Have Banks Become Climate Advocates? Interpreting Shareholder Votes And Lending Policies Regarding The Fossil Fuel Sector

The economic and political problems of the fossil fuel industry are mounting. The economic recession due to COVID-19 shutdown, along with Russia-Saudi Arabia price war, has led to bankruptcies in the shale sector. Early this week, in two rulings, the 9th Circuit ruled in favor of California cities and counties on lawsuits they have brought against oil companies. As if this were not enough, major financial firms are vocally pressuring fossil fuel companies to take climate change seriously and even denying them funding for some projects.

Larry Fink’s Bombshell

BlackRock is the largest asset manager in the world, controlling about $7 trillion (if it were a country, it would be the third largest economy behind the US and China). In January 2020, Larry Fink, BlackRock’s CEO, dropped a bombshell in his annual letter. Fink declared that environmental sustainability will now be at the center of BlackRock’s investment strategy. He also promised that BlackRock would deploy its shareholder power to push companies to act on climate change.

Fink has begun to (slowly) walk the climate talk. At Chevron’s recent annual meeting, Blackrock supported a non-binding resolution asking Chevron to disclose how its corporate lobbying coheres with the Paris agreement. In Exxon’s annual meeting,  BlackRock voted against the reelection of two outside directors, Angela Braly and Kenneth Frazier, to express unhappiness over Exxon’s climate risk disclosures.

BlackRock is not alone. David Solomon of Goldman Sachs recently noted that “There’s no question that the private sector has been focused on a transition to thinking broadly about how it can use its capital in ways that improve the sustainability of our society.” He announced a $750 billion commitment to finance sustainability projects. Several banks such as JPMorgan Chase, Citibank, and Wells Fargo have declared that they will not fund oil and gas development in the Arctic National Wildlife Refuge (ANWR).

A Backlash Against Financial Firms

Arguably, what big finance is doing is simply “climate-washing”. A recent report by the Rainforest Action Network notes that global banks invested $1.9 trillion into fossil fuels since the Paris Agreement.

But even these symbolic pro-climate steps have drawn harsh criticisms from some quarters. This probably reveals the calculation that unless countervailing pressure is applied, these small steps could quickly transition to giant leaps on the climate front.

Fossil fuel firm’s political strategy is to invoke the holiest of the holy cows: markets and capitalism. Their supporters complain that the “powerful” activists are rigging the market process. House and Senate Republicans have complained that financial institutions are “discriminating” against fossil fuel companies. Energy Secretary Dan Brouillette employed the exceptionally inappropriate analogy of “redlining” to describe banks’ actions against fossil fuel firms.

Do Firms have the Right Not to do Business?

Consumption is politics because consumers vote with their dollars. They can boycott or “buycott” products and firms. For example, consumers could favor products that are “made in America” and disfavor the ones that use child labor. 

Could firms themselves, as suppliers or customers, also boycott and buycott? Can they incorporate politics in their business decisions? Larry Fink believes not only that they can, but that they ought to. In his 2020 letter to CEOs, he states: The money we manage is not our own. It belongs to people in dozens of countries trying to finance long-term goals like retirement. And we have a deep responsibility to these institutions and individuals – who are shareholders in your company and thousands of others – to promote long-term value.”   

Firms take political positions all the time. They lobby and contribute to political action committees. They demand that their suppliers, at home or overseas, join certification codes that improve labor and environmental practices. Trade associations play an important role as well. For example, the American Chemistry Council requires member firms to join the Responsible Care program.

If firms take political positions that are not prohibited by law, it is both legal and moral for them to boycott or buycott based on climate concerns.  

Stakeholder Model of Capitalism

Firms are profit-seeking actors. Markets reward firms when they meet consumers wants. To fulfil their economic mission, firms work with employees and their suppliers. But firms are also social and political actors. In the non-market arena, they need support from regulators and the local community. They must defend their actions in the court of public opinion. This is how they secure the “social license to operate.

David Baron has argued that firms need an integrated  market and non-market strategy. This can sometimes be challenging. Take the case of Amazon and Microsoft. To maintain their profitability, they sell cloud computing services to the fossil fuel sector. But to secure a social license to operate, they proclaim their climate credentials. Consequently, there is incoherence between their market and nonmarket strategies, which invites accusations of “climate washing.”

Similarly, the financial sector faces conflicting pressures regarding its economic and social licenses to operate. On the one hand, it profits from doing business with the fossil fuel sector. But on the other hand, it faces pressure from climate groups who want financial firms to cut fossil fuel industry’s access to finance.

Recognizing their deteriorating social license to operate on climate issues, financial firms are taking small steps in this direction. In a less polarized issue, this sort of political choreography might have worked. But it does not when it comes to climate change. These half-hearted measures seem to provoke backlash from both the fossil fuel lobby and climate groups.

To conclude, support for shareholder resolutions and denying funding to projects in the ANWR region are first steps only. It remains to be seen whether financial firms will deploy their full financial muscle on climate change. Along with helping the climate cause, an unambiguous decision to stop doing business with the fossil sector will mitigate the stranded asset problem and reduce the social cost of making a transition to a zero-carbon economy.