Do you know the adage, “slow and steady wins the race”? Well, it played out again recently when PNC Bank announced a policy change in its financing of companies engaged in mountaintop removal coal mining operations.
This big win followed nearly five years of public campaigning by Earth Quaker Action Team (often known by its acronym, EQAT) and other nonprofits, as well as years of quiet, persistent shareholder advocacy by a coalition of socially responsible investors, including my organization, Friends Fiduciary Corporation.
Earth Quaker Action Team organized and engaged in direct actions that ranged from sitting‐in at bank branches to writing personal letters to board members. A fair amount has been written about this important and successful campaign, and I applaud Earth Quaker Action Team’s deliberate, creative, and Quaker‐inspired approach toward nonviolent direct action.
As executive director for Friends Fiduciary, I am also keenly aware of the role socially responsible investors played behind closed doors in this overall effort and the company’s actions in response.
In my view both street activism and shareholder advocacy are important and represent different but potentially complementary strategies for change. Together they create compelling pressure on a company to do the right thing. Friends Fiduciary believes that doing the right thing for the environment and society is also doing the right thing for a strong, sustainable business!
Friends Fiduciary manages $340 million in investments for 330 Quaker meetings, churches, schools, and organizations. We seek to provide outstanding returns at low cost while rigorously screening so that we invest in companies compatible with Quaker values. Friends Fiduciary is also vigorous in shareholder advocacy and known as “the national Quaker voice” on business policy issues to support Quaker values and long‐term company and shareholder interests.
In 2011, Friends Fiduciary joined with peer socially responsible investors to begin a dialogue with PNC Bank to raise concerns about its mountaintop removal financing. While these dialogues were cordial and moderately constructive, their lack of progress led to our co‐filing a shareholder resolution in 2012 with other investors. Friends Fiduciary helped ensure that mountaintop removal mining remained front and center in the engagements with PNC management.
As dialogue continued over the next three years, the shareholder group broadened its concern to include the company’s exposure to climate risk in its lending, investing, and financing. By broadening the resolution to the total impact of the bank’s financing of high‐emitting businesses, we as shareholders were expressing concern about climate risk from a financing perspective. Investors were saying to the bank, as owners, we believe it is important that the bank strategically assess and anticipate potential climate risk in order to manage and mitigate it in its lending portfolio and operations. We believe this is important for long term sustainability of companies, and that those companies with sustainable operations will be advantaged and more successful over time. This should result in increased shareholder value.
As a strategy, shareholder advocacy requires a delicate balance between working with, cajoling, and sometimes pressuring companies to consider changing their practices. As a long term investor, Friends Fiduciary is able to tell company management in an engagement that our interests are aligned with the company. As long‐term investors—as owners of the company—we want them to succeed. All of our efforts are in the context of building long‐term shareholder value.
By encouraging companies like PNC Bank to consider sustainability of their operations, to evaluate potential reputational risks, and to assess climate risk in operations and portfolios, we are encouraging them to think beyond the current earnings quarter. Unfortunately Wall Street has become increasingly short‐term focused—looking to quarterly earnings to reward and punish companies in the trading markets.
As long‐term investors, Friends Fiduciary is interested in long‐term shareholder value, which is what yields strong returns for our constituent investors. This type of relationship between shareholder advocate and company management works best when built on mutual respect and trust. As such, this is a very different strategy and requires different tactics than Main Street activism; and yet we believe it is critically important for substantive change on issues like climate change. That said, the levers for change in the corporate sector are limited, and I think most would agree that the governmental sector must show leadership and take bold action to address climate change.
As a result of investor efforts—as well as the efforts of groups like Earth Quaker Action Team—PNC Bank, along with changing its mountaintop removal policy, also publicly committed to enhancing its financing due diligence to include an environmental assessment at the borrower level; considering how environmental events might impact its financing portfolio; and hiring an environmental and social risk officer to focus on these issues.
From an investor perspective these follow‐ons are critical. With coal use declining and coal operations suffering, financing of coal operations has been declining as a percent of PNC Bank’s loan portfolio over the past several years due to market forces. However, these commitments to change the way the bank is assessing and managing climate risk are much more likely to have a broader potential impact in terms of signaling to bank borrowers that climate risk is a significant business concern and worthy of careful assessment and management.
Friends Fiduciary’s investment practices, including shareholder advocacy, seek to represent broadly held Quaker values and concerns. The environment is one of those concerns. As a small organization with limited resources but significant Quaker moral force, we have focused our shareholder advocacy around this issue on two business sectors which we believe have a leveraging opportunity: banking and insurance. Both of these industries serve other businesses and as a result of their financing and underwriting policies and requirements can potentially influence thousands of other businesses.
Friends Fiduciary believes that changes like those at PNC Bank are a small but important step for the broader business world to begin transitioning to a lower carbon economy. We will continue to work with peer investors and PNC management to ensure that the public commitments are kept and that the promised changes become operational. This is part of our work on behalf of our Quaker constituent investors. We believe this patient, persistent, and strategic approach, while slow to yield results at times, will help us win the race for excellent investment returns and a better world.
At PNC Bank, Main Street activism and Wall Street advocacy seem to have worked together to win the day. Strange bedfellows? Not at all.
Web Bonus: Our author chat with Jeffery W. Perkins: