Climate Collapse? Money Talks.

Investing and divesting as tools for mitigating climate destruction

We know all the cliches: Money talks, BS walks. Money makes the world go round. Put your money where your mouth is. Follow the money. Yes, cliches are overused and trite, but that’s because they capture an essential truth. The simple truth is that in the campaign for a livable climate and mitigating climate destruction, money is key.

For better or worse, barring mobilization of vast numbers of people to confront climate destroyers via in-person direct action, using money is going to be how we win the battle for a livable climate and secure future.

This is the first of three articles looking at how financial impacts can be used to motivate change in climate-impacting companies:

  1. First, a look at how investing and divesting can influence corporate behavior
  2. Then, analyzing successes and failures resulting from investing and divesting approaches
  3. Lastly, “ESG” (Environmental, Societal, Governance) investing themes are evolving to help motivate change

Money is Leverage

In this first article, I’ll review the two financial levers with the capacity to move the massive weight of corporate dominance over climate health: investment and divestment.

Corporations know only one simple fact when all the complexity is reduced to fundamentals: money is either flowing IN to and enriching them, or money is flowing OUT and away from them and reducing their value. By controlling the flow of dollars into and out of corporations, they can be influenced. It’s that “simple.”

Here I’ll briefly discuss how ownership or sale of large blocks of stock, and banking and lending policies, can impact and shape corporate climate behavior. There are only two choices: Invest in and support a company financially to influence how it operates, or Divest from and remove support, at scale, to punish bad behavior, send a message, or make a personal statement. How does this work?

How Investing Practices Can Influence Corporate Behavior: A Primer

Shareholder Rights

The most important aspect of investing as a tool to influence corporate behavior is this:

“Perhaps one of the most important principles of corporate governance is the recognition of shareholders”

“The policy of allowing shareholders to elect a board of directors is critical. The board’s “prime directive” is to be always seeking the best interests of shareholders”

This is the fulcrum of the investment lever to promote corporate change: the shareholders own the company, they elect the board of directors, and the board of directors is mandated to put executives and mechanisms in place to serve the interests of the shareholders.

“This means that shareholders, effectively, have a direct say in how a company is run.”

Also, shareholders want to maximize the influence of their stake in a company, so they are motivated to reach out to current or prospective customers, government, or other external participants, to influence them to do what’s in their, the shareholders’, best interest. This is a “force multiplier” that reaches beyond the boardroom.

(See https://corporatefinanceinstitute.com/resources/knowledge/other/corporate-governance/)

Shareholders have additional rights to protect their self-interest, beyond voting on resolutions and board members:

Opportunity to inspect corporate books and records. Shareholders have the right to examine basic documents such as company bylaws and minutes of board meetings. In addition, the Securities and Exchange Act of 1934 requires public companies to periodically disclose financials.

The right to sue for wrongful acts. Suing a company typically takes the form of a shareholder class-action lawsuit.”

(See https://www.investopedia.com/investing/know-your-shareholder-rights/)

Proxy Voting

Each year, companies hold a shareholders’ meeting in which governance issues are voted on. In preparation, relevant information is provided to the shareholders: financial reports, shareholder resolutions, executive compensation levels, and board member nominations. At the time of the meeting, shareholders can vote on governance matters directly, or via a proxy mechanism where they delegate their vote to an investment manager, hedge fund, company management, or other intermediary.

(See https://www.investopedia.com/terms/p/proxy-vote.asp)

This voting power gives holders of large blocks of stock a significant say in how a company is run, and how it is held accountable, or not, for behaving appropriately. If most of a large fund’s investors defer their vote to their fund manager by proxy (which is typical,) the vote from the fund could have major impact.

Even if a fund doesn’t have a large block of shares, it can still present resolutions for a shareholder vote, which also can be significant leverage.

Incumbent interests don’t want “activist” shareholders showing up and causing disruption over changes in company strategy. In response to this threat, legislation is being discussed that would limit the ability of large index funds to vote their very significant blocks of shares, to shield companies from progressive action being taken by the funds. Senator Dan Sullivan (R-Alaska) has introduced the “INDEX” bill that would stop giant investment funds like Blackrock and Vanguard from directly using shares they hold on behalf of their customers to force companies into doing more to mitigate their climate damage.

(See https://www.msn.com/en-us/money/markets/harvard-expert-warns-of-potential-harm-to-index-investing-as-republican-bill-takes-on-woke-fund-managers/ar-AAYsUDA)

In contrast to the various tools available to shareholders to affect company behavior, non-shareholders must rely on extrinsic forces to shape corporate actions. There are two primary means to do this: political involvement to influence regulation and legislation, and public pressure such as protest and boycott. These approaches have their own advantages and challenges, and have their place, but are at arm’s length from effecting change within companies.

Influence of Lending

Another mechanism for financial engagement with a company is to lend it funds. All large companies are in some way reliant on debt financing to operate, and the large amounts of money involved mean there are deep legal and operational ties between company and lender. Having the decision-making power whether to make a loan and under what terms gives the lender a mechanism for shaping the borrower’s behavior.

Commercial banks who use the public’s deposits for capital to invest can potentially be influenced to apply financial leverage in negotiations with prospective borrowers, putting conditions in place that reflect the will of the public. ESG Lending refers to setting loan terms that are tied to sustainability and other “social good” performance metrics, reflecting both public and financial industry pressure. Banks’ desire to both cultivate a positive image and satisfy regulatory risk management requirements contribute to the growing attention on “sustainable lending.”

(See https://www.jdsupra.com/legalnews/esg-loans-the-next-big-wave-in-fund-6869513https://www.lsta.org/news-resources/what-is-esg-linked-lending-and-why-do-we-care — there are many internet sources on this topic)

How Divestment Works

Divestment is the term for selling off shares in a company and disengaging from it. Divesting could also mean refusing to issue or renew loans, and possibly accelerating existing loans. Once fully divested, there is no more connection between the divestor and the actions, profits, or losses of the company.

Divestment of large amounts of stock impacts a company primarily through lowering its stock price, drawing attention to the company’s behavior, affecting perception of the company by the public and the market, and adding risk which influences lenders and investors.

If a large block of stock is sold off quickly, the share price is likely to drop at least temporarily. Executive compensation as well as personal net worth are based significantly on share price, so a large enough drop in price for a sustained period could get the attention of the company executives and board. There could be a reaction from the market that exacerbates the share price drop, as perception turns negative, news gets around, and a crowd starts to follow the selling trend. All this is a strong social signal with potential to change behavior.

There may be a significant enough move in stock price, or in sentiment, to alert lenders that the company presents a higher risk as a borrower. This could result in increased interest rates with a corresponding impact on the bottom line and add to a company’s negative outlook.

(See https://fairholder.org/blog/how-divestment-works)

The effectiveness of divestment continues to be debated, largely because as a “negative action” it’s difficult to connect the dots between a divestment decision and a change in corporate behavior. However, there is wide agreement that divestment sends powerful signals and makes a statement. The next article in this series will examine this issue in depth to look more closely for cause-and-effect.

As with activist investing, the divestment movement has caught the attention of pro-fossil-fuels interests and they are starting to fight back. This is a clear indication that divestment has an impact that is felt. For example, West Virginia has banned Blackrock, a huge investment firm, from doing business with the state.

Up Next: What Is Effective?

The fossil fuel incumbents’ negative reaction to the use of financial leverage to influence climate policy shows that it has an impact, whether the lever is investment or divestment. As I say at the start of the blog money talks, and when it talks, people listen — they don’t have a choice.

After this rudimentary outline of how investing in and divesting from publicly owned companies might influence companies, the next blog will look at the organizations using these different approaches and what results have been achieved. With an objective evidence-based analysis of what tactics are producing favorable outcomes, organizations can make decisions around what initiatives they can support or propose, and we’ll be taking a deep dive into pension fund, hedge fund, and grass roots movements’ effectiveness to see what is happening out there.

After that: ESG

Evolving patterns of activist investing and divesting at scale involves large legal and cultural shifts, most visibly the rise of “ESG Investing.” There is intense activity in this space with involvement of giants in regulation, technology, corporate governance, and public relations. This explosion of interest and visibility has brought with it confusion, competition, progress, deception, and political intrigue that will be the subject of a third part in this series of blogs. ESG metrics will play a critical role in both investment and divestment decision-making so it is an essential part of the analysis.

Disclaimer: this article is necessarily a very simplified description of an extremely complex field. It’s intended as a primer for those with little or no experience in how corporate finance is structured.


California Utilities Try to Destroy the State’s Rooftop Solar Progress

On behalf of three major investor-owned utilities, the California Public Utilities Commission has created a false premise to justify creating new rules that would gut rooftop solar incentives and penalize feeding owner-generated power back to the grid.

"NEM3" - Solar Nemesis 

The California Public Utilities Commission (CPUC) is planning to issue rules that would penalize owners of rooftop solar panels for feeding power back into the grid, a process known as Net Metering. If these rules, called “NEM3,” are approved they will decimate forward progress on deploying distributed renewable energy, and punish homeowners and businesses for installing solar and wind power. This move will benefit only the investor-owned utility companies’ bottom lines and centralized business models, upon which their executive incentives depend.

The CPUC commissioned an elaborate “Lookback Study,” which they say justifies this move, but the study is incomplete and its methods susceptible to bias. The study, which was created by consulting firm Verdant Associates under the CPUC’s direction, guidance, and funding, leaves out critical measurements and had no outside vetting before it was used to drive the CPUC’s punitive proposal.

E3 Consulting, a firm specializing in energy utility operational research, used the Lookback Study results to create what is euphemistically called a “glide path” plan for enacting the NEM3 rules to achieve the utilities’ goals. Since the Verdant Lookback Study cannot be relied on due to serious validity concerns, the entire E3 “glide path” must be considered invalid. A new study must be done that addresses the failures of the current work, and a new proposal generated using complete and objectively verified data.

Otherwise, as they stand, the CPUC’s proposed rules would reverse the progress made on California’s distributed clean energy, when aggressive expansion and support to combat the climate crisis is getting more and more urgent.

 

Negative Impacts of NEM3 on Solar Adoption

Opposition to the proposed NEM3 rules needs to be vigorous since the negative effects on solar adoption are projected to be devastating.

The Sierra Club told the CPUC that the rules would “’crush the California rooftop solar market’ and its critical role in meeting the state’s climate objectives, improving local resiliency and reliability, and preserving our open spaces.”

California Solar & Storage Association writes “the proposed decision would impose large new fees on California families. These fees would be the highest in the nation, adding up to more than $600 per year. The proposed decision would also reduce the value of solar electricity sent back to the grid on hot summer days by 80%” (https://calssa.org/blog/2022/1/4/cpucs-proposed-nem-3-decision-would-hurt-solar-adoption-among-low-income-consumers)

And, according to the Solar Rights Alliance, “We estimate the average solar user would pay between $300 and $600 per year” just in fees. In response to a proposed net metering 80% payback rate reduction to $.05/kWh, Solar Rights says “The CPUC claims this is comparable to the cost of energy from solar and wind farms. If that were true, then wouldn’t the utilities be proposing to also lower our rates to $.05/kWh?” (https://solarrights.org/the-solar-tax-is-back-and-the-solar-cliff-too/)

The last time the CPUC issued rules that reduced benefits and increased costs for rooftop solar owners, there was a noticeable drop in new solar installation in California. When Nevada enacted rules similar to NEM3, adoption of rooftop solar installations dropped by 92%. (https://www.brookings.edu/research/rooftop-solar-net-metering-is-a-net-benefit)

Even if the study behind NEM3 was valid, the CPUC’s rules are in direct contradiction to the Public Utilities Code 2827.1, which says that “in developing the standard contract or tariff, the commission shall … ensure… that customer-sited renewable distributed generation continues to grow sustainably and include specific alternatives designed for growth among residential customers in disadvantaged communities.”

CPUC is constructing a ruling that does exactly the opposite.

 

Lookback Study Omits a Critical Test

In August of 2020 the CPUC commissioned Verdant Associates to create the Lookback Study to assess the results of the current “NEM2” net metering system. E3 Consulting then used its incomplete results, and only those results, to support the new NEM3 “glide path” proposal for rule implementation. The study asserts that under NEM2 the utilities are paying too much back to the rooftop solar owners, compared to the benefit to other parties including other rate payers and the utilities, and that it hurt non-solar customers. This single, 150-page study is the entire justification for the CPUC’s position.

But the study leaves out a “Societal Cost Test” (SCT) which is called out in CPUC decision 19-05-19, and explicitly recommended by existing law and ruling, to quantify this critical component of measuring solar energy’s benefits.

The SCT includes the “avoided social cost of carbon” and air quality impacts of solar, so by not including it the CPUC has deliberately ignored vital measurements of solar energy’s public benefit. Omitting this holistic analysis of the cost-benefit of distributed solar and wind power for all California residents is potent evidence that the CPUC and the utilities’ intention was to cherry pick data that could be used to do the bidding of the utilities. This is clear indication of bias.

Verdant says that the SCT is still in development and “the CPUC has provided guidance that the (SCT) is not approved for use in the NEM Lookback Study.” If the SCT is still unfinished, then the Lookback Study is incomplete and the NEM3 proposal premature. It must be considered whether the CPUC is rushing NEM3 to end-run the SCT and avoiding reporting data that could show solar energy’s wide benefit to the public.

Since the CPUC is accountable to the voters and citizens of California, its guidance to ignore the Social Cost Test is indefensible as well as a failure to follow legislative guidance.

 

Sources of Study Bias

Verdant Associates, LLC (the company that conducted the study) was established just as the pandemic hit and owes its very existence to one single client, PG&E. PG&E funding is what allowed Verdant to hire staff and stay afloat during the pandemic, presumably working on the Lookback Study.

According to PG&E, “PG&E is all the better because of our ongoing working relationship…Without PG&E, Buege [Verdant’s founder] said she wouldn’t have been able to hire her former team and grow the company to seven clients. ‘They would’ve faced an uncertain future at the start of the pandemic,’ she said. ‘I was really happy to provide some stability to them and their families.’” (https://www.pgecurrents.com/2021/09/23/worth-the-risk-starting-a-business-during-a-pandemic-to-help-pge-achieve-its-sustainability-goals/)

Before Verdant, Buege and her team worked for Itron, a large technology company that sells to the utility industry. This longstanding business involvement between Verdant and investor-owned utilities, and their dependence of a single industry benefactor, should be assumed to introduce bias. Even with the highest ethical standards, it is too easy for a researcher to arrive at conclusions she knows will please a sponsor. And, since PG&E was directly involved in the study as well, there is even more reason to question objectivity.

“Funding Bias” or “Industry Sponsorship Bias” is well documented and understood across other industries. (https://catalogofbias.org/biases/industry-sponsorship-bias) For example, clinical drug trials funded by drug manufacturers have been shown to produce more favorable outcomes for the manufacturers (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC156458)

No fiduciary would be allowed to publish a quantitative financial analysis like the Lookback Study without independent external audit if it was written by a team with business ties to the subject of the analysis. Why should California voters accept a process known to introduce bias, and that doesn’t meet the analysis standards of peer industries like medicine and finance?

 

CPUC Ignores Challenges

When CALSSA filed comments raising questions about the study’s validity, the CPUC merely said “CALSSA’s contention that the study ‘assumptions are or appear flawed’ does not persuade us; CALSSA and all stakeholders have been given several opportunities to weigh in on the development and drafting of the study. A disagreement on an assumption does not equate to a flaw in the assumption.”

This response is inadequate – “several opportunities” does not mean “sufficient time” and “a disagreement on an assumption” means there are important unanswered issues, and the challenges must be investigated. Assumptions must be vetted by all stakeholders, and CPUC’s dismissive response is unacceptable.

 

A New Impartial Study Is Needed

If the intention of the CPUC with NEM3 is to use evidence-based, objective cost-benefit analysis and refine the net metering program to truly benefit all constituents, the Verdant study cannot be used as the only foundation. But it was used, and the resulting NEM3 proposal authored by E3 Consulting must be redone.

To see what a study should look like, this (https://www.impactprinciples.org/sites/default/files/2022-03/Impact%20Performance_Climate%20Change%20Mitigation.pdf) is how the financial industry conducts an analysis for environmental impact investing. Billions, if not trillions, of investor dollars ride on these types of analysis and when “real money” is involved the research is done correctly. There’s no excuse for the CPUC doing any less.

 

Call to Action

Californians’ response to the CPUC, the Governor, and the utilities should be unanimous in rejecting the very basis of the NEM3 rules based on the Lookback Study. They must insist on the following changes going forward:

  • Incorporate the completed full Social Cost Test model
  • Commission an independent party from academic or federal resources to participate and collaborate directly with the study and analysis designers and implementers (Verdant and E3) to review methodology and results.
  • Provide evidence that the models used are valid (the evidence cited says only that “results were consistent with a sampling of customer bills” which is a meaningless test in this context.)
  • Throughout the study revision process, hold regular meetings with representatives from all interested stakeholders to discuss the evolution of the model assumptions and parameters.
  • Obtain, present, and incorporate survey data from current and prospective solar and wind producing ratepayers, as to how they will respond to various changes in the NEM program. The lack of market analysis in the CPUC’s research is remarkable.
  • Once redone, review the updated Lookback Study and a new E3 proposal and adjust the CPUC NEM3 rules accordingly.

 

Contact the CPUC and Governor

It is urgent to make it clear to the CPUC that its proposals cannot go forward based on a flawed study, given the potential for a disastrous impact on solar adoption and climate mitigation. The CPUC needs to come back only after producing an acceptable candidate proposal that relies on properly conducted and validated research.

NEM3 is only one in a multitude of attacks against the progress we must make to mitigate climate destruction. By sending a clear and resounding message to California rule-makers that we, their constituents, insist on best following practices and performing objective and holistic analysis, other entities will take notice. What happens in California, the world’s fourth largest economy, has worldwide impact.

We need to show that it doesn’t work to dress up hidden agendas in trappings of authority using big spreadsheets, reams of jargon, and fancy presentations.

 

Contacts

To leave your comments with the CPUC, go to https://tinyurl.com/nem3cpuc or the CPUC website link here.

You can email the CPUC at  [email protected]

You can email the California State Assembly on Utilities and Energy at [email protected]

or call (916) 319-2083

Instructions for submitting position letters are at https://www.assembly.ca.gov/sites/assembly.ca.gov/files/Publications/2019_quick_ref_guide_advocacy.pdf

To contact Gavin Newsom’s office, dial (916) 445-2841 or go to https://govapps.gov.ca.gov/gov40mail