Guest essay by Eric Worrall
A study conducted by Joseph P. Kalt, Ford Foundation Professor (Emeritus) of International Political Economy at the John F. Kennedy School of Government, Harvard University suggests that activists who successfully force companies to disclose their “climate risk”, and other activist resolutions, have no impact on the profit or share price of the companies targeted by their campaigns.
New Study Finds Climate Change Shareholder Resolutions Have No Impact
JUN 24, 2018
A new study finds that the climate-based shareholder resolutions being so actively pushed by proxy advisory firms and their Environmental, Social and Governance (ESG)-based institutional investors have “no statistically significant impact” on a company’s bottom line, either positive or negative. The study, funded by the National Association of Manufacturers (NAM), was led by the highly-respected PHD economist Joseph Kalt, Senior Economist at Compass Lexecon and is the Ford Foundation Professor (Emeritus) of International Political Economy at the John F. Kennedy School of Government at Harvard University.
This was an interesting finding given the elevation of the demands from this kind of investor activism in the past several years, especially against fossil fuel companies, and the recent decision by several big institutional investor firms to use their market position in an attempt to frighten major oil and gas companies away from attempting to explore for oil in the always-controversial Arctic National Wildlife Reserve (ANWR). The study’s lead finding will no doubt not sit well with the proxy advisory firms who place such high priority on having their clients push climate change-related shareholder resolutions, or with the companies for whom such resolutions can create onerous new administrative burdens.
Kalt and his team state in the executive summary that claims by institutional investors that such resolutions actually benefit shareholders provided the main direction for their study:
“We focus on climate change resolutions both because of the growing activism on the part of certain large institutional investors around climate change disclosure and because of the argument upon which that activism is predicated, i.e., that such additional disclosure provides meaningful information to the marketplace and therefore serves to benefit shareholders. Our analysis fails to find support for such assertions.”
The ability – or even the necessity – of a company to respond to a constantly shifting and evolving issue such as “climate change” depends to a very high degree on the whims of voters and the politicians they elect. Nowhere has this fundamental reality played out with greater impact over the past decade than in the United States of America.
From the study;
The increased use of politically-charged shareholder resolutions has garnered considerable attention in recent years, as shareholder meetings have become venues for discussion and debate regarding corporate positions and actions on issues of the day. Recent proxy seasons have seen corporate management being asked to address issues as diverse as deforestation, corporate clean energy goals, climate change, the uses of antibiotics and pesticides, political contributions, human rights risks through the supply chain, indigenous rights and human trafficking, cybersecurity, the development and reporting of sustainability metrics, and tax fairness. As we show, this change has both expanded the number of resolutions to which a given company may be required to respond and broadened the range of issues that boards and senior managers are being asked to address.
This study explores the impact of social and environmental shareholder proposals on shareholder returns. Specifically, using the case of climate-change- related proposals to test the economics, we examine statistically the reaction of companies’ stock prices to both increased disclosure of climate-change-related information and shareholder proposals calling for such disclosure. We focus on climate change resolutions both because of the growing activism on the part of certain large institutional investors around climate change disclosure and because of the argument upon which that activism is predicated, i.e., that such additional disclosure provides meaningful information to the marketplace and therefore serves to benefit shareholders. Our analysis fails to find support for such assertions. Rather, we find that the evidence demonstrates that the adoption of such shareholder resolutions has no statistically significant impact on company returns one way or the other.
Notwithstanding the stridency of arguments surrounding politically charged shareholder proposals, our finding that such proposals do not enhance shareholder value is not surprising. The fundamental drivers of risk and the impact of an issue like climate change on the ability of management’s decisions to enhance or detract from shareholder value are political. Specifically, whether a company should be doing more or different in responding to an issue like climate change turns overwhelmingly on political actors and factors: Will nation A adopt certain kinds of policies to deal with climate change? If so, when? Will adopted policies “stick”, or will new political forces come along and change the direction of policy? How will other nations respond? And so forth…
Read more (p3): nam_shareholder_resolutions_survey.pdf
The study was commissioned by the National Association of Manufacturers.
I’ve got to admit I’m surprised – I thought activist campaigns to force oil companies to state that their business might evaporate if governments ban fossil fuels might have caused at least a small wobble in their share price.
Perhaps “green risk” has already been priced in. Owners of fossil fuel related stocks know that renewables are in no position to displace use of their product anytime soon – they are already aware of the issues activists hope to force companies to disclose. Nuclear fusion, which might displace fossil fuel usage in a big way, is still 20 years away™.
Green politicians and hostile government policies can damage a company’s fortunes, green activists not so much.