Guilt by Association

Investors are joining the dots to get a more detailed understanding of the links between lobbying and policy on the road to net zero.  

In October last year, four Swedish pension funds, the Church of England (CoE) Pensions Board and Denmark’s AkademikerPension filed a lawsuit against German vehicle manufacturer VW – a European first.  

They alleged that VW is failing to disclose sufficient information on climate lobbying and is a member of trade associations that are lobbying against climate policies, undermining the company’s own commitments. This follows previous attempts by the asset owners to obtain information, including by filing a shareholder resolution.  

“It’s unfortunate that VW wasn’t responsive prior to the filing, and it’s deeply regrettable that we’re having to take such a step for a very reasonable request that has been addressed and met by many other companies,” Adam Matthews, Chief Responsible Investment Officer for the CoE Pensions Board, tells ESG Investor 

It’s a clear example of investors’ increasing willingness to scrutinise and challenge investee companies on their lobbying activities.  

“Many investors and consumers alike want to support a low carbon transition, and they need accurate information about companies’ activities so they can make informed decisions based on their own values,” says Maria Petzsch, Lawyer at environmental law firm ClientEarth, which is supporting the pension funds’ action against VW. 

The dangers of anti-climate lobbying can be seen in the inclusion of gas and nuclear energy in the EU’s environmental taxonomy. Think tank InfluenceMap uncovered evidence of over 50 meetings between oil and gas majors and EU lawmakers in the lead up to the decision, with efforts largely engineered by trade associations like the International Gas Union (IGU).  

“The companies and sectors with the most to lose [due to climate policies] fight the hardest,” notes Joe Brooks, Program Manager at InfluenceMap. 

By and large, VW’s direct lobbying can be viewed as “quite constructive”, according to Matthews, who notes that the pension funds’ main concerns centre around relationships between industry associations and VW subsidiaries. “There needs to be much clearer evidence that VW is looking at all lobbying activities being undertaken,” he says.  

Given the world’s long-established reliance on fossil fuels, the unfortunate reality is that the biggest and most carbon-intensive companies globally have huge amounts of influence over policy, recently outnumbering delegates from countries most impacted by climate change at COP summits and even clinching crucial climate-focused roles 

Climate lobbying isn’t static either, warns Rory Sullivan, CEO of specialist advisory firm Chronos Sustainability. “Much less attention has been paid to company efforts to influence public policy indirectly through shaping and mobilising public opinion – for example, via social media.” 

With the pace and direction of policy the biggest enabler of an accelerated net zero transition, the importance of engaging with companies to ensure they are not hindering progress is becoming increasingly clear to investors. But when the sheer scale of the problem is laid bare, it seems like an insurmountable mountain to climb.  

As seen with VW, investors are prepared to get tough.  

“It’s the first such instance of litigation in Europe, but I do think it will become a course of action that more investors will be willing to take, because it’s an appropriate exercise of their rights,” says Matthews. 

Deeper dependencies 

The case against VW aside, there are examples of positive engagement progress on climate lobbying that have been resolved outside of court.  

“Investors’ general asks have been related to improving the transparency of [lobbying] activities and ensuring the alignment of these activities with stated company positions and/or agreed societal sustainability goals,” says Betina Vaz Boni, Senior Analyst on Governance at the UN-convened Principles for Responsible Investment (PRI), pointing to a 2022 PRI analysis of current engagement trends in lobbying.   

Following engagement efforts by members of the investor-led engagement initiative Climate Action 100+ (CA100+), in 2020 mining giant BHP published a new industry associations expectations policy, pledging to work with its lobby groups so they are aligned with the company’s own positioning on climate policy. More recently, Nordea Asset Management, OFI Asset Management and Trusteam Finance led engagements with French industrial gases company Air Liquide. The firm agreed to take a Paris-aligned climate lobbying position and to conduct and publish a review of its trade associations’ positions on climate policies.  

“The explicit focus on lobbying within the CA100+ Net Zero Company Benchmark signals a step change in how investors look at climate lobbying,” says Chronos’ Sullivan. “We now have the expectation – backed by well over 500 major investors – that companies will report on their climate lobbying practices and processes.” 

Further, in March 2022, a group of investors – led by the CoE Pensions Board, Swedish pension fund AP7 and BNP Paribas Asset Management – launched the Global Standard on Responsible Climate Lobbying 

“The standard was introduced because there still needs to be a broad level of improved practice around climate lobbying,” says Matthews. 

It outlines 14 indicators covering governance and oversight processes through which company climate lobbying practices can be assessed to determine the extent to which they are aligned with the goals of the Paris Agreement. These include assigning responsibility for climate lobbying oversight to a board-level individual, annually reviewing direct and indirect climate lobbying activities across all geographies to ensure they are aligned with limiting global warming to 1.5°C, and implementing a framework for addressing any misalignments. 

Expanding on these 14 indicators, the Interfaith Center on Corporate Responsibility (ICCR) this week published its analysis of the climate disclosures of over 70 companies globally. It noted that company practices and investor expectations on corporate climate lobbying are “still developing and evolving”, with continued issues around overall transparency and insight into the objectives of their trade associations.

Matthews says that information requests from investors are now deepening from a narrow focus on identifying negative lobbying to actually understanding the dependencies of a company’s short to long-term climate targets on existing and future public policy. 

“Companies setting net zero targets are now expected to articulate in their transition plans any dependencies on public policy and how they intend to engage with policymakers to make sure the policies they need are in place, so that’s what [asset owners] increasingly want to see evidence of,” he says. 

According to Matthews, this is also being considered by the UK’s Transition Plan Taskforce (TPT), which is consulting on its framework for disclosure until the end of February. “How can this be reflected through disclosure requirements?” he posits.  

The trend toward deeper transparency is likely to continue over the course of 2023, Vaz Boni agrees, noting that “this will allow investors to monitor companies’ performance against expectations, but also assess their interdependence within the portfolio on a range of policy matters and the broader system-level implications”.  

Hands are tied  

While lobbying by companies is even more established in the US than Europe, investors face similar challenges in achieving transparency, according to Bryan McGannon, Managing Director of the US Forum for Sustainable and Responsible Investment (US SIF).  

“There’s been a big push from investors for transparency around political spending, as this is a core part of understanding the extent of corporate lobbying activities. But the SEC’s hands are tied on this,” McGannon tells ESG Investor. 

There is a rider prohibiting the US Securities and Exchange Commission (SEC) from finalising a rule on political spending disclosures, despite Chair Gary Gensler signalling his support for developing and implementing such a rule. Further, in 2010, the Supreme Court decreed that political spending falls under free speech, and therefore any limitations would violate the First Amendment. 

Powerful lobbying groups such as the Business Roundtable have benefitted, spending money to push back against climate policy, including the Biden administration’s Build Back Better agenda and, more recently, the SEC’s proposed climate risk disclosure framework, which is expected to be published in April 

Although investor network Ceres noted some significant progress in the number of S&P 100 companies advocating for climate action in 2022 compared to the previous year, the climate lobbying records of the 130 “largest and most climate-relevant” US companies have failed to impress, following research conducted by InfluenceMap and published on its US-focused grading platform. 

“The ideal solution is that investors put pressure on Congress – specifically Republicans – to remove these barriers so the SEC can introduce disclosure rules,” says McGannon. “The current political environment and the influence of the anti-ESG movement means this isn’t likely in the short-term.” 

However, a group of US senators, including Elizabeth Warren and Bernie Sanders, challenged the SEC in March 2022 to include a disclosure requirement for climate lobbying activities within its climate risk disclosure framework to help investors understand their risk exposure.  

“To the extent the Commission ascribes any legitimacy to issuers’ public commitments to investors on climate, these anti-climate lobbying activities are undoubtedly material,” they wrote. The senators proposed that the climate risk disclosure rule should require companies to report the percentage (by time or dollars spent) of lobbying that is devoted to pro- and/or anti-climate legislation and regulations. 

They acknowledged the political spending rider that is in place, but said they “do not believe” this language prohibits the SEC from including climate lobbying and memberships to and affiliations with trade associations and other influential groups within the disclosure framework. 

Pushing forward

Institutional investors “can still be effective” without regulatory action on political funding, “but it takes a significant amount of energy to develop shareholder proposals and to work with these companies”, according to Danielle Fugere, President and Chief Counsel of US shareholder advocacy non-profit As You Sow. 

As You Sow has filed 2023 resolutions against JP Morgan Chase and Mastercard, asking for disclosure on incongruent lobbying activities.  

Both firms have committed to supporting net zero, but As You Sow noted they also fund industry associations such as the Chamber of Commerce, the Business Roundtable, and the State Financial Officers Foundation (SFOF), all of which have lobbied against climate and ESG policies.  

“It creates reputational damage when companies say one thing and do another, however indirectly, so we’re asking these companies to tell us how they are currently or planning to address this incongruency,” says Fugere.  

Earlier this month, US State Comptroller Thomas DiNapoli also called on seven corporates in the New York State Common Retirement Fund portfolio to disclose their direct and indirect political spending. US SIF Foundation’s 2022 report on US sustainable investing trends noted that shareholders filed 288 proposals on corporate political spending and lobbying from 2020 to the first half of 2022.   

It’s important that investors in the US and beyond maintain this growing momentum in 2023, says InfluenceMap’s Brooks. 

While enhanced disclosures are an important step for companies and can provide useful leverage for further engagements, the urgency of the climate crisis demands a more robust and outcomes-led approach,” he notes.  

“There is a significant need to reform the real-world lobbying activities of companies and their industry associations to facilitate the policy response required to transition to a net zero world.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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