Affirmative Impact - Fall 2015
Posted on Friday, October 16, 2015
By Anikha LeRoy
In climate change, humankind faces a challenge of unprecedented magnitude.
While skepticism remains, the science of anthropogenic climate change is broadly accepted. Calls to keep the average rise in global temperatures within a 2oC threshold date back to 1975. Two degrees centigrade may not sound like much, but to put it in context, the temperature difference between today's world and the last ice age is just 5oC. And, while the ramifications of climate change pose enormous risks to the environment, the world economies, and our daily lives, collective action at the global governmental level has been sorely lacking.
But, there is reason for cautious optimism as there finally appears to be something of a galvanization of efforts to take substantive action during COP21 in Paris.
Since 1992, an ongoing response to the threat of climate change has been The United Nations Climate Change Conference's (UNFCCC) Conference of Parties, or COP. However, despite running for more than 20 years, COP conferences have yielded little more than discussion.
For the UNFCCC to be fully effective it needs to be implemented via a protocol. This was first attempted at COP 3 in Kyoto in 1997; however, President Bush formally removed the U.S. from the Kyoto Protocol and other countries failed to meet their commitments. No universally accepted and enforceable agreement has resulted out of the subsequent conferences.
Most recently, The UNFCCC held COP20 in Lima, Peru where a New Universal Climate Agreement was drafted. Christiana Figueres, Executive Secretary of the UNFCCC, said, "The negotiations here reached a new level of realism and understanding about what needs to be done… if climate change is to be truly and decisively addressed."
The Lima agreement set the foundations for what is envisioned to be a contract that would bind all countries to reduce their carbon emissions. This agreement is intended to be finalized during this year's COP21 being held in Paris in December of 2015. COP21 will be one of the largest international conferences ever held in France, hosting more than 190 countries and expected to attract close to 50,000 participants, including 25,000 official delegates from governments, intergovernmental organizations, UN agencies, and NGOs around the world.
For COP 21 to be a success, many believe that it must produce a legally binding agreement. However, Carbon Tracker Initiative CEO, Anthony Hobley, suggests that success could actually be a " political agreement on steroids,"given that a legally-binding agreement may lack ambition as countries are unlikely to sign-up to anything they cannot achieve. In addition, "events and technological developments could change the climate change dynamic quickly," thus, a legally-binding agreement may, ironically, be too rigid.
Whatever the case, COP21 must result in detailed agreements that address criticial issues such as setting numerical goals for countries to adhere to, implementing methods to help developing countries mitigate and finance climate change projects, and the over-arching logistical planning to support objectives. Even though there are high expectations for COP21, no solid numerical goals have been set, and significant philosophical questions remain unresolved.
That being said, as of this month, 146 countries that account for almost 87% of global greenhouse gas emissions have submitted country-level action plans to the UNFCCC. While it is not yet clear how these Intended Nationally Determined Contributions (INDCs) will contribute to keeping within the 2 degrees, the submissions demonstrate an unprecedented level of planning as compared to previous conferences.
These submissions also demonstrate increased cooperation between developed and developing countries-another critical aspect of reaching a sufficiently ambitious agreement. Per Christina Figueres, a number of developing countries have received support from more developed nations in submitting their action plans.
The inherent tension between developed and developing nations is by far the biggest struggle in coming to a climate agreement. It has been argued that it is unfair to hold developing countries to the same standards as developed countries without help. Moreover, for developing countries, climate change and economic development cannot be separated.
A critical issue to be addressed at COP21 is the financial contribution to help developing countries transition to low-carbon economies without threatening their economic development. One solution is the Green Climate Fund (GCF) which aims to collect $100 billion by 2020 to distribute. However, the path to the $100 billion is unclear, as are distribution mechanisms.
But as world governments continue to thrash out their issues, companies are increasingly vocalizing their concerns and their desires to see real agreement come out of COP21. Certainly, in recent months we have seen:
- Major international food companies such as Nestle USA, General Mills, Unilever, and Kellogg Company sign a joint letter urging world leaders to act decisively in December.
- Six big banks-Bank of America, Citi, JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo- issued a joint release calling for a strong global climate agreement.
- Companies in industries heavily impacted by a reduction in fossil-fuel energy, such as aviation companies, are urging governments to back industry and civil society efforts" to implement market-based measures.
First Affirmative recently joined forces with other financial services firms and industry groups to call for a inclusion of a long-term emissions reduction goal in the international climate agreement. As First Affirmative CEO, George Gay stated, "In order for First Affirmative, and the wider investment industry, to do our job effectively we need reasonable certainty that there will be universal commitment to implement any plan, including a clear understanding of the strength and depth of emission cuts therein."
In fact, a recent PwC report, which surveyed 142 CEOs globally, found " that companies are on board with climate action, but that they don't have much faith in the U.N. process." PwC found that companies are keen for their governments to set clear goals and establish policy and regulation. To return to the words of Carbon Tracker Initiative CEO, Anthony Hobley, success for COP21 is "an agreement that is relevant to both the World's of business and finance. Particularly the financial markets who both fund the status quo and will need to fund the envisaged transition."
At First Affirmative we believe wholeheartedly in the power of business innovation as a catalyst toward a truly sustainable future. However, business stakeholders need certainty-goals to measure against, market mechanisms to provide incentives, and regulation to enforce accountability. We therefore look forward, with cautious optimism, to COP21 and the efforts of the international community to meet its obligations to create this clarity and to continue the growing momentum towards substantive, collective action.
Does Corporate Lobbying Compromise Democracy... and Capitalism?
By Holly Testa
The dictionary definition of lobbying is "an organized group of people who work together to influence government decisions that relate to a particular industry or issue." Lobbying would therefore seem to be a cornerstone of democracy in action. If numerous groups that reflect the rich diversity of opinion held within society are effectively represented, governmental policy will be better informed and more reflective of the collective will of the people.
But what happens when the lobbying power of one type of stakeholder supersedes that of all others?
Corporations Controlling the Conversation
Corporations have long attempted to influence public policy and legislation, but until relatively recently, other influences also had a prominent place at the table. The last few decades, however, have seen the landscape change. Companies are on lobbying spending sprees at the state and federal levels, both directly and via trade associations and " think tanks." Other interests cannot compete, as evidenced by the following recently presented in the Washington Post:
- Of the 100 organizations that spend the most on lobbying, over 90 represent business.
- Lobbying expenditures grew from an estimated $200 million in 1983 to $3.24 billion in 2013, with business accounting for more than 80 percent of all lobbying.
- Often, the goal of corporate lobbying is to maintain the status quo by "keeping an issue off the agenda."
- Other interests that represent the breadth and depth of public opinion-for example, labor unions and consumer groups-are estimated to spend just $1 on lobbying for every $34 that businesses spend.
- The number of organizations with Washington representation more than doubled between 1981 and 2006, from 6,681 to 13,776.
- The Government Accountability Office (GAO) and the Congressional Research Service (CRS), which provide nonpartisan policy and program analysis to lawmakers, employ 20 percent fewer staffers than they did in 1979.
A recent Washington Monthly points out some obvious consequences to this drastically changed landscape:
"Given limited time and nearly unlimited demands, policymakers have to choose who and what to pay genuine attention to. The loudest, most insistent voices have an advantage. Those who can saturate Washington by funding the most research, hiring the most lobbyists, and paying for the most elites to write op-eds highlighting and supporting their perspective are going to stay at the front of the crowd. Everyone else will recede into the background."
Congressional and agency staffers are increasingly inundated with viewpoints and messaging that favors specific corporate interests to the virtual exclusion of any other viewpoint. In fact, Lee Drutman, author of The Business of America Is Lobbying, points out that in his interviews with 60 corporate lobbyists, none of the lobbyists identified the leading opposition on any of their issues as a union or public interest group.
Corporations Become Lawmakers
Corporate lobbyists don't just influence policies and legislation-they actually write the draft legislation that may eventually get passed into law. When considered in the context of companies generally seeking to defend the status quo-which may, or may not be of benefit to broader society-the unfair advantage afforded to corporations is clear.
The American Legislative Exchange Council (ALEC), for example, brings together lawmakers and corporations to write and advocate for model legislation at the state level. This particular organization is of particular concern to responsible investors because of their persistent efforts to block governmental support of the necessary transition from a fossil fuel to a renewable energy economy. This shortsighted agenda might be profitable for companies entrenched in the fossil fuel paradigm today, but in the long-run, such action compromises society and the economy as a whole. Unfortunately, less well-resourced but vital voices are often drowned out.
Case in Point: Diluting the Dodd Frank Act
The financial meltdown of 2008 led to the relatively rapid passage of the Dodd Frank Act in the face of vehement opposition from the financial industry. Since then, banks have been working to delay the act's implementation and to reverse some of its provisions. In December of last year, they had a spectacular success.
The New York Times broke the widely publicized story of a provision, substantially written by Citigroup (over 70 of its 85 lines), that became law as part of a "down to the wire" $1.1 trillion spending bill. This provision repeals section 716 of the Dodd Frank Act, which required banks to move some of their riskier credit derivatives trades into a separately capitalized unit. Tom Hoenig, the vice chairman of the Federal Deposit Insurance Corp., called section 716 an important step in "pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks."
According to Arthur Wilmarth, a professor of law at George Washington University "Wall Street's determined lobbying on Section 716 provides compelling evidence that Wall Street's business model depends on the ability of large financial conglomerates to keep exploiting the cheap funding provided by their 'too big to fail' subsidies... Shame on Congress if it allows megabanks to continue to pursue the same business strategy that brought us the financial crisis."
Unlike with the Affordable Care Act which has lobbying influences on both the supporting and opposing sides, Wall Street has no major influence standing in opposition to its lobbying efforts with regard to Dodd Frank.
First Affirmative Calls for Disclosure and Transparency
Lee Drutman notes that we have entered a period where "the only possible policy changes on economic policy issues are those changes that at least some large corporations support." But, he also cautions us to avoid seeing lobbying through an "overly simplistic" lens and to view the system in its entirety in order that we can determine how to make it fairer.
First Affirmative has joined forces with other institutional investors who share our concerns about shareowner dollars being potentially wasted on purchasing short-term temporary advantages at the expense of long-term value creation. We believe that disclosure is an essential characteristic of good corporate governance and that it allows investors to make better informed decisions about the companies in which they invest, and how those companies are contributing to upholding an open democracy.
It's important to note that companies sometimes play both sides of an argument or interest-sometimes unwittingly-which can lead to reputational damage as we referenced in our post, Disclosing Secret Corporate Political Spending Does Not Hinder Free Speech.
We therefore ask corporations that spend significant money on lobbying to improve disclosure of their spending policies and practices as a matter of good governance.
A Primer on Market Volatility
By Mel Miller
Volatility in its simplest form is the price movement up and down of a stock or index. An index which changes little from day to day has little volatility; while large changes up and down result in high statistical volatility.
The average investor doesn't care all that much about volatility. The movement up and down might add to anxiety, but their real concern is the total return of their portfolio. In fact, a highly volatility time period can result in higher stock prices, which is of no particular concern to the average investor. Only a decline in stock prices is concerning!
We have experienced high volatility in the stock market over the past few months, scaring the bejesus out of some investors. But perspective is important. The S&P 500 Index gained over 74% during the past four years. Investors who remained invested in the market during this time period were rewarded with average annual returns of over 15% plus dividends-much higher than the long-term average stock market return (see chart).
Long-term successful investors utilize periods of market
declines to add to their portfolios. They recognize the
potential of buying stocks when they are "on sale." They let the short-term traders and high frequency trading programs generate the volatility while they seek out long-term investment opportunities that can be purchased at bargain prices.
Another principal of sound investing is to stay diversified. A well-constructed portfolio is diversified across multiple equity sectors, asset classes, and countries, and includes an allocation to fixed income. In fact, most long-term investors are pleasantly surprised when they review their portfolio performance following a market correction because their returns are generally higher than the stock market return. A diversified portfolio allocation tends to be less volatile and lose less during those inevitable corrections.
Driving a car without an accident requires focusing on the road ahead and not on the front of the car. Think long-term, stay diversified, don't panic, take advantage of assets on sale, and you too can be a successful long-term investor.