Threatening clawback

A central aim of the climate change activist movement is to discourage further investment in fossil fuel projects. This is closely tied to economic analyses showing that the total cost of the transition depends critically on how quickly it starts and how effectively long-term high-carbon projects are avoided. It’s also the inverse of a frequent claim made by pro-fossil proponents: that investor confidence is necessary to keep billions flowing into fossil fuel infrastructure investment. That was the logic that made Canada’s federal government buy the Trans Mountain pipeline, in order to demonstrate to investors that Canada still has a legal and economic climate in which major fossil fuel projects are possible.

A potential strategy that could help avoid further fossil fuel infrastructure investments is the threat that profits earned in the near-term will be clawed back in the longer term to pay for some of the damages arising from climate change. It’s not something that today’s governments in North America are willing to threaten (not least because the longstanding purpose of corporations is to protect investors from personal liability for the actions of the firms they invest in). Nonetheless, it’s something that can be emphasized as a risk in the future in order to increase investor reluctance.

One practical way could be to begin tracking which entities large enough to be worth targeting in the future are profiting from fossil fuels today: fossil fuel corporations directly, but also major stockholders receiving dividends. Having some claim to being able to credibly track the flow of profits is essential to this strategy; otherwise investors will likely believe that they will have spent the profits by the time there is any demand for compensation, or that they will have shifted them through so many other investments as to have ‘cleaned’ them in a sense akin to money laundering.

The threat of clawback could be an argument to use when advocating divestment from the fossil fuel industry, since it would protect the institutional investor from such future claims of compensation, at least as far as future fossil fuel profits go.

It may seem pointless to suggest an idea like this when it is so far outside the political mainstream today, but a central point in the entire stranded assets / carbon bubble argument is that the political possibilities of the future will be different, and governments may grow far less accommodating of fossil fuels as decarbonization proceeds and the impacts of climate change worsen. Putting a little asterisk beside fossil fuel profits (* may be clawed back in the future to pay for climate damages) would both be a fair representation of a reasonable prospect, which can be made more probable through activist effort, and a way to make fossil fuel related returns seem less valuable and more tenuous than returns from alternative investments.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

12 thoughts on “Threatening clawback”

  1. Tobacco industry lawsuits and the ones happening now against opiate producers could be precedents that make the risk more credible.

  2. This could be brought up in relation to the Saudi Aramco IPO. Say people are buying some of their liability along with the stock.

  3. Potential investors could ask what assets Aramco is setting aside for future climate change liabilities. No matter what answer they give the point about the risk is raised.

  4. Moody’s Analytics says climate change could cost $69 trillion by 2100

    The consulting firm Moody’s Analytics says climate change could inflict $69 trillion in damage on the global economy by the year 2100, assuming that warming hits the two-degree Celsius threshold widely seen as the limit to stem its most dire effects.

    Moody’s says in a new climate change report that warming of 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, increasingly seen by scientists as a climate-stabilizing limit, would still cause $54 trillion in damages by the end of the century.

    The firm warns that passing the two-degree threshold “could hit tipping points for even larger and irreversible warming feedback loops such as permanent summer ice melt in the Arctic Ocean.”

    The new report predicts that rising temperatures will “universally hurt worker health and productivity” and that more frequent extreme weather events “will increasingly disrupt and damage critical infrastructure and property.”

    Moody’s Analytics chief economist Mark Zandi said that the report was “the first stab at trying to quantify what the macroeconomic consequences might be” of climate change, written in response to European commercial banks and central banks.

    Climate change, Zandi said, is “not a cliff event. It’s not a shock to the economy. It’s more like a corrosive.” But, he added, it’s one that is “getting weightier with each passing year.”

  5. The final threat looms in the courtroom. It is the hardest of the three to assess. This month pg&e reached an $11bn settlement with insurers seeking compensation from the Californian utility for payouts they made to homeowners and businesses in connection with wildfires. These were sparked by its power lines—and climate change increased their likelihood. Proving a company’s culpability for natural disasters is rarely this uncomplicated. Plaintiffs must show that they have suffered an injury, that the defendant caused it and that the court can redress it (with damages, say). In 2012 a federal court threw out a case brought by residents of Mississippi against 34 big carbon emitters for harm resulting from Hurricane Katrina, which they argued climate change made more destructive.

    Still, climate lawsuits against companies are mounting. Last year New York state sued ExxonMobil for deceiving investors about risks to the firm from climate-change regulation (the firm denies this). Better climate science has made establishing causality more credible, if by no means easy. Some American counties have sued a number of oil giants on grounds akin to those of the Mississippi claimants.

    In 2017 the fsb issued voluntary guidelines to firms and investors about disclosing such risks. Big asset managers, including BlackRock, back these in principle. But firms are reluctant to be the first to own up to vulnerabilities. They fear, rightly, that the market will punish honesty, not reward it. Until disclosures are made mandatory, companies are likely to prevaricate.

  6. “While opponents have tried to use the legal system to block progress on clean energy, advocates have also taken to the courts for their own ends. In Arizona, SolarCity challenged the legality of net metering charges. More broadly, the legal system is becoming an increasingly important venue for battles over climate policy. Significant investigative reporting and academic work revealed that ExxonMobil knew the science of climate change in the 1970s and 1980s (Supran & Oreskes 2017). Yet ExxonMobil launched a denial campaign and lied to the public for decades (Oreskes & Conway 2010). In response, the attorney generals [sic] of New York and Massachussets opened legal investigations into the company in 2015 and 2016, respectively.19 While the New York case was unsuccessful, that does not mean that other challenges will not prevail. States, cities, and counties have similarly instigated suits against several fossil fuel companies, including for compensation from climate damages. This strategy mirrors efforts to hold tobacco companies accountable for fraudulent behavior—an effort that, after decades, eventually succeeded.”

    Stokes, Leah Cardamore. Short Circuiting Policy: Interest Groups and the Battle Over Clean Energy and Climate Policy in the American States. Oxford University Press, 2020. p. 233

    19. David Hasemyer, “Fossil Fuels on Trial: Where the Major Climate Change Lawsuits Stand Today,” InsideClimate News, January 6, 2019

    Supran, G., & Oreskes, N. (2017) “Assessing ExxonMobil’s Climate Change Communications,” Environmental Research Letters, 12/8: 084019.

    Oreskes, N. & Conway, E. M. (2010) Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Global Warming. New York; Bloomsbury Press.

  7. Volkswagen will claim damages from former chief executive Martin Winterkorn and former Audi boss Rupert Stadler over its diesel emissions scandal, the carmaker said on Friday.

    The German group said that following a far-reaching legal investigation it had concluded Winterkorn and Stadler had breached their duty of care, adding it had found no violations by other members of the management board.

    https://www.theglobeandmail.com/business/international-business/european-business/article-volkswagen-to-seek-dieselgate-damages-from-former-ceo-audi-boss/

  8. If business had a Moses, “Thou shalt link pay to performance” would be on his tablet. Compensation committees have, however, tended to stick to a narrow reading of the commandment. Whereas they reward good behaviour, deterring the bad is an afterthought. Worried that this may lead bosses to adopt a mentality of “heads we win, tails shareholders lose”, boards are rethinking their priorities—partly in response to pressure from regulators and investors, but also to shifting social winds. Perfectly balanced incentives remain as elusive as the promised land. Still, measures designed to ensure that misconduct does not pay are becoming central to the debate about how to craft bosses’ salary plans.

    The most striking change of recent years has been the rise of the “clawback”. This is a provision in pay plans that gives the board the right (or, less commonly, an obligation) to yank bonuses or stock awards given but later found to be unjustly earned. A prototype, contained in America’s Sarbanes-Oxley reforms of 2002, required retrieving pay from chief executives and chief financial officers whose sins caused accounting restatements. The idea gained traction after the global financial crisis. The European Union mandated recouping money from wayward bankers. In America Congress told regulators to craft a new clawback rule. While they mulled this, big firms got the message and began to draw up such policies voluntarily. Some 93% of those in the s&p 500 index now say they have one covering cash bonuses, equity awards or both, according to iss, a proxy-advisory firm, up from a small minority before Sarbanes-Oxley.

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