BioCycle June 2016
Usually this column is about renewable energy and climate change policy, and how changes might help or hurt the biogas industry. However, as the word “industry” implies, private enterprise will be the primary engine for transitioning our energy sources from traditional to renewable; policy is just a tool by which to move that along. Eventually, news about the business world in general must intersect with news about renewables and climate change, and that is starting to happen.
Large institutional investors are increasingly inclined to view investments in fossil energy as a risk or a problem. A recent high profile example is JP Morgan (over $2 trillion in assets), which is getting out of coal, and now classifies coal power in the same undesirable category as illegal logging, uncontrolled fire and child labor. Coal sector bankruptcies are becoming common if not epidemic. The most recent filing by Peabody Energy Corp. joins earlier filings by Arch Coal Inc., Alpha Natural Resources Inc., Patriot Coal Corp. and Walter Energy Inc., which have lost a combined $30 billion in market cap since 2010. It is important to note, however, that this is not a blow to the economy, just a shift. Although the coal sector has lost 50,000 jobs in the last five years, the solar sector is projected to add 30,000 jobs in 2016 alone, according to a Wall Street Journal article. Let us hope that rapid growth in biogas jobs is not far behind.
Worldwide, investors are putting higher risk ratings on fossil energy investments in general, and pushing for greater transparency as to how all firms in their portfolios are preparing for climate change risks and an inevitable low carbon global economy. A group of investors representing $23 trillion in assets recently declared its support for the Paris Climate Agreement, and urged governments to quickly implement it. For comparison purposes, the total global capital market is about $118 trillion, so that’s about 20 percent of all the investment capital in the world telling the world’s governments to get going on climate change. The group, the Institutional Investors Group on Climate Change, also called on all utility companies to perform “stress tests” demonstrating to shareholders how they were addressing climate change.
Prodding The Boardroom
Despite investor pressure, the corporate boardroom is moving slowly. A recent comprehensive report, “The Top 25 U.S. Electric Utilities: Climate Change, Corporate Governance and Politics,” prepared by the Sustainable Investments Institute and commissioned by the Investor Responsibility Research Center Institute, analyzes the Boards of Directors and other corporate governance aspects of the 25 largest publicly held utility companies in the U.S. The report makes no secret it is a tool for shareholder action, to allow investors to pressure these companies to stop fighting the inevitable shift from fossil energy and instead prepare for it. It notes that the companies spent $400 million fighting the EPA but have little climate change expertise on their boards, and no meaningful incentive compensation for sustainability achievements. Only three of the 25 have a board member with discernible climate change expertise, and only three (not the same) have “specifically articulated climate change board oversight responsibilities.” That is corporate-lawyer-speak for the fact that most Boards do not currently review their companies’ performance in this area.
There is also a Sustainability Accounting Standards Board (SASB), started in 2011 with the goal of doing for sustainability accounting what FASB (Financial Accounting Standards Board) does for financial accounting. While the generally accepted accounting principles (GAAP) overseen and updated by FASB are much more institutionalized than the emerging SASB sustainability standards, in recent years SASB’s influence has grown significantly. There are specific standards by industry, laying out guidelines as to what is “material” and therefore disclosable.
Unfortunately, such self-examination is not always forthcoming. Despite the SEC publishing regulations in 2010 regarding disclosure of climate change and fossil energy related risks, compliance and enforcement have been lackluster to say the least. Large groups of investors are now ratcheting up the pressure on the SEC to demand greater disclosure.
Failure to disclose knowledge of climate change risks and fossil energy’s role therein is a serious matter, and some officials have suggested the Justice Department investigate the worst offenders under the Racketeer Influenced and Corrupt Organizations Act, a tool originally created for organized crime. In the meantime, the New York Attorney General’s office began an investigation last year into ExxonMobil on suspicion that it lied to the public and investors about climate change. Based on the state’s powerful stock fraud statute, the Martin Act, the investigation joins others from recent years, all designed to force fossil fuel companies to disclose more about the financial risks they face from climate change.
Recently, U.S. Virgin Islands Attorney General Claude Walker joined the investigation, and filed a demand for massive amounts of additional documents accusing the company of fraud under an anti-racketeering law. The U.S. tropical islands are, of course, especially vulnerable to climate change. Walker’s office has also subpoenaed documents from high-powered public relations firm DCI Group, and free market think tank Competitive Enterprise Institute. ExxonMobil’s 2015 profit was five times the Virgin Islands’ gross domestic product, so Walker is likely to have some difficulty bringing it to heel, but it should be a fun little side story to watch.
For decades, advocates for the environment and the climate have made valiant but largely failed attempts to sue fossil energy companies for real harms to public health, to regulate their activity with government agencies that the companies can easily control, and to pass new laws in legislatures traditional energy can unduly influence. It therefore might be somewhat dispiriting that, in the end, the only charge that sticks will be lying to their stockholders, but such is the system we have. As is often observed in moments like these, remember that Al Capone went to jail for tax evasion.
Ted Niblock develops biogas projects for NewAg Development.