When Policy Fails, Investors Must Step Up
For years, there has been a debate among those working to fight climate change: does time spent on investor stewardship pressing companies to limit their greenhouse gas emissions distract from the essential work of changing government policy?
At The Shareholder Commons, we have always taken a “both-and” position. We believe that policy reform and investor action are complementary and interrelated tools for protecting long-term portfolio value—indeed, investor stewardship discouraging pernicious corporate influence may be crucial to effective policy work.
In any event, the recent action by the United States Environmental Protection Agency repealing the 2009 Endangerment Finding—the legal foundation for regulating greenhouse gas emissions under the Clean Air Act—strikes at the heart of federal authority to control emissions that are dangerously heating the planet. It means that companies in the world’s largest economy face dramatically weakened constraints on the damage created by their GHG emissions.
Our theory of change begins with a simple economic reality: when companies are unchecked, they externalize costs (such as GHG emissions) if doing so boosts enterprise value. This is especially true in an economy where profit maximization at the company level is the North Star for business. Those externalized costs accumulate as systemic risk—slowing growth, destabilizing markets, and ultimately dragging down diversified portfolios. One academic study predicts that the failure to conform to the Paris goals threatens to reduce the value of diversified portfolios by 30% or more.
Yes, the unprecedented rollback of the Endangerment Finding must be challenged in courts, at the EPA, and in Congress. But in the meantime, diversified investors cannot stand still: when public guardrails fall away, system-level investing and system stewardship may offer the best opportunity they have to protect portfolio-wide returns from devastating economic losses.
To learn how to protect their portfolios against the risks of climate change, investors can consult this report from the Sierra Club, this case study from The Shareholder Commons, and other materials available in the Resource Library of the System-Level Investing Knowledge Lab.
