Now that I've offered you some background on what we mean when we talk about greenhouse gas emissions and the transition to a net-zero economy, you can begin to see the risks and opportunities for business firms. But before we get to the risks and opportunities, there's one more important piece of context. What is driving business firms to focus on climate change, or more properly who? There are two primary categories of actors who are driving business firms to focus on climate change. The first is government, and the second is private stakeholders. I want to focus for a moment on the private stakeholders, private actors, piece of what and who is driving business firms to focus on climate change because this is where a tremendous amount of action has been in the past few years, and in particular it has really been growing in the past year. We have investors and asset managers pushing their clients and portfolio companies to focus on climate change. Lenders like banks, insurance firms, customers, employees, and members of local communities, all of these private stakeholders are forcing business firms to begin thinking more actively about climate change. What do I mean? Investors and asset managers are playing an essential role in forcing their portfolio companies that they own as shareholders to focus more actively on climate change. There's a great example of this that happened recently with respect to Exxon, which is the second largest oil company in the United States after Chevron. Exxon's total returns had fallen by about 20 percent over the last 10 years, as compared to a 277 percent rise within the S&P 500. In August of 2020, Exxon was removed from the Dow Jones Industrial Average. Engine Number 1 came in with this background of facts, owning less than one percent of Exxon's shares, in fact less than 1/10 of one percent of Exxon's shares, only 0.02 percent. Engine Number 1 is an activist investor fund which successfully pushed to have three members elected to Exxon's board of directors. The firm's goal was to position Exxon for more long-term sustainable value creation. Its concern, and the reason why it targeted Exxon, was that the firm had a poor long-term capital allocation strategy, as well as a lack of adaptability to changing industry dynamics, and a failure to focus on a shift to renewable energy sources. Its goal in this campaign was to realign management incentives. Although Engine Number 1 owned less than 1/10 of one percent of Exxon's shares, it was able to get on board the support of major institutional investors. Originally, Engine Number 1 proposed that the names of four members of the board of directors be elected. But major institutional investors including the California State Teachers Retirement fund which owned $300 million of Exxon's stock, The Church of England Investment Fund, California Public Employees' Retirement System, the New York State Common Retirement Fund, and the three major institutional investors in the United States, BlackRock, Vanguard, and State Street, as well as Institutional Shareholder Services and Glass Lewis, all of these major institutional investors and organizations got on board to vote for somewhere between two and four of the proposed candidates. As a result, three of these candidates were elected to Exxon's board of directors despite opposition by the existing management. This was a very important campaign by Engine Number 1 to change the way that a major corporation in the United States thinks about how to manage risks and opportunities arising out of climate change. In addition to the specific actions with respect to Exxon that I just described, shareholders in general have been putting forward more shareholder resolutions to force companies to focus on climate change, as well as greater disclosure their climate risks and opportunities and their lobbying activities. For example, very recently, 62 percent of FedEx shareholders voted to pass a non-binding resolution that FedEx would be required to disclose annually online its lobbying policies and payments to trade associations and groups. Part of the motivation for the shareholder resolution was the idea that when FedEx or any firm is part of a trade organization, and that trade organization lobbies for certain public policies, that the policies for which that trade organization lobbies ought to be consistent with the firm's public statements about materials, social, and environmental impacts. This was a successful resolution and remains to be seen, of course, how things are going to change, but resolutions like this have been proposed and adopted routinely in the past couple of years. As you can see from this chart prepared by a non-profit organization called As You Sow, in the 2021 year, the firm filed 86 shareholder resolutions and engaged 188 times with different companies to promote better environmental, social governance by firms including with respect to climate change. In addition to individual organizations, there are also now collaborative multi-stakeholder organizations like the Net Zero Asset Managers group which has multiple members. Eighty-seven major asset managers have signed on to be part of the Net Zero Asset Managers at the latest count, managing more than $37 trillion in assets under management. The goal of this organization is for these asset managers to collaborate with their clients, to achieve net zero emissions in their portfolios by the year 2050. In addition to equity, shareholders, and asset managers, we also need to think about the role of debt. Banks and lenders are engaging actively in climate governance as well. They are doing so in four primary ways. The first is they are engaging in portfolio analysis to screen and mitigate risk. Before a bank decides to lend to a new project like a coal-fired power plant, for example, or a natural gas fired power plant, the bank is going to undertake an analysis to determine whether that project should be offered credit, whether it's consistent with the banks carbon emission reduction targets, so banks have engaged in negative screening. The second main method that banks are using is to take positive steps to accelerate the transition to a zero carbon or net-zero economy. This includes making the choice to invest in or lend to clean and renewable energy projects, as well as to provide advice to clients. The third way that banks and lenders are acting on their net-zero commitments is through voluntary industry associations, for example, the Partnership for Carbon Accounting Financials which is a way that banks and other financial industry organizations have gotten together to set standards for how to measure portfolio emissions. Then finally, banks are committing to reduce their operational on-site emissions. I want to just take a moment to go through each of these in a little bit more depth. In order to understand any individual firm's commitments to achieve net zero, we need to be sure that we're talking about the same emissions. There are three different scopes of emissions that can be at issue. Scope 1 emissions are those direct on-site emissions from sources controlled by the entity itself. This could include on-site vehicle fleets or production processes on site, primarily. Scope 2 emissions are greenhouse gas emissions that arise from purchased electricity, heat, or steam by the entity. These are indirect. The emissions are off site, but they're within the control of the entity. The third type of emissions are Scope 3 emissions, and these are the most distant and indirect from an organization. These are greenhouse gas emissions that arise out of sources that are not controlled by the entity, but relate to the upstream or downstream activities of the entity. For example, if an employee of a firm flies on a plane for business-related travel, the firm doesn't own the aircraft, it doesn't operate the aircraft, but it sends the employee on that business trip. The emissions from that business-related travel are the Scope 3 emissions of the firm. It also includes any indirect emissions not counted in Scope 1 or 2. But when we're talking about banks for example, their lending portfolio emissions qualify as Scope 3. Down with that understanding of Scope 1, 2, and 3, we can take a moment to take a deep dive into banks and lenders. All six major US banks have joined many banks globally in making net-zero commitments by 2050. In other words, their plan is to achieve net zero, not only in Scopes 1 and 2, but also in Scopes 3 by 2050. The first way to do this is to reduce operational or on-site emissions, which are Scopes 1 and 2. For example, banks in the United States have made plans or have already retrofitted bank branches with energy management technology and have committed to source all energy that powers their business operations from renewable energy sources. When we're talking about negative screens for portfolio emissions, that's Scope 3. Banks in the United States as well as globally have already made public statements that they will decline to provide financing or credit for certain types of projects including, for example, oil and gas exploration in the Arctic or the construction of new coal-fired power plants. Banks have also made commitments that they will undertake enhanced due diligence for other types of projects. For example, whether to renew financing for an existing coal-fired power plant, the bank might require some form of carbon capture and storage. In addition, these negative screens require the banks to undertake carbon footprint analysis of their asset management portfolio. This is consistent with a set of principals known as the Equator Principles, which have been adopted by more than 80 financial institutions around the world, and require those financial institutions to undertake environmental and social impact assessment before deciding to provide financing to certain major projects. In addition to the negative screens, there's also positive screening. This is the idea that banks are now providing additional financing for clean tech and energy projects. They are issuing green bonds, and they're providing advice to their clients on how to achieve net-zero commitments outside of the bank's own operations but rather in their portfolios. In addition to shareholders and creditors, customers of firms are providing a major impetus to business firms to focus on climate change. There's research that shows that customer boycotts are having an impact on business models. Many customers actually do conduct research on the environmental impact of the products that they purchase. Customers also spend time researching a company's claims of how it's tackling climate change, and will be aware of whether the company's claims are consistent with the lobbying that the company is engaging in. Customer influence may come less from whether they purchase one product versus another product, but more by creating or the potential to create bad public relations through the media or through social media about a firm. In addition to customers, employees are a significant source of what is driving business firms to focus on climate change. Here, you can see an example of employees protesting outside the headquarters of their firm. Just to give one example, in the spring of 2019, about 9,000 employees of Amazon signed an open letter to Jeff Bezos, urging him to take bolder action on climate change. Hundreds of Amazon employees, climate activists, and politicians then spread the hashtag AMZN speak out. In response, Amazon made a climate pledge stating that it would commit to achieving net zero by 2040, and using 100 percent renewable energy by 2030. Amazon subsequently announced a $10 billion fund to address climate change. In addition to these important private sector stakeholders, the government and public sector is playing an important role in driving business firms to focus on climate change. When we think about government actors, it's important to understand that there isn't just one government actor, the EPA or the Environmental Protection Agency that's important in this space. When we think about environmental regulators in the federal government, we have some traditional regulators. The EPA, the DOT which is the Department of Transportation, the Department of the Interior, FERC, the Federal Energy Regulatory Commission which manages pipelines as well as electric power generation in the United States, at least some aspects of it. But the actors within the federal government who are focusing on climate change, this is an expanding list. We now have agencies within the federal government that are not traditionally thought of as environmental regulators, focusing on climate change. Now, the Securities and Exchange Commission, the Department of the Treasury, the Export-Import Bank of the United States, and the Department of Defense, among others, are all focusing on climate change. In addition to action at the federal government level, state and local governments have long been active in this space. Numerous states have what are known as renewable portfolio standards. These are requirements that a certain portion of energy generated within the state must come from renewable sources. That obviously creates a certain amount of demand for electric power generation to be powered by renewables rather than fossil fuels. In addition, California has exhibited leadership with respect to transportation emissions, and many local governments are taking even more active steps to address climate change by doing things like, for example, banning new natural gas appliances in homes. Beyond the United States, it's important to recognize that the global regulatory environment can have an influence on US business firms and households, even if those laws are not technically binding. It's important to be aware of what's happening in the European Union, as well as globally. One professor at Columbia has referred to this as the Brussels Effect. But the European Union has been a leader in this space in particular with respect to things like climate disclosures, and other nations decisions can lead to market pressures. If another country decides that no new vehicles sold after a certain date can be internal combustion engine vehicles, and instead must be electric vehicles, this is going to have implications for major auto manufacturers in the United States who sell cars not only in the United States, but also globally.
