#3 February 2019
Can shareholder activism reduce our carbon footprint?
by Professor Gaizka Ormazabal

The reduction of carbon emissions is becoming a world-wide endeavor. A major difficulty faced by this initiative, however, is that the negative consequences of carbon emissions might not be fully internalized by those who generate this externality, notably corporations. Governments have dealt with this difficulty via regulatory requirements and carbon pricing, either through Pigouvian taxes or through the creation of cap-and-trade systems. Despite these governmental efforts, it is unclear whether regulation alone can curve carbon emissions at the desired pace, as these initiatives face several political and technical challenges. As such, it is necessary to identify alternative, market-based, mechanisms to induce firms to reduce their carbon emissions. One of these alternative mechanisms is shareholder monitoring; firms could reduce carbon emissions responding to pressure from their shareholders. 

But are shareholders pushing companies to reduce carbon emissions? Critics would concede that some are, but would argue that it is unlikely that shareholder activism is strong enough to curve emissions in a significant way. In support of the skeptical view of the role of shareholders on carbon emission reduction, one could also argue that, historically, shareholder proposals related to climate risk have not gained majority support. 
Recent developments, however, suggest that climate risk-related shareholder activism is on the rise. For example, in a major rebuke to the company, shareholders of ExxonMobil passed a climate proposal at the May 2017 annual meeting requiring greater transparency on the impact of climate change on the company’s operations. The resolution successfully passed partly because ExxonMobil’s two largest shareholders – Blackrock and Vanguard – supported the measure. Occidental Petroleum and PPL are other recent examples. 

There is also increasing anecdotal evidence that institutional investors are directly interacting with corporate leaders regarding climate risk issues. For example, in the guidelines on their approach to climate risk issued last month, BlackRock states that “…Over the past year, we have engaged with over 200 companies on the topic of climate risk, some multiple times. During the course of our engagements, we have asked management and corporate boards to speak to board oversight of climate-related risks, how the company assesses potential opportunities that the changing market may present, how climate risk might influence future long-term capital expenditure plans, how certain companies are managing methane emissions, and whether the company does scenario analysis in relation to its climate risks and business strategy.”[1]

Does this mean that shareholder activism has become a meaningful mechanism to mitigate climate risk? While it might be too early to reach such a conclusion, the above-mentioned recent developments suggest that we are moving in this direction. Is this good news? Many would claim it is, but this move also raises intriguing questions. For example, what is the effect of institutional investors’ engagement in climate risk on overall shareholder wealth? Is the reduction of carbon emissions a source of higher returns or a necessary cost that shareholders are willing to assume for the overall benefit of society? Why weren’t the targeted firms reducing emissions before they felt shareholder pressure? Do firms’ responses to shareholder pressure effectively result in lower emissions or are these responses cosmetic changes or, as dubbed by some commentators, just “greenwashing”? These questions suggest that the economic consequences of the recent surge in shareholder activism on climate risk are non-trivial. We look forward to future research that will help us understand them.

Professor Gaizka Ormazabal
Academic Director
IESE Center for Corporate Governance 
Corporate Governance News
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Corporate culture: an engagement priority for investment manager giant
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Acquisition of Monsanto poses legal and reputational risks to Bayer
In August 2018, only three months after Monsanto was acquired, a court ruled that an herbicide produced by Monsanto was responsible for a man’s cancer. Bayer had to pay $289 million, and the company’s stock price plummeted… Read more
Elliott Management Corporation urges eBay to restructure itself
In a recent letter to eBay’s Board of Directors, the investment management firm urged the company to implement a series of changes, among which the separation of both StubHub and Classifieds from its core Marketplace platform… Read more
How companies are fighting back investor activism
ACCF and other trade associations have formed a group called the Main Street Investors Coalition which is pushing for legislation that would pose constraints on activist investors… Read more
Changes in the leadership of Renault
Within hours of Carlos Ghosn’s departure, Renault announced the names of the company’s new chairman and CEO… Read more
Responsible investment pays off, according to Europe’s biggest money manager
Amundi SA calculates that investors buying shares of the companies that ranked in the top 20% for ESG and selling the bottom 20% would have generated a positive annualized return of 6.6% between 2014 and 2017… Read more
Germany’s executive pay reforms receive cold welcome from investors
The set of proposals Germany presented last November to improve executive pay and governance have received criticism from investors, who found them too prescriptive and rigid… Read more
The investor letter that pushed Uber’s founder to resign as CEO 
Shareholders representing 40% of Uber’s voting shares and 28% of Uber’s overall stock highlighted in a letter addressed to Travis Kalanick the necessity to enhance the company’s leadership and culture by following specific steps… Read more
IESE: Recent Publications on Corporate Governance

"Cellnex: A Growth Project

In this case Prof. Jordi Canals presents the challenges that Cellnex was facing in 2015, with its large investments in telecommunication sites and its potential IPO. The case examines what the priorities of Cellnex's Management Committee and Board of Directors should be… Read more

"Are Directors More Likely to Relinquish Their Riskiest Directorships After the Crisis?"

In this article Prof. Gaizka Ormazabal documents how directors exhibit a strong tendency to resign from their riskiest directorships in the period subsequent to the 2007-2008 financial crisis… Read more

"Going Political? Towards Deliberative Corporate Governance"

In this article Prof. Fabrizio Ferraro suggests that the emerging theoretical models in economics and finance, which clearly recognize the role of all stakeholders, are limited by their narrow conception of politics… Read more

"Does Regulating Banks’ Corporate Governance Help? A Review of the Empirical Evidence"

In this chapter Prof. Miguel Duro and Prof. Gaizka Ormazabal compile and analyze a large body of evidence regarding the impact and effectiveness of the reforms, which the authors have grouped into three categories: internal governance mechanisms, market discipline, and regulatory intervention… Read more
External Resources

22ndAnnual Global CEO Survey

In September and October 2018, PwC conducted 1,378 interviews with CEOs in 91 territories to anticipate what the business climate will look like in 2019… Read more

16thAnnual What Directors Think Survey

On January 17th, Corporate Board Member released the results of its 16thannual “What Directors Think Survey”, which gathers the opinions of 249 directors at publicly traded U.S. companies… Read more

Activist Investors in 2019 

Malcolm McKenzie, head of European corporate transformation services at Alvarez & Marsal, discusses investor activism in Europe in 2019… Watch here

Elements of an Effective Onboarding Program

Spencer Stuart’s Julie Daum and S&P Global and Wells Fargo board member Maria Morris join host TK Kerstetter to provide insights and guidance on onboarding new directors… Watch here
Upcoming Events & Programs

Executive Program: “Mujeres en Consejos de Adminstración”
IESE Madrid campus, March 11th, 12th, April 8th and 9th, 2019
(in Spanish)

Executive Program: “Value Creation Through Effective Boards”
IESE Barcelona campus, May 20th - 23rd, 2019
(in English)

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