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Investors warned about lobbying risk in portfolios: PRI

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Political lobbying is an established approach for businesses wanting less regulation, more tax support or other benefits. Yet access to senior government officials is often opaque to stakeholders. Given the history in the tobacco and fossil fuel industries, such lobbying should be of concern to responsible investors.

  • The PRI has launched an investors guide to responsible political engagement – otherwise known as lobbying.
  • Industries from fossil-fuel companies, utilities and transportation-related businesses have been discovered to have lobbied against the introduction of climate-friendly regulation.
  • While direct lobbying can be a concern, it is the indirect behind the scenes lobbying that carries real reputational risk.

Alongside Chronos Sustainability, the Principles for Responsible Investment (PRI) has researched the current state of responsible political engagement (RPE) stewardship. The interviewees included investors, think tanks and civil society organisations and it resulted in the publication of its report The Investor Case for Responsible Political Engagement.

The impact of lobbying on climate related legislation

NGOs including UK based InfluenceMap have highlighted how misinformation can be spread about climate change. This can run the gamut of misleading advertising, misrepresentation of corporate positions and, of course, behind the scenes lobbying of policymakers.

In terms of positioning, one useful tool can be association with a respected event. In April 2022 a number of investors with $140 billion under management requested clarity from Coco Cola regarding its own opaque lobbying practices. The global drinks giant is now a sponsor for the next climate negotiations meeting in Egypt, COP27.

Given that the company is described by activists as one of the largest plastic polluters in the world (in 2021 the Break Free from Plastic audit said the company produces 120 billion throwaway plastic bottles a year), there has been a great deal of concern about the agreement.

According to analysis from Influence Map, corporate climate lobbying has resulted in the dilution or failure of legislation and regulation around many different approaches. These include: emissions trading; tail-pipe emissions; shipping regulations; electricity and green power; carbon taxes, low carbon energy and aviation regulation.

For example, 20 years after the ratification of the Kyoto Protocol, fewer than 15% of emissions are covered by binding carbon pricing systems. Even the goals of the Paris Agreement are not binding on any country. This inaction is due to unprecedented lobbying by industry with ties to the fossil fuel economy. The Glasgow Pact initially included copy on the phase out of fossil fuels – language that was removed before the end of COP 26.

Engagement with lobbying can include direct engagement, as well as association with climate friendly events but also trade group pressure (and even law-suits such as the US National Mining Associations case against the Clean Power Plan in 2016) to industry capture and influence. But its that which you don’t see that can be associated with the greatest risk.

Investors can make a difference

According to the Principles of Responsible Investment (PRI), investors can transform political engagement into a lever for progress on sustainability. What they need to do is assess the extent to which portfolio companies’ political engagement aligns with investors’ long-term interests and responsible investment objectives, as well as how it contributes to informed public policy-making.

More importantly, they need to think of greater transparency around what they’re doing as simply the first step. The report warns that responsible investors are being hindered in their attempts to probe political engagement by portfolio companies, by the opaque nature of much of their activity.

Concern about opaque corporate behaviour is not new. In March 2021, Vanguard cautioned that “poor governance of corporate political activity, coupled with misalignment to a company’s stated strategy or a lack of transparency about the activity, can manifest in financial, legal, and reputational risks that can affect long-term value.”

The report warns that the most significant barriers to investors engaging on indirect lobbying are the lack of clear definitions, the limited corporate disclosures on indirect lobbying and the general lack of useful research to underpin engagement.

Political engagement can be justified but should be transparent

While companies can have a legitimate business interest in undertaking political engagement to shape the laws and policies that affect them. However, it warns this may present unforeseen risks for companies and investors.

Problems arise from the lack of visibility and clarity of purpose in the way corporate political engagement is conducted, because the less transparent the higher the risk of improper engagement. There are challenges around inconsistent rules in many jurisdictions, but that is not solace if lines are stepped over resulting in scandal.

One of the biggest challenges is a disconnect between a company’s public statements on sustainability or climate commitments, and lobbying for the short term benefits (such as weakening mandatory reporting frameworks, or the amount of CO2 allowable under government guidelines.)

Given the growing crisis there is an increasing burden on the investment community not only to behave appropriately themselves, but to manage the risks associated with investee companies behaviour. The PRI argues this means that over the long term it is in investor interest to get oversight of such engagements. And that means understanding the objectives, processes, and outcomes of political engagement by companies in a portfolio, to ensure they align with investors’ long-term interests and shared societal needs.

Focus on the role of lobbying is increasing

David Atkin, chief executive office of the PRI wrote: “There is greater scrutiny than ever before on companies’ political spending, lobbying and other direct and indirect forms of political engagement. Without adequate safeguards, questionable company practices can translate into governance risks and systemic implications for investors, ultimately undermining investment returns.”

The PRI has been supporting CA100+ members to engage companies on this topic, and, through partnerships with InfluenceMap and the Transition Pathway Initiative, promoting research that helps investors understand how their investees are performing on this issue.

It is also supporting a project on responsible corporate climate lobbying, led by the Church of England Pensions Board, Swedish pension fund AP7 and BNP Paribas. The project developed standards on corporate lobbying and political influence, the  Global Standard on Responsible Climate Lobbying (RCLS) framework. It has identified a 14 point plan for investors to engage responsibly with corporates on lobbying. The group is now building a benchmark to evaluate portfolio companies on Paris-aligned climate lobbying practices.

It’s supported by major investor groups interacting with companies on climate-related issues, with members managing a collective $130 trillion, as well as specialist advisory firms like the report’s co-author Chronos Sustainability.

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