The Economist - USA (2020-11-21)

The EconomistNovember 21st 2020 Finance & economics 67

2 offa cliff.Householdsweresentcheques
for$1,200,unemploymentbenefitswere
mademoregenerousandtheFedbought
government debtwith newmoney. The
stockofmzmshotupbymorethan20%be-
tweenMarchandJune.
Theglutofdollarscouldcreatea newset
of difficulties once thepandemic ends.
Households,flushwithcash,couldgoona
spendingspree.Asconsumerdemandre-
covers,moremoneywillstarttochange
hands and inflation will start to rise.

Thoughshoringuppricesispartlywhythe

Fedisbuyingassetsinthefirstplace,some

economistsworrythatthesituationcould

quicklyspiraloutofitscontrol,ifhouse-

holdsalltrytospendtheirmoneyatonce.

MichaelBordoofRutgersUniversitypre-

dicts“agreaterriskofinflationgettingout

ofcontrolthantheFediswillingevento

contemplate”.Ifthevelocityofmoneyre-

boundspost-pandemic, placing aspeed

limitonitmayprovetobeastroublesome

asjump-startingit. 7

K

athleen o’donnellis a 23-year-old

Australian law student whose holdings

of her government’s bonds mature in 2050,

by which date carbon emissions may well

have pushed global warming past the 1.5°C

goal enshrined in the unParis agreement.

In July Ms O’Donnell filed a court case

against the Australian government for fail-

ing to disclose climate-change risks to in-

vestors. In 2018 Mark McVeigh, another

young Australian, sued his pension fund,

the Retail Employees Superannuation

Trust (Rest), for allegedly failing to ade-

quately manage the risks that climate

change poses to its investments.

The fact that Mr McVeigh and Ms O’Don-

nell are both Australian may reflect their

government’s laggardly approach to cli-

mate change. But their court cases are also

part of a growing willingness among green

investors to see legal action as an alterna-

tive to divestment. “Unless the corporate

sector switches quickly to meet investor

expectations, I think we are inevitably go-

ing to see increasing shareholder litiga-

tion,” says Peter Barnett, a lawyer with

ClientEarth, an ngo.

The approach can yield results. On No-

vember 2nd, with Mr McVeigh’s case due

back in court that day, Rest, which man-

ages assets worth A$57bn ($42bn), agreed

to settle, stating that “climate change is a

material, direct and current financial risk”

to the pension fund and committing itself

to identifying and managing the risks. It

now aims to shrink its carbon footprint to

net zero by 2050. (Ms O’Donnell’s case is

still being heard.)

In some ways, litigation is the logical

next step as investors become more en-

gaged. The number of shareholder resolu-

tions seeking to shift companies’ policies

on climate change is rising, including

through initiatives like Climate Action

100+, a group of 518 investors with more

than $47trn in assets. ShareAction, a chari-

ty, counts 11 shareholder resolutions citing

climate change filed in Europe in 2020, up

from five in 2015.

If resolutions fail, shareholders can di-

vest, or they can choose to sue. In 2018 a

group of 95 asset managers overseeing

$11.5trn called on rich-world utilities to

draw up decarbonisation plans that are

consistent with the Paris goals and elimi-

nate coal power by 2030. “If necessary, we

will deploy all the tools available to us as

shareholders to require laggards to do so,”

they wrote in the Financial Times. To Mr

Barnett, that implies a willingness to liti-

gate. ap7, a Swedish pension fund, lists ini-

tiating “legal processes” against compa-

nies as one of its tools to promote

sustainable asset management.

So far, most lawsuits have centred on fi-

duciary duty to disclose climate risk.

Shareholders have sued the Common-

wealth Bank of Australia for failing to dis-

close them, including risks related to pos-

sible investment in a coal mine (the

lawsuit was dropped when the bank pub-

lished an annual report acknowledging the

risk). In America ExxonMobil, an oil major,

has been beset by class-action and share-

holder lawsuits alleging that the company

has misled investors on climate risks. So

far, none has been successful.

In some more recent cases, the focus

has shifted from disclosure to demanding

strategies to reduce risk. Mr McVeigh’s case

alleged that Rest was failing to address the

risks posed by climate change. Ms O’Don-

nell’s case is being watched for a different

kind of outcome. If she wins, the Austra-

lian government, which has done much to

support the coal industry and little to limit

national emissions, may have to issue a

public statement about the financial risks

posed by climate change. A backlash

against dirty bonds is already hurting some

of Australia’s regional governments. Last

year Sweden’s central bank said that it

would not invest in the assets of dirty issu-

ers, and promptly sold bonds issued by

Queensland and Western Australia.

Occasionally shareholder litigation can

lower emissions directly. In 2018 Client-

Earth bought €30-worth ($36) of shares in

Enea, a Polish power company, and later

sued over the firm’s plan to build Ostroleka

C, dubbed “the last coal unit ever to be built

in Poland”. The ngoargued that the decar-

bonisation of the energy sector would

make Ostroleka C an unprofitable stranded

asset, creating an “indefensible” financial

risk. The Polish courts ruled in Client-

Earth’s favour last year, and the project has

been abandoned—a powerful precedent. 7

Investors seeking action on climate change turn to the courts

Shareholder litigation

Setting precedents

Drought down under