How to Invest in Solving Climate Change

Your Shares Have Voting Power

Overview

Why does where you invest things like your retirement fund matter? Your shares have votes. Corporations are large, consolidated actors. Getting a corporation to change can have a significant impact.

The problem is that most shareholders' votes don’t get used, meaning they get voted with management’s position. If your money sits in a traditional index-based portfolio, your shares likely aren’t getting voted on in any ethical fashion, particularly not around climate change.

There are two schools of thought regarding which types of companies to focus on when it comes to climate change.

Some argue that the worst actors should be made to change their business models for the better. In the case of ExxonMobil, such an approach would pressure them to voluntarily reduce the supply of oil through their business.

We believe this tool can be far more useful, focusing on the other side of the ledger: demand.

Instead of trying to force a company to change its core business model, focus on getting its customers to switch away from using fossil fuels to power their goals. Adopt renewable energy. Switch to an all-electric fleet. Reducing demand for fossil fuels can have a far greater impact and is much easier for these companies to grant.

Regardless, shareholders are beginning to really flex their muscles, particularly around sustainability. Big asset managers like Vanguard and BlackRock are ready to follow others’ leadership and align their shares with the right resolutions. It’s now a question of bringing more leaders into the space and getting as many votes behind them as possible.

So let’s dig into the mechanics of how shareholder activism works, where it’s been successful thus far, and where we can best leverage it moving forwards.

How Shareholder Activism Works

Shareholder activism happens when shareholders of a publicly-traded corporation use their voting rights to bring about changes in or for the corporation.

This approach can take the form of an institutional investor’s engagement with companies around governance issues, an individual investor’s shareholder proposal, or a hedge fund’s proxy fight where corporate factions vie for needed votes.

Who Can Put Forth a Shareholder Resolution?

Shareholders have a range of strategies to affect change in the company. The least aggressive is to hold one-on-one engagements (meetings, phone calls, and so on) with corporate managers. When these engagements don’t lead to the changes that shareholders want, they often adopt more aggressive tactics like submitting shareholder resolutions, "Vote no" campaigns, and proxy contests.

A shareholder resolution is a document roughly one page (500 words) long containing a formally resolved clause, which is a specific request, with a number of carefully-researched rationales in the forms of "whereas clauses" as supporting statements.

Any shareholder or group of shareholders owning $2,000 or more of a company’s stock for at least three years can introduce a resolution. This development means that institutional investors (like pension funds, insurance companies, and firms managing mutual funds and exchange-traded funds), hedge funds, religious groups, non-profits, and individual shareholders can submit shareholder resolutions.

Shareholder resolutions need to be drafted and submitted according to rules set by the Securities and Exchange Commission (SEC), and they need to be filed with companies’ corporate secretaries by specific dates to be placed on the company proxy ballot.

What It Takes for a Shareholder Resolution to Pass

Once a shareholder resolution is put to the vote at the annual general meeting of the corporate board, a resolution needs to garner more than 50% of the votes to formally pass.

But the true test of a resolution is whether it can influence a company’s decision-making. For this to happen, a resolution doesn’t have to "pass" in the technical sense: merely filing a resolution (or even threatening to) often leads to a serious dialogue with managers, who may be amenable to addressing concerns raised in the resolution to keep it off the table.

If a resolution is voted on, a majority vote isn’t needed to show shareholder concern over an issue, which can prompt the requested changes. Votes with more than 10% support are difficult for companies to ignore. Resolutions with 20% or more support send a clear signal to corporate management that the current company policy is not beneficial to shareholder interests.

Who Can Vote on Shareholder Resolutions?

The provisions in a corporation’s charter and its bylaws determine shareholders’ rights, including their right to vote on corporate matters. These provisions also have to adhere to rules and guidelines established by the SEC.

Note that not all shares are created equal when it comes to shareholder voting rights. Shareholders who hold common stock typically receive one vote per share. Those holding preferred stock enjoy higher dividend distributions but without voting rights.

But what if a shareholder can’t attend a shareholder meeting or chooses not to vote on a particular issue?

In these cases, a person or a firm can act as a "proxy" to cast a vote in the shareholder’s place. Registered investment management companies can cast proxy votes on behalf of mutual fund shareholders or high-net-worth investors in separately managed accounts (Carbon Collective does this for our members).

What Types of Issues Can Be Shareholder Resolutions?

Resolutions can address a wide range of issues that substantially impact business policy. These can be conventional corporate governance-related issues like executive compensation, share buyback rules, and changes of directors, and non-financial issues, such as human rights, labor relations, animal welfare, and not least, climate change and greenhouse gas emissions.

What Happens if Management Fails to Follow Through on a Shareholder Resolution?

In most cases, shareholder resolutions are non-binding under state corporate law, meaning management has no obligation to comply with resolutions even if they pass by a majority vote. But it’s rare for a company to ignore the concerns of even 10% or 20% of shareholders voting in favor of a resolution.

History of Shareholder Resolutions

In the United States, rules for shareholder resolutions and shareholder voting rights were stipulated in 1934 in the Securities Exchange Act. But the first real wave of shareholder resolutions started in the 1960s and focused on social causes like equal employment opportunity and environmental issues.

In the 1970s, the number of resolutions started ramping up thanks to religious institutional sponsorship by organizations like the Interfaith Center on Corporate Responsibility. In the 1990s, shareholder resolutions began to focus on mainstream corporate governance issues relevant to a wider segment of shareholders.

The dot-com bubble and major accounting scandals of the early 2000s prompted demands from the public at large for board accountability and governance reform, and the number of shareholder proposal filings dealing with these issues also quickly rose.

In recent years, the number of resolutions dealing with environmental issues has climbed steadily, reaching 26% of all shareholder proposals submitted to Fortune 250 companies in 2019.

Individual activist shareholders and institutional investors have been proactive in submitting resolutions. Particularly crucial in this space is the growing number of activist hedge funds that have recently begun incorporating environmental issues in their investment strategies and submitting resolutions.

Shareholder Resolutions and Climate Change

Boardroom-level decisions at major corporations can massively impact a company’s emissions. Corporations own fleets of cars, buy significant levels of electricity, manage corporate campuses, and outfit their factories. While their size can make them easy to point to as climate villains, it also means that getting one to change can have an outsized impact.

As such, as investors wake up to the reality and risks of climate change, they engage with the world’s largest corporations to take action.

What Resolutions Need to Happen to Reach Zero Emissions

The most crucial action for a company to take on climate change is to lay out and execute a clear plan to reach zero emissions. Their electricity comes 100% from renewable sources. A 100% electrified/green hydrogen-powered fleet transports their people, goods, and services. They find new zero-carbon suppliers for the upstream components of their products and eliminate the use of emissions. They restore any natural ecosystem with which they interact.

Without basically all major corporations taking these steps, we won’t be able to reduce emissions fast enough to avoid 2ºC levels of global warming. That’s the bottom line.

Many shareholder resolutions are built around publishing sustainability/ESG reports and disclosing emissions, energy use, and resource efficiency.

In the "you can’t fix what you can’t measure" way of thinking, these are a start, but they lose valuable time and chances to extract meaningful commitments to tangible climate actions.

Furthermore, disclosures are generally based on the assumption that investors will discipline high-emitting and energy-inefficient companies.

But while recent academic research has found that climate-related disclosures help raise a company’s valuation, it’s not yet clear whether these disclosures enable investors to press these companies to become greener. At best, disclosures help reveal energy consumption and emissions levels and serve as a baseline for reduction targets.

On the other hand, climate action plans and targets are effective tools that shareholder resolutions can demand. Especially when goals and targets are science-based and accompanied by specific short-term, medium-term, and long-term timelines, action plans can serve as important guidelines to keep the management accountable.

In our book, climate progress should be linked to executive compensation.

Examples of Successful Shareholders Resolutions

There have been some notable climate change-related shareholder resolutions in recent years. For example, the three greenhouse gas emissions proposals filed by oil majors Phillips 66, ConocoPhillips, and Chevron received 80%, 58%, and 61% of shareholders’ votes, respectively.

The proposal filed by Follow This at Chevron called for the company to substantially reduce emissions from the end-use of their product (part of what’s known as Scope 3 emissions). This development is awesome and the strongest counter to our argument that focusing shareholder resolutions on getting fossil fuel companies to voluntarily change is a poor strategy.

Does Adding Climate-Aware Board Members Help?

Another recent example of shareholder activism that stunned Wall Street was the election of three dissident directors to ExxonMobil’s 12-member board following a proxy campaign by the activist hedge fund Engine No. 1. One of these dissident directors is a former Department of Energy official who focused on energy efficiency and renewable energy.

But does electing climate-aware directors really prompt fossil fuel companies to fundamentally change their behavior and cut emissions? No. At least not yet. There’s been criticism over Engine No. 1’s proxy victory as lacking specificity about the clean-energy investments that Engine No. 1 would like Exxon to make.

Also troubling is that one of the new directors clarified that she will respect Exxon’s "traditional, existing business," and another is an oil industry veteran. These facts cast serious doubt on whether the Engine No. 1 shake-up will really fundamentally change Exxon’s core business model as a fossil fuel powerhouse. It cost Engine No. 1 approximately $12.5 million to run this campaign. Could those resources have had more climate impact if spent on another company?

Climate-Focused Shareholder Activism Should Focus On Reducing Demand for Fossil Fuels, Not Supply

We go into more depth on this in another piece in this series, but let's give an overview here.

To solve climate change, we must significantly reduce fossil fuel usage by 2050. This means cutting oil by 75%, coal by 90%, and natural gas by 55% (assuming half of that will be used to generate hydrogen with the excess carbon getting captured and stored).

To get there, we must reduce the demand for fossil fuels. Trying to force fossil fuel companies to voluntarily reduce supply when they have customers waiting to buy their products will be very challenging. And even if you succeed, it would only mean some other company, maybe a privately held one or a government, would meet that demand.

No, the fossil fuel industry will only change when forced by the market. And that market responds to pressure.

Major corporations invest significant resources trying to position their brands on the right side of climate change. If Amazon switches all of its delivery trucks to electric (which they plan to do), that will reduce the demand for fossil fuels. When Microsoft runs its server farms 100% off renewable energy, that reduces demand for fossil fuels.

These are the shareholder proxy fights climate activist investors should look to win. While still a challenge, it’s easier than getting a company to change its core business. They just change some of the infrastructure around it.

Conclusion

Shareholder activism is a key part of why it is crucial to approach your investment strategy carefully. When you don’t use it, decisions get made, in your name, that support the status quo. Decisions you probably wouldn’t be very happy with.

But not all shareholder resolutions can have the same potential impact. Electing dissident directors on the boards of fossil fuel companies, for example, is a too-costly strategy with a too-little payoff. There’s simply not enough time or money to elect directors in every boardroom who may or may not fight for the fundamental and necessary changes in the core business models of oil and gas companies.

Instead, we think that shareholder proposals to push companies on performance toward low-carbon transition are far more effective. These proposals can request companies to align with recognized science-based transition targets that include emission reduction goals and timeframes in which to achieve these reductions.

In 2021, climate-focused shareholders filed 126 proposals, and 26% of these proposals requested companies to adopt emission-reduction targets and strategies. We very much support this trend. There are over 4,000 publicly-traded companies on US markets. Let’s get to work.

Your Shares Change a Company’s Cost of Capital

The stocks you hold in things like your retirement fund can impact climate change. They can help climate solutions companies grow faster, or fossil fuel companies expand.

Why? How? Because what you choose to buy and hold and what you choose to sell and leave out impacts the stock market’s supply and demand. Supply and demand drives share prices. And the better a company’s stock performs, the more cheaply it can raise capital to expand its operations.

How does that work? So glad you asked :)

Let’s dig in. And to do so, we’ll need to talk about sneakers.

The Stock Market Is Like eBay but for Ownership in Corporations

Secondary markets sell used stuff. Think eBay, Goodwill, Sothebees, a swapmeet, or the stock market. Yes, when you buy a share of Apple, you aren’t buying it from the company (in almost all cases), you’re buying it from someone else who wants to sell it. Who bought it from someone else, who bought it from someone else, and so on. The primary transaction where the company sold that freshly minted share to the public happened long before, potentially decades ago. After that, the company hasn’t had anything to do with buying and selling it.

But supply and demand dictates the price of a company’s stock. If more of us want to buy it on a given day than sell, the price rises. If more want to sell, the price goes down.

So why do companies, CEOs, and boardrooms care at all about their stock price, let alone spend so much time and effort fretting about it?

Why Secondary Market Performance Matters to Companies: A Sneakerhead Analogy

Let’s explain with an analogy. Instead of stocks, let's look at another commodity sold directly by a company to "investors," who often resell them, never worn, onto secondary markets: collectible sneakers.

So, let’s imagine two scenarios:

The secondary market for collectible sneakers is hot. Every new, limited edition shoe that Nike comes out with instantly sells out, with lines around the block at FootLockers across the country. That same day, some buyers resell them on eBay for 2-3x what they paid. Some wait a few months or years and find buyers willing to pay 10x what they paid.

In this scenario, Nike will find it much easier to keep selling new limited edition sneakers. The clear demand for these sneakers means they can decide to raise their prices and make more money off of each new collectible shoe they sell.

Then, if Nike wants to borrow money from a bank to finance making more limited edition sneakers, the company can probably expect lower interest rates. At a high level, banks assign interest rates based on their assessed likelihood of being paid back. The less risky the loan, the lower the interest rate. The demonstrable strong demand "investors" have for Nike’s sneakers helps convince bankers of the low risk of not being paid back.

In this scenario, the strong secondary market enables Nike to a) sell new collectible sneakers at higher prices and b) pay less in interest to finance the expansion of their collectible sneaker business (meaning they have more to put into expansion).

The secondary market for collectible sneakers is cold. Something happened. Nike releases its latest collectible shoe. Based on its strong history of secondary market sales, "investors" crowd into FootLockers. They buy, Nike gets paid, and then put the shoes on eBay. Then crickets. Nobody is buying. Instead of 10x the value, sneaker "investors" lower their prices to 5x, then 2x, then just try to get their money back.

What happened? Overnight, Nike found itself in a PR disaster. Accusing the company of corruption and unfair treatment, top basketball players canceled their contracts with Nike. Tweets flew from famous NBA players about what the Nike brand now symbolized for them and how they wouldn’t be caught dead wearing Nike again. Some speculated that maybe the players were on the verge of launching their own, collectively-owned sneaker brand.

This sudden turn in the resale market for Nike’s collectible shoes has immediate and significant impacts on their business. They scramble to find other stars to resuscitate their brand with the next series of shoes. They conduct a market analysis to see what the right price is for this new line and find that without the strong secondary market, sneaker investors are only willing to pay 25% of what they had paid only months before. They can still sell collectible sneakers, but they’ll make far less money per pair.

The Nike executive team decides that the situation needs a huge advertising and PR campaign. They go back to the bank they worked with previously and find the terms have changed. The bank sees this business line as much riskier. They aren’t sure that in the worst-case scenario, Nike could just pump more collectible sneakers into the market to make sure the bank gets paid back. They end up agreeing to a loan but with significantly higher annual interest rates. Nike gets the cash, but the company has to set aside far more in reserve to cover the interest payments.

In other words, it’s less efficient cash because the cost of capital is higher. So the rapid decline in secondary market interest has left Nike unable to sell its collectible shoes for nearly as much or raise the capital efficiently to grow out of the problem.

Bringing It Back to Stocks

Stocks are like collectible sneakers, but for an entire company.

When the secondary market for a stock is hot, the company can issue and sell additional shares (equity) at higher prices.

Let’s say a company wants to issue and sell 1% of its shares to raise capital for an expansion project. To make the math easy, let’s say that’s 1,000,000 shares. It would much prefer a going rate closer to $100 than $20 per share. By selling the same amount of equity, the company could have $80 million more to deploy and grow.

During the green tech stock price boom of 2020, this happened a lot. Tesla could use its surging share price to raise $5 billion by selling new stock. Plug Power raised $1 billion to build out its green hydrogen infrastructure.

This strong secondary market investor confidence also likely helped these companies raise debt more cheaply. Tesla could set the terms on $1.35 billion in debt in 2019 on the back of its strong share price.

When the secondary market for a stock is cold, the company will struggle far more to raise capital. If they want to sell more equity, they’ll earn far less per share. If they want to raise debt, they’ll likely need to agree to far more onerous terms.

We saw this happen in February 2022 with Peloton, the fitness company. From February 9, 2021, to February 9, 2022, the company’s share price fell by -73.76% in a spiral of bad news. It started with lower-than-expected sales and the shutting down of some manufacturing plants. As of February 2022, it ended with 2,800 layoffs and the founder/CEO stepping down.

Without investor confidence and the ability to raise efficient capital, Peloton’s only choice was to cut costs and bring in new leadership to try and regenerate investor confidence. Put another way, despite trading on a secondary market, Peloton’s falling stock price has significantly hindered its ability to grow and expand its business.

So that’s why CEOs and corporate boards care about stock prices.

Why Influencing Cost of Capital Matters for Climate Change

To solve climate change, we need climate solutions technologies to rapidly scale. Basically as quickly as is logistically feasible. At the same time, we need fossil fuel demand and production to wind down to the point that by 2050, we no longer globally burn fossil fuels to make energy (and if we are, the emissions are being captured and sequestered).

Many companies that have the size and resources to quickly scale technologies like solar, wind, batteries, electric cars, heat pumps, induction stoves, green hydrogen, advanced biofuels, and more are publicly-traded. You can buy or sell their shares on the stock market. 

The higher their stock prices, the faster they can expand. And for them, expansion means solving climate change. It’s both more complicated and as simple as that.

At the same time, we need fossil fuel company stocks to experience the opposite phenomenon and have more years like the one Peloton had. Low stock prices lead to leadership changes, layoffs, and the canceling of ambitious expansion plans.

Why the Stocks in Your Retirement/Brokerage Account Matter

Like collectible sneakers on eBay, the notion of supply and demand sets the going price for a stock. If way more people are looking to sell the latest sneaker than buy, they’ll end up undercutting each other’s prices to make the sale. The going rate of that shoe will drop. More buyers and fewer pairs available means the sellers in the market will raise their prices.

The same is true of stocks. When more buyers demand to buy a stock than suppliers are willing to sell, the price goes up until enough people get convinced to sell, and the demand is satisfied. When there are more sellers than buyers, the reverse is true.

External factors, such as a company’s quarterly performance, the macroeconomic conditions (inflation, interest rates, and so on), and how investors broadly view the future of the company’s sector, often set demand. Supply, though, is set by the investors themselves.

Let’s turn back to shoes for a second. Let’s say Nike only made 1,000 pairs of a collectible sneaker series. If 990 of those sneaker owners aren’t looking to sell, the supply of available sneakers in the market will be low. An eBay search will only turn up ten offers. If more than ten people want to buy, the price will probably go up. If any of those 990 aren’t convinced to sell, the price will likely continue going up.

Especially in long-term investments like our retirement accounts, we generally don’t do a lot of trading stocks. We tend to buy and hold. So the choice of funds, stocks, and bonds you buy and hold really matters because you are effectively removing them from the supply of actively traded stocks. You’re one of the 990 shoe owners who don’t want to sell.

Today, a lot of our retirement funds hold fossil fuel company stock. Given their higher-than-average dividends, this often makes tax sense in tax-protected IRAs. But this also helps fossil fuel companies by reducing their total number of actively traded shares. It helps keep their share price higher and their cost of capital lower.

Instead of holding fossil fuel companies, our retirement funds should buy and hold the companies building climate solutions. Not only will owning green stocks likely be a smart investment in the coming decades but you’ll also help these companies grow faster.

We know what we have to do to solve climate change. We have most of what we need. The question is just how fast we can do it.

Your Shares Help Change the Narrative Around Sustainable Investing

In our past article, we walked through how your shares can impact the supply of actively traded stocks. As a quick summary: the stocks you buy and hold in long-term investment portfolios like your retirement fund (and who you choose to exclude) can impact the supply of shares available for trading. The lower the supply of shares available "for sale", generally higher the price. The higher the price, the more a company can raise through selling equity and/or better terms it can get on debt, and the faster it can expand.

But what about demand? Can you influence how many people want to buy a given stock?

Yes. You absolutely can.

Investors Are Humans and Humans Are Wonderfully Biased, Social Creatures

The price at which supply and demand reach a balance sets the price of a stock. This balance is dynamic. It will change throughout the day. In today’s world of high-speed trading, it can change in the course of a given minute.

Some argue that this balancing act is the market reaching the optimal equilibrium by accounting for all publicly available information. This theory is called the Efficient Market Hypothesis (EMH). Bad news means the share price falls; good, it goes up.

Those who tout EMH often use it to justify making no changes to a portfolio. To them, because the stock market crowdsources the decision to buy, sell, or hold across many millions of opinionated investors, future risks like those posed by climate change are "baked into" a company's existing price. To them, the current price of a stock is always "correct" and if not, the market will "correct" itself soon. So to them, you should just invest in the market.

It might not sound like it, but we actually agree that EMH is correct. Stock prices and levels of supply and demand reflect the totality of publicly available information on that stock.

The problem is, humans don’t process "all publicly available" information like machines. We aren’t algorithms. We’re the opposite. Our decision-making processes are often wonderfully flawed and sometimes comically illogical.

To date, behavioral scientists have outlined 188 cognitive human biases. Many serve important survival purposes. We have a strong bias to conform to those around us. If you’ve taken psychology 101, you probably remember the Asch conformity experiments from 1951 (where everyone in the room but you gave the wrong answer about which of three lines was shortest).

This phenomenon of naturally seeking to conform can be quite helpful in our daily lives. From product reviews to home repair videos, making the same choice as the herd can often result in smart, satisfying, time- and money-saving decisions. Decision fatigue is a real phenomenon, and going with the crowd can save valuable brainpower for more important decisions.

In the world of investing, herd mentality can get supercharged. Not only can the collective mentality of investors drive the market into highly irrational directions (tulips, pets.com, mortgage-backed securities), but influential individuals can make billions of dollars of value appear or disappear overnight.

For instance, Jim Cramer, host of CNBC’s "Mad Money," makes comically loud recommendations to "buy, buy, buy!" These messages to the "herd" are strong enough to have earned their own financial term - the Cramer Bounce. While not large, stocks he recommends get an average short-term 3% increase in value.

And one of the most powerful biases humans often unknowingly fall into is confirmation bias, which occurs when we filter facts to (often unconsciously) support a pre-existing belief about how the world (should) work. And it’s these shared beliefs that investors filter "all publicly available information" about a stock through.

Addressing the Belief That Sustainable Investing Will Underperform the Market

Most people still think sustainable investing will underperform the market. And most people think that fossil fuels stocks are a necessary evil to maintain portfolio performance. 

We encounter this every day. From retirees who have been investing for 40 years to college students just starting to put money away, we hear something like, "I want to invest sustainably, and I’m comfortable accepting returns a few percentage points lower."

Somehow, the belief that to invest sustainably is to give up returns, that such an action is a form of charity, has taken hold (very likely through some effective fossil fuel propaganda).

This collective belief has real-world results: it has slowed the flow of capital into sustainable investing and artificially kept more of it invested in fossil fuel companies. It has hurt the price of solar companies and helped oil majors.

This collective belief is an input into the system. It is actually a piece of "publicly available information" in its own right. A correction is needed, and that’s where you have power.

The Truth Is Sustainable Investing May Equal Smarter Investing

The wonderful thing about shared narratives is they can change. Here are the narratives around sustainable investing that we at Carbon Collective believe:

Fossil fuels have not been a smart investment over the past 30 years. From 1989 to 2021, an S&P 500 divested of energy companies would have outperformed the total S&P 500.

Fossil fuels will not be a smart investment over the next 30 years. Fossil fuels are an industry starting a long decline. Competitors have arisen to challenge fossil fuels for a significant part of their market share in electricity production and transportation. Fossil fuels’ hopes of staying relevant rely upon very unproven jumps in technology.

Climate solutions are poised for tremendous growth over the next 30 years. Whether you look bottom-up at how climate solutions, from solar to electric cars, economically outcompete their fossil fuel-dependent competitors, or whether you look top-down at the rates of growth in renewable energy, batteries, electric cars, green hydrogen, and advanced biofuels, we will need to see significant growth between now and 2050 to remain on course to avoid catastrophic warming.

Conclusion: We Can Change the Narrative

We have the power to force a market correction. Given that the prevailing narrative has been that fossil fuels are necessary and sustainable investments are superfluous, the stock market pricing of these categories is likely off.

Our collective narratives drive demand for stocks. Narratives only change when enough of us stop believing them. So, change your investments. Then talk about it. Share why aligning your investments with solving climate change is smart and why holding fossil fuel companies in long-term portfolios is dumb.

We’re not going to change EMH. But we can certainly change the "publicly available information" flowing into it.