For the first time, shareholders of a major bank voted on whether greenhouse gas emissions associated with the bank’s loan practices expose the bank to serious risks. Activist investors were successful in placing a shareholder resolution in the proxy materials sent to shareholders of PNC Financial Services Group (“PNC”) in advance of the bank’s April 23, 2013 annual meeting. As reported by the Pittsburgh Post-Gazette, a majority of the shareholders voted against the resolution that was also unanimously opposed by PNC’s directors.
The Resolution. Boston Common Asset Management drafted the shareholder resolution, which was cosponsored by Domini Social Investments, Friends Fiduciary Corporation, Mercy Investment Services, and Walden Asset Management. The sponsors are Quaker and Roman Catholic groups and mutual funds focused on socially responsible investments. Carbon Tracker, Ceres, and the Rainforest Action Network collaborated with the sponsors.
The failed resolution stated that PNC has acknowledged the importance of climate change management in its brand reputation. The resolution went on to say, in part:
PNC stated that its “credit review process includes due diligence that takes into consideration the environmental impact of a prospective borrower.” PNC claims to perform a “supplemental evaluation for companies in the extractive industries, including an understanding of any significant environmental impacts.” PNC states it takes these actions because it recognizes the “potential risks associated with changing climate conditions that could affect business operations and performance.” (PNC, 2011 Corporate Responsibility report)
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Banks and other financial institutions contribute to climate change through their financed emissions, which are the greenhouse gas footprint of loans, investments, and financial services. A bank’s financed emissions can dwarf its other climate impacts and expose it to significant reputational, financial and operational risks.
The resolution requested that PNC’s Board of Directors report to the shareholders by September 2013 concerning PNC’s assessment of the greenhouse gas emissions resulting from its lending portfolio and PNC’s exposure to climate change risk as a result of its lending, investing, and financing activities.
Why PNC? PNC is the only major bank located in Appalachia, a region of the United States with significant coal and gas extraction activities. PNC provides financial services to mining companies, including those engaged in mountaintop removal, a practice that has been blamed for adverse environmental impacts. At the same time, PNC also enjoys an environmentally friendly image as a result of its green building program, loans for solar projects, and environmental incentives for small businesses.
Nevertheless, the backers of the resolution maintain that PNC has not provided investors with sufficient information to allow for a meaningful assessment of the risks posed by its financing of greenhouse gas-intensive businesses. More importantly, they accuse the bank of reneging on a 2011 promise not to extend credit to individual mountaintop removal projects or to mining companies receiving the bulk of their production from this process.
Why Now? PNC asked the U.S. Securities and Exchange Commission for permission to exclude the resolution from its annual meeting ballot. This is a fairly common request. Activist investors submit hundreds of resolutions to companies every year, but companies can choose not to forward the resolutions to shareholders if the resolution addresses topics within the ordinary authority of the company’s Board of Directors.
A company that has decided to exclude a resolution may ask the SEC to “concur” with its decision. PNC asked, but in a surprise move, the SEC staff did not concur. Instead, PNC was told that climate change represents a “significant policy issue” for the bank and its shareholders. Importantly, the SEC did not say that climate change is important in general, but rather that climate change is important for banks.
The SEC had in the past supported excluding similar resolutions, because the SEC agreed that such resolutions concerned the “ordinary business” of banks. In 2010, however, the SEC issued guidance stating that corporations should disclose to shareholders the potential effect of climate change on their business and their strategies for addressing the risks.
According to SEC spokesman John Nester, the PNC decision does not mean that every financial institution must consider the issue of climate change. Instead, the ruling was based on the particular facts of PNC’s case, including the nature of the bank’s lending criteria and its public statements, which demonstrated a “meaningful relationship” between climate change and operations.
Who Is Next? The sponsors of the PNC resolution have submitted a similar resolution to JPMorgan Chase. The sponsors have stated that they may withdraw the resolution before the bank’s May 2013 annual meeting depending on the outcome of discussions with the bank.