The Netherlands and the US are both free-market countries with thriving financial industries. But they also are very different and this is an unrecognised risk for large US mutual fund managers.
For example, the De Nederlandsche Bank has undertaken behaviour and culture assessments of 54 financial institutions, identifying “fundamental risks” in 34. Their report DNBulletin: Time for Transition: Towards a Carbon-Neutral Economy advocates greater transparency on climate risks, including energy transition plans to help financial institutions assess climate risks. And a judge has ruled that the Dutch government is not doing enough to protect its citizens from climate risk.
In the US, in contrast, the Supreme Court has sided with vested corporate interests and their political supporters to stay implementation of the Clean Power Plan. And Chevron and Exxon Mobil have asked the Securities and Exchange Commission (SEC) to effectively bar similiar resolutions that the boards of BP, Shell, Statoil and now Suncor have endorsed. And informed sources indicate Southern Company’s board plans to oppose a resolution asking for a transition plan to adapt to a 2°C cap in global warming. This inconsistency in company behaviour forces fund managers to ask themselves if they are willing to vote against disclosure of the kind they support in other markets.
The Dutch are a good example of where EU investors are heading. So why is this a challenge for large US mutual fund managers and especially their senior European staff?
Most independent commentators agree that large investors are systemically important. And after COP21, where countries had to announce their greenhouse gas reduction targets, many are asking why large investors do not have a similar responsibility.
The clash of cultures will surface at annual general meetings (AGMs), assuming that the SEC allows the resolutions to move forward, as it has done with a resolution at AES, a US electrical power company, on business resiliency
for a 2°C scenario. In the likely event that company boards recommend a vote against these resolutions at ExxonMobil, Chevron and Southern Company, then US fund managers will either have to vote against management or explain why they are voting inconsistently on the same resolutions they supported in European markets for similar companies, and tell their clients why this is not a conflict of interests.
The environment is more politically contentious in the US than in any other advanced economy. How did such a situation develop? The answer includes powerful individuals with influence over the policy process like the Koch Brothers, trade associations like ALEC, and increased politicisation of the Supreme Court, which is more pro-business than at any time since the 1930s.
More interesting are the bystanders – like investment professionals – who enable the extremists to set the agenda. The best hope for marginalising the extremists rests with moderate US conservatives – many of whom are in the corporate and financial community – and their trusted colleagues and friends.
As climate consciousness increases, pressure from trusted colleagues will have influence. The negative consequences of bystander behaviour by the ‘good guys’ have also been highlighted in the corporate community. According to Senator Sheldon Whitehouse: “Around Congress, the bullying menace of the fossil fuel industry is a constant. If the good guys cede the field to them, the result is predictable: members of Congress frozen in place, often against their better judgement.”
The climate culture clash will not go away. Now is the time for large, globally diversified and long-horizon investors to do the right thing at the AGMs and demonstrate consistent support for 2°C transition plans across key markets.
Dr Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University