which we invest."
Simply put, climate change is among the most critical ESG issues intended to be addressed by PRI signatories, and failing to support any climate resolutions brings into question whether some PRI members are adhering to the principles.
Some mutual fund companies are themselves publicly traded, and investors have begun to file shareholder resolutions asking mutual fund companies to disclose why they fail to support financially material climate resolutions. For example, Zevin Asset Management filed shareholder resolutions with Franklin Resources and T. Rowe Price Group during the 2016 proxy season because it appears that both firms' proxy voting records are inconsistent with proactive approaches to climate change. Walden Asset Management co-filed the T. Rowe Price resolution, which will be voted on at the company's annual meeting in May.
Sonial Kowal, president of Zevin Asset Management, explained to us:
“Proxy voting is one of the principal ways in which investors can engage in active management of portfolio risks and opportunities related to climate change, so inconsistency on climate poses a reputational risk to Franklin and T. Rowe, especially given the proactive record of many of their competitors. Given the severe threats of climate change to human societies and economies, clients may start to wonder if their investments are in good hands. We also hope that other investment companies will now become more thorough and transparent in making decisions when voting on climate related resolutions."
Adding to such reputational risks are campaigns such as a petition, launched by U.S. PIRG, asking Vanguard to vote in favor of resolutions regarding political spending disclosure. More than 65,000 people have signed the petition so far. Walden Asset Management recently sent a letter to Vanguard zeroing in on climate-related voting (some of these resolutions ask companies to disclose lobbying expenditures) and received a response that includes this defense of Vanguard's approach:
“… while we believe that some of the issues animating these proposals are worthy of attention and may have long term implications for a company, we have not been convinced that the prescriptive framing of the proposals will address the risks in a way that drives long term value. Our aim is to influence change that is clearly linked to value creation, and in some cases a simple vote "for" or "against" a proxy proposal doesn't get to the heart of an issue."
Vanguard's explanation is inadequate. For climate change alone, resolutions filed in 2015 covered approximately 20 different types of requests, with many requesting disclosure of risks and others asking for comprehensive sustainability disclosure. Vanguard failed to support even a single one of this broad variety of resolutions. Vanguard's claim that they are all too “prescriptive" is disingenuous. The U.S. Securities and Exchange Commission (SEC) has rules against filing resolutions that are “ordinary business," or that seem to micromanage a company. A number of the resolutions Vanguard failed to support have survived SEC scrutiny on this very question.
As financial, environmental and societal risks from climate change escalate, it is important for shareholders to know if their mutual funds are taking one of the simplest steps to address the risks—voting for climate resolutions.
If your fund company is failing to do so, it is time to give them call, write them a letter or sign petitions such as the one sent to Vanguard. These flawed myopic approaches, such as Vanguard's, need to change.
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When President Donald Trump visited California on September 14 and dismissed the state Secretary of Natural Resources Wade Crowfoot's plea to recognize the role of climate change in the midst of the Golden State's worst and most dangerous recorded fire season to date, he gaslighted the tens of millions of West Coast residents suffering through the ordeal.
Foxes Guarding the Henhouse<p>Before he assumed power, Trump attacked regulations as unnecessary barriers to freedom and economic prosperity. Since taking office, he has targeted anything enacted by the administration of his predecessor, Barack Obama, and taken steps to withdraw the U.S. from the Paris agreement, the international effort to combat climate change. He has also staffed heads of key agencies with climate deniers of various stripes, forced out career public servants and created a hostile work environment for those who don't profess loyalty to his deregulatory agenda.</p><p>Like Trump himself, some of his cabinet choices displayed an audacious penchant for <a href="https://www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html?action=click&module=Spotlight&pgtype=Homepage" target="_blank">self-dealing</a> and abusing their positions of authority. 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Described by one environmental group as "<a href="https://www.washingtonpost.com/national/health-science/interior-secretary-zinke-resigns-amid-investigations/2018/12/15/481f9104-0077-11e9-ad40-cdfd0e0dd65a_story.html" target="_blank" rel="noopener noreferrer">the most anti-conservation Interior secretary in our nation's history</a>," Zinke was forced out after numerous highly publicized conflict-of-interest scandals.</p><p>The DOI is now run by Zinke's deputy secretary, David Bernhardt, another longtime Republican Washington insider and former oil industry lobbyist who has also been the subject of <a href="https://slate.com/news-and-politics/2020/05/this-is-still-happening-david-bernhardt-trump-lincoln.html" target="_blank">several government ethics complaints</a> for various violations favoring polluting industries.</p><p>More recently, longtime climate change denier David Legates, a climatologist at the University of Delaware previously <a href="https://insideclimatenews.org/news/19032015/u-delaware-refuses-disclose-funding-sources-its-climate-contrarian" target="_blank">funded by fossil fuel interests</a>, was hired for a <a href="https://www.npr.org/2020/09/12/912301325/longtime-climate-science-denier-hired-at-noaa" target="_blank" rel="noopener noreferrer">top job</a> advancing weather modeling and prediction at the National Oceanic and Atmospheric Administration (NOAA). 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The Damage So Far<p>A September 17 <a href="https://rhg.com/research/the-rollback-of-us-climate-policy/" target="_blank">report</a> by the Rhodium Group calculates that 1.8 billion tons more greenhouse gases will be released over the next 15 years as a result of climate change rollbacks the Trump administration has achieved so far. These include repealing Obama's main climate policy, the Clean Power Plan, which was intended to reduce dirty emissions from power plants; increasing pollution from cars by rolling back fuel economy standards and challenging California's longtime authority to set stricter emissions standards; targeting controls on hydrofluorocarbons, powerful greenhouse gases used mainly in refrigerators and air conditioners that also destroy the Earth's protective ozone layer; and allowing unreported and unregulated emissions of methane, another potent greenhouse gas, by oil and gas companies.</p><p>Besides these measures, Trump is also trying to gut core environmental statutes like the Clean Air Act, the Clean Water Act, the National Environmental Policy Act and the Endangered Species Act, all of which were enacted to protect human health and preserve a livable world.</p><p>The Paris agreement aims to keep the rise in average global temperatures at less than 2 degrees Celsius above pre-industrial levels and hopefully cap it at 1.5 degrees C or lower. We are now at approximately 1.2 degrees C and counting.</p>
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Climate a Top Concern for Youths, Latinx<p>So who's still thinking climate? Mostly young voters – 18 to 25 or 29 and Latinx voters.</p><p>Climate and the environment are the top concern among young voters, just above racism and healthcare according to <a href="https://circle.tufts.edu/latest-research/poll-young-people-believe-they-can-lead-change-unprecedented-election-cycle" target="_blank" rel="noopener noreferrer">CIRCLE</a>, the Center for Information and Research on Civic Learning and Engagement at Tufts University, which focuses on the political life of young people in the U.S. For Latinx youth, it drops a bit but remains in the top three.</p><p>The issues young people care about have an impact on how they volunteer their time, says Kristian Lundberg, an associate researcher at CIRCLE. He says that's played out most notably through the Sunrise Movement, which focuses on climate change and the environment along with other key activist groups such as Black Lives Matter and March for Our Lives.</p><p>He points to polling this summer that showed that 83% of 18-to-29-year-olds felt they had the power to change things. "Young people feel much more empowerment than in 2016 and 2018," Lundberg says. "It's intentional these movements are carving out space for young people. It's an important strategy."</p><p>In positions of power in these organizations, young people have developed peer-to-peer outreach on activism. And Lundberg says young people have made the leap that connects activism to voting as a lever for change. "In the past in very close races, young people breaking heavily have provided the margin of victory," he says.</p><p>CIRCLE is highlighting 10 U.S. Senate races as ones in which young voters can be decisive. Several of them have notable climate or environmental components – most prominently the Colorado and Montana races.</p><p>The Republican incumbents in each state – Cory Gardner in Colorado and Steve Daines in Montana – are running against a popular Democratic governor – John Hickenlooper in Colorado, now out of office — and Steve Bullock, still the governor of Montana. Both governors have had to balance their state's fossil fuel economic interests with supporting climate change solutions.</p>
Tying Climate Change to the Economy<p>In August, Data for Progress, a progressive research think tank, released polling on climate change – including in the battleground Senate elections in Arizona, Iowa, Maine, and North Carolina – showing voters back a Senate candidate supporting strong climate action.</p><blockquote>Climate change as 'mobilizing issue … key persuasion issue.'<br></blockquote><p>It also showed that linking climate change to the economy may be key. That means talking about clean energy and jobs together, says Danielle Deiseroth, climate data analyst for <a href="https://circle.tufts.edu/latest-research/poll-young-people-believe-they-can-lead-change-unprecedented-election-cycle" target="_blank">Data for Progress</a>. She says that in addition to jobs, climate change issues include climate justice and economic equality – both of heightened interest because of fallout from western wildfires.</p><p>"Climate change, we've observed over the last year or so, is a key mobilizing issue and a key persuasion issue," she says. "Climate issues can only grow support for Democratic candidates.</p><p>"I think it's pretty naive to say climate is the key issue for voters. For a lot of voters it really exemplifies so many things that are wrong with the Trump presidency," Deiseroth says.</p><p>So a factor among others. Helpful, but pivotal only in narrow circumstances.</p><p>At the League of Conservations Voters, a progressive environmentalist organization putting a lot of money and effort into the 2020 races, Senior Director of Political Affairs Craig Auster says: "I'll push back that climate change doesn't matter or isn't registering."</p><p>"It's still showing up in several Senate races. It's been playing a role in almost all of them."</p><p>Candidates are still talking about it, he says, pointing to Colorado, Montana, Iowa, and other states where ads are addressing climate and environmental issues. That shows the candidates believe their opponent is vulnerable on the issue or they're strong on it, he says.</p><p>Like others, Auster calls climate a motivator.</p><p>"Climate change matters," he says. "We have proof point after proof point about what's happening, whether it's a hurricane, a superstorm, derechos in Iowa, or wildfires out west.</p><p>"Pre-COVID it was top tier for Democratic voters along with healthcare. If COVID didn't happen I think climate would be a big deal."</p>
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