Shareholder Proposals Targeting Net Zero Emissions – White Paper
Executive Summary
- Climate change shareholder proposals are increasingly common. They generally take one of two forms: 1) requesting a report on a company’s plans to cut greenhouse gas emissions to net-zero, or 2) directly mandating a net-zero emissions goal.
- These proposals are transparently motivated by environmental concerns, not financial ones. The speculative cost estimates of inaction are incomplete, the costs of achieving any such targets are not considered, and the cost-benefit analysis of alternative action is ignored.
- Further, these proposals do not advance any direct shareholder-value creation, and instead risk reducing shareholder value. Nor is adopting them legally required. Because these shareholder proposals have no clear connection to increasing shareholder value, Strive generally opposes them.
Background
Climate change concerns are now the single largest focus of shareholder proposals. According to progressive organizer As You Sow, 2022’s proxy voting season saw 145 proposals about the environment, up from 91 the prior year. It adds that “A striking change is the near-total focus on greenhouse gas (GHG) emissions targets, with most proposals asking for a transition to net-zero status by 2050.”[1] So far, 2023’s proxy voting season is on track for even more climate-related proposals.[2]
These proposals come in two main forms. Some, often introduced by As You Sow itself, ask companies to report on their plans to cut emissions in compliance with the Paris Agreement, which aims to limit global warming to 1.5°C above preindustrial levels. Others directly mandate companies adopt net-zero greenhouse gas reduction targets across their “full value chain,” including the emissions produced by their customers. All these proposals aim to implement the Paris Agreement through directing corporate behavior. Achieving its ambitious goals requires cutting global GHG emissions by almost half by 2030 and to zero by 2050, after accounting for offsets like planting trees to absorb carbon from the atmosphere.
The recent surge in net-zero emissions proposals follows Securities and Exchange Commission decisions making them possible. Shortly after President Biden took office, the SEC rescinded three Trump-era bulletins offering its staff guidance on when to grant companies’ requests to take no action against their omission of shareholder proposals from ballots.[3] The new SEC guidance makes it easier for shareholders to micromanage a company’s ordinary business operations to achieve significant social policies even when their proposals have little economic relevance to its business. The SEC wrote it was interested in allowing proposals implementing the Paris Agreement’s net-zero goals.
Environmentalists feel increasing urgency to enforce the Paris Agreement because the window to achieve its 1.5°C target is rapidly closing.[4] The Intergovernmental Panel on Climate Change’s most recent report claims that “The likely range of total human-caused global surface temperature increase from 1850–1900 to 2010–2019 is 0.8°C to 1.3°C, with a best estimate of 1.07°C.”[5] Environmentalists are now turning to market power to force through dramatic emissions cuts.
As a fiduciary for our clients, Strive’s role is to determine whether these proposals are likely to increase or decrease long-term shareholder value. These net-zero proposals are transparently motivated by environmental concerns, not financial ones. They are usually disconnected from companies’ specific missions and would often require them to sacrifice their customers’ economic interests in pursuit of a social goal. They ask for radical changes in short time frames without regard to financial discipline. They are not legally required. Because these shareholder proposals have no clear connection to increasing shareholder value, Strive generally opposes them.
The extent and cost of climate change
Strive’s opposition to net-zero proposals is not founded on any particular view about the science of climate change. Instead, our position is based on economics. The expected cost of climate change is far lower than net-zero advocates claim, and the cost of slashing fossil fuel use far higher than they acknowledge.
Supporters of net-zero proposals and the broader ESG movement they belong to often argue that climate risk is investment risk. For instance, in its 2022 shareholder proposal urging Travelers Insurance to outline a plan imposing the Paris Agreement on all its clients, As You Sow asserts that “Projections have found that limiting global warming to 1.5 degrees versus 2 degrees will save $20 trillion globally by 2100; while exceeding 2 degrees could lead to climate damages in the hundreds of trillions.”[6]
The study the proposal cites to support its first claim relies on controversial assumptions, as an analysis published alongside it notes; it assumes, for example, that humanity will not invent new technologies to adapt to the effects of climate change.[7] And while the study As You Sow cites to support its second claim argues that 9°C of global warming could cause hundreds of trillions of damages by 2200, its proposal misrepresents that conclusion as if any warming above 2°C might do so by 2100. Even on As You Sow’s own terms, the hundreds of trillions of climate damages its shareholder proposals seek to avoid are fictitious.[8]
Data drawn from Raphael Calel et al., “Temperature variability implies greater economic damages from climate change,” Nature Communications, October 6, 2020, p. 3.
The expected damages of climate change become exponentially worse at higher levels of warming, but scientists agree the world is now on track to avoid catastrophic warming. According to a recent article in New York Times Magazine, “Just a few years ago, climate projections for this century looked quite apocalyptic, with most scientists warning that continuing ‘business as usual’ would bring the world four or even five degrees Celsius of warming. . . . Now, with the world already 1.2 degrees hotter, scientists believe that warming this century will most likely fall between two or three degrees.”[9] The UN[10] and independent climate trackers[11] project that on our current path, by 2100, the world will have warmed between 2-3°C above preindustrial levels.
Rather than relying on any single study anticipating the effects of moderate warming, our view is drawn partly from the IPCC’s own analysis of twenty studies. Most examined the effect that warming up to 3°C would have on the average person’s income. The IPCC displays the results in a chart and sums them up with “Estimates agree on the size of the impact (small relative to economic growth), and 17 of the 20 impact estimates shown in [the chart] are negative.” Three studies predicted moderate global warming would be neutral or positive for average income.[12]
If anything, the IPCC’s assessment downplays just how small the damages of moderate warming are expected to be. Obama administration under secretary for science Steven Koonin expresses the twenty studies’ conclusion more clearly: “global temperature rise of up to 3°C by 2100 would negatively impact the global economy by—wait for it—3% or less.”[13]
In other words, due to climate change, people in 2100 are expected to earn 3% less than they otherwise would, although economic growth will still make them far more prosperous than we are today. As one distinguished economist puts the point, “If world economic output increases by 2 per cent annually for the rest of the century, global warming of 3 degrees Celsius will cause GDP to increase annually by approximately 1.95 per cent instead.”[14]
Strive does not believe this small cost to annual global GDP justifies shareholder proposals forcing American companies to abandon fossil fuels. One recent article examined the results of 11 studies on the effect of 2.5°C of warming and concluded that “a century of climate change is about as bad as losing a year of economic growth.”[15] Forsaking fossil fuels in a misguided effort to salvage the Paris Agreement’s 1.5°C target would cost far more.
The cost of cutting emissions
The fundamental flaw with the Paris Agreement is that it focuses only on the costs of climate change; it does not weigh them against the cost of cutting emissions. This is why economists and climate activists reach such different conclusions. As Yale University Sterling Professor of Economics William Nordhaus said, “However attractive a temperature target may be as an aspirational goal, the target approach is questionable because it ignores the costs of attaining the goals. If, for example, attaining the 1.5°C goal would require deep reductions in living standards in poor nations, then the policy would be the equivalent of burning down the village to save it.”[16]
Nordhaus pioneered the study of the economics of climate change. He received the Nobel Prize in Economic Sciences for his work in 2018. His model, DICE, is the foundation for virtually all other work on the issue. This is his answer about the optimal level of warming that balances the costs of climate change with the cost of cutting emissions to avert it:
In the DICE model, it is essentially infeasible to attain the stringent temperature target of 1.5°C, and the 2°C path requires negative emissions in the near term. Another finding, much more controversial, is that the cost-benefit optimum rises to over 3°C in 2100—much higher than the international policy targets. Even with the much more pessimistic alternative [climate change] damage function, the temperature path rises to 3°C in 2100.[17]
In the years since Nordhaus accepted his Nobel Prize, it has become clear that the world is currently on track for at most 3°C of warming, which happens to strike the balance his model recommends.
Given these facts about the science and economics of climate change, one might wonder where the Paris Agreement’s 1.5°C target comes from to begin with. The answer is that a coalition of small island nations concerned by rising sea levels successfully negotiated for it.[18] The Paris Agreement’s attempt to limit global warming to 1.5°C, and net-zero shareholder proposals meant to implement it using the private sector, are motivated by the belief that the broader world should halt all fossil fuel use as soon as possible to mitigate the effects of rising sea levels on these islands.
This is a political compromise based on a contestable moral view; billions of people would be harmed if the world immediately abandoned fossil fuels, and those harms would fall hardest on the poorest nations most in need of cheap energy. Nothing in American companies’ missions requires them to impose these sacrifices on themselves or the world. Nothing in law requires it either: US presidents can only bypass Senate ratification to join the Paris Agreement because it does not count as a treaty, since it does not require any substantive actions. President Obama called the Paris Agreement a non-binding commitment to justify his unilateral decision to join it.[19]
Years later, some shareholders are asking companies to constrain their operations to comply with that non-binding commitment. Strive generally recommends voting against shareholder proposals aimed at compelling companies to adopt net-zero emissions goals unless the proponent is able to demonstrate that such measures are likely to generate a long-term financial return on investment for that company’s shareholders.
[1] Heidi Welsh and Michael Passof, “2022 Proxy Preview,” As You Sow, Sustainable Investments Institute and Proxy Impact, 6.
[2] Heidi Welsh and Michael Passof, “2023 Proxy Preview,” As You Sow, Sustainable Investments Institute and Proxy Impact, 6.
[3] https://www.sec.gov/corpfin/staff-legal-bulletin-14l-shareholder-proposals
[4] Brad Plumer, “Climate Change Is Speeding Toward Catastrophe. The Next Decade Is Crucial, U.N. Panel Says,” New York Times, March 20, 2023, https://www.nytimes.com/2023/03/20/climate/global-warming-ipcc-earth.html
[5] Richard P. Allan et al., “Summary for Policymakers,” Intergovernmental Panel on Climate Change, 2021, https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf, 5.
[6] The Travelers Companies, Inc., “2022 Proxy Statement,” April 8, 2022, 72.
[7] Maximilian Auffhammer, “Grand damage projections,” excerpted from “The cost of a warming climate,” Nature, May 23, 2018, https://www.nature.com/articles/d41586-018-05198-7.
[8] Raphael Calel et al., “Temperature variability implies greater economic damages from climate change,” Nature Communications, October 6, 2020, https://www.nature.com/articles/s41467-020-18797-8/.
[9] David Wallace-Wells, “Beyond Catastrophe: A New Climate Reality Is Coming Into View,” New York Times, October 26, 2022, https://www.nytimes.com/interactive/2022/10/26/magazine/climate-change-warming-world.html.
[10] Ibid.
[11] “The CAT Thermometer,” Climate Action Tracker, November 2022, https://climateactiontracker.org/global/cat-thermometer/.
[12] Intergovernmental Panel on Climate Change, Climate Change 2014: Impacts, Adaptation, and Vulnerability. Part A: Global and Sectoral Aspects (New York: Cambridge University Press, 2014), https://www.ipcc.ch/site/assets/uploads/2018/02/WGIIAR5-PartA_FINAL.pdf, p. 690.
[13] Steven E. Koonin, Unsettled: What Climate Science Tells Us, What It Doesn’t, and Why It Matters (Dallas: BenBella Books, 2021), 178.
[14] David R. Henderson, “Good Reasoning on Global Warming,” Financial and Economic Review 21, no. 2 (June 2021), https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-21-2-br2-henderson.pdf, 207.
[15] Richard S. J. Tol, “The Distributional Impact of Climate Change,” Annals of the New York Academy of Sciences 1504, no. 1 (November 2020): 63−75, https://nyaspubs.onlinelibrary.wiley.com/doi/10.1111/nyas.14497.
[16] William Nordhaus, “Climate Change: The Ultimate Challenge for Economics,” The Nobel Prize, December 8, 2018, https://www.nobelprize.org/uploads/2018/10/nordhaus-lecture.pdf, 451.
[17] Nordhaus, “Climate Change,” 452.
[18] Forster, “Why is ‘1.5 degrees Celsius of warming’ our climate target?”, https://www.fastcompany.com/90826263/why-1-5-degrees-climate-target-global-warming.
[19] Durney, Jessica. “Defining the Paris Agreement: A Study of Executive Power and Political Commitments.” Carbon & Climate Law Review 11, no. 3 (2017): 234–42. https://www.jstor.org/stable/26245362.
