Wells Fargo: What Are The Obligations of a Financier?
Wells Fargo claims to be a leader on environmental sustainability among banks, but does it have an obligation to go farther?
When one contemplates the effect on climate change of America’s largest industries, the impact of financial services firms does not necessarily come to mind. Energy, transportation, and heavy manufacturing are the ones most often shouldering the blame, and these industries include some of the companies claiming to work the hardest to decrease their large carbon footprints. However, financial services firms are recognizing they too can help combat climate change. Wells Fargo has taken the lead within the industry, committing a substantial amount of capital and resources to the cause while garnering a tremendous amount of positive media attention. But, despite these efforts, a holistic view the company’s balance sheet tells us Wells Fargo may have a greater opportunity, if not an obligation, to further curb the human impact on Earth’s climate.
The environmental sustainability lever that Wells Fargo has the most control over is the way the company itself operates. The company set targets for sustainability in 2012 as part of its 2020 Corporate Social Responsibility Commitment has been progressing well towards those goals [1]. As of 2016, the company had utilized smart irrigation systems at its 1,400+ banking centers and corporate offices to increase its water efficiency by 52% compared to a 2008 baseline – with an ultimate goal of a 65% [2]. Wells Fargo has also reduced its greenhouse emissions by 36% (with an ultimate goal of 45%) by utilizing “greener” data centers, installing solar panels and using more efficient LED lighting. Along with the recently announced achievement of powering 100% of its 2017 global energy consumption with renewable energy [3], it’s clear Wells Fargo is making strides in developing environmental sustainability within its own organization.
Wells Fargo has also contributed in the form of providing capital to organizations promoting environmental sustainability. The company has established a grant program that funds nonprofits and universities focused on sustainability projects and innovative clean technologies [1]. The company has given more than $53 million since 2012 and plans to give another $65 million by 2020. 2015 grantees planted more than 450,000 trees, restored 15,000 acres of habitat and reduced more than 13,000 tons of carbon dioxide. Wells Fargo has also established an incubator program specifically targeting early stage technologies that “provide scalable solutions to reduce the energy impact of commercial buildings” [4]. It plans to provide $10 million to the program over the next 5 years.
The company’s main business, though, is providing large-scale financing to for-profit companies, and Wells Fargo has deployed a substantial amount of capital in environmental loans and investments. Since 2012, the company has invested and financed over $70 billion in renewable energy, clean technology, green buildings and sustainable agriculture and in 2016, projects wholly or partly owned by Wells Fargo represented 8.1% of the solar and wind energy produced in the U.S. [5]. The company has also financed an additional $5 billion in affordable green housing as well as $1 billion in green municipal bonds. Wells Capital Management, a subsidiary of Wells Fargo, is a signatory of the United Nations Principles for Responsible Investment, which it claims represents the company’s commitment to “integrating environmental…issues into its investment practice” [6].
However, some customers believe the idea of being a “responsible” capital provider has not permeated the entire organization. In February 2017, the city of Seattle pulled its $3 billion account from the bank in protest of Wells Fargo’s financing of the Dakota Access Pipeline, a 1,170-mile oil pipeline stretching from North Dakota to Illinois [7]. This decision directly followed an announcement by the U.S. Army Corps of Engineers that allowed the pipeline to go forward without an environmental impact study [8]. The California cities of Santa Monica and Davis quickly followed suit, pulling their own $1 billion and $124 million accounts [9]. Citizens who addressed the council before and after the vote urged the councilmembers to “establish social and environmental criteria to guide the selection of a new bank” and it was clear that the market was pushing back on Wells Fargo’s participation in the controversial pipeline [10].
These cities’ divestments of business relationships with Wells Fargo were not solely motivated by the environmental impact, but their actions bring forth an important question: to what extent are financing institutions obligated to limit or cease lending to potentially non-environmentally sustainable projects and companies? As a lending institution, Wells Fargo is directly enabling companies to operate and grow, and these companies include those that contribute directly to CO2 emissions such as Canadian Tar Sands oil extractors, coal miners and liquefied natural gas exporters [11]. Where do we draw the line on what a bank should and shouldn’t be financing when it comes to environmental sustainability?
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- Wells Fargo & Company Corporate Social Responsibility Report 2015 https://www08.wellsfargomedia.com/assets/pdf/about/corporate-responsibility/2015-social-responsibility-report.pdf. Accessed November 2017.
- Wells Fargo & Company Corporate Social Responsibility Interim Report 2016. https://www08.wellsfargomedia.com/assets/pdf/about/corporate-responsibility/2016-social-responsibility-interim.pdf. Accessed November 2017.
- “Wells Fargo Global Operations Now Powered by 100 Percent Renewable Energy”. BusinessWire. http://www.businesswire.com/news/home/20171108005614/en/Wells-Fargo-Global-Operations-Powered-100-Percent. Accessed November 2017.
- http://in2.wf.com/home.html
- “2016 Highlights – Environmental Sustainability.” https://www.wellsfargo.com/about/corporate-responsibility/environment/. Accessed November 2017.
- “Wells Capital Management Becomes a UNPRI Signatory”. Press Release, April 22, 2015. https://wellscap.com/pdf/news/news_042215.pdf. Accessed November 2017.
- William Yardley, “Seattle becomes the first city to sever ties with Wells Fargo in protest of Dakota Access pipeline”, Los Angeles Times. February 7, 2017. http://www.latimes.com/nation/la-na-seattle-divests-from-wells-fargo-20170206-story.html. Accessed November 2017.
- Matt Egan, “Seattle to cut ties with Wells Fargo over Dakota Access pipeline”, CNN. February 8, 2017. http://money.cnn.com/2017/02/08/investing/seattle-wells-fargo-dakota-access-pipeline/index.html. Accessed November 2017.
- Kate Cagle, James MacPherson and Blake Nicholson. “Wells Fargo: Santa Monica divestment will not effect on Dakota Access Pipeline”. Santa Monica Daily Press. February 27, 2017. http://smdp.com/wells-fargo-santa-monica-divestment-will-not-effect-on-dakota-access-pipeline/159933. Accessed November 2017.
- Cathy Locke. “Davis to sever ties with Wells Fargo over Dakota pipeline, banking practices”. The Sacramento Bee. February 8, 2017. http://www.sacbee.com/news/business/article131411524.html. Accessed November 2017.
- “Fossil Fuel Finance Report Card.” Rain Forest Action Network. https://d3n8a8pro7vhmx.cloudfront.net/rainforestactionnetwork/pages/17788/attachments/original/1504737269/RAN_Banking_On_Climate_Change_2017_final.pdf?1504737269. Accessed November 2017.
You raise an interesting question about the role of banks in promoting sustainable development. As the growth engine for the economy, they are the key enablers for the success or failure of a lot of businesses. To your point, should they be using that power to drive change? While I think the fact that they should be investing in renewable projects is clear, for me, the question about whether they should be powering traditional CO2 emitting companies comes down to whether the bank is financing responsible energy projects. In the short term, we will need a mix of energy resources and we will need to finance projects to produce cleaner (though not carbon neutral) energy sources like natural gas. As an investor, Wells Fargo should be doing due diligence to understand if this project is being managed responsibly and in the most environmentally and culturally friendly way possible. If there are glaring red flags (like there were with the Dakota Access Pipeline), they should not invest. On the flip side, if a company is looking to build a new natural gas pipeline to change a power plant from coal power to natural gas power, and the company has worked through an environmental assessment of the pipeline, I think that’s a responsible project for Wells Fargo to finance.
Looking at Wells Fargo’s track record in Energy finance, however, I would argue that they in particular need to take a careful look at how their evaluating their energy deals. Rather than take the careful, disciplined approach I outlined above, it appears that they were actually very bullish on energy over the last few years (https://www.reuters.com/article/us-wells-fargo-energy/wells-fargo-energy-investment-unit-sought-risky-deals-faces-losses-idUSKCN0XA09K). This, combined with their financing of the Dakota Access Pipeline despite red flags, suggests to me that they don’t have careful vetting systems in place and did not properly understand the industry. If they really are serious about impacting climate change with their investing choices, they will need to put in more controls that not only price the risk of the energy market correctly, but also take into account factors like environmental impact, cultural impact and net carbon impact. They might also reallocate some of the 400 petroleum engineers they hired to sustainable investing.
When looking at the role of financial institutions in combating climate change, I agree that Wells Fargo and other firms could certainly be doing more. Based on your review of Wells Fargo, the initiatives do seem cursory and shallow instead of embedded in the company’s core philosophy. I’d like to see more disciplined investing in companies with core sustainability initiatives and active divesting from fossil fuels, etc.
However, I’m hesitant to say Wells Fargo can do this alone. If the company takes a hard line of refusing to invest in non-sustainable companies, Wells Fargo risks missing out on investment opportunities that other firms would gladly fund. As a supplier of capital, Wells Fargo on its own cannot force a shift in how users of capital impact the environment; the user would simply look to a different supplier for capital. I believe financial institutions have a responsibility to affect climate change through their investments, but they need to be unified in their actions in order to see any change in the market.
This was an interesting look at how climate change is impacting the operations of the financial services industry and market makers more generally – thank you for sharing. Please see below for my responses and observations:
– Interestingly, in this context the motivating factor in addressing global climate change is not, in fact, avoiding the negative consequences of global warming, but instead avoiding negative PR (or, in this case, seeking positive PR – potentially to counter-balance the negative PR surrounding WF’s retail banking operations). Consequences of global climate change have been publicized for years by the scientific community and by the media, yet the public (including private citizens and corporations) still largely ignores them. If we view the threat of reputational risk as a more imminent and tangible threat to corporations such as WF, this could be an important lever to pull in order to convince more corporations to commit to more sustainable operations. This will carry a network effect: as more corporations sign on, the ones that do not will eventually be penalized for not actively fighting climate change. Though the means are levered upon corporate selfishness, they may justify the end-goal of stigmatizing those who do not actively fight climate change.
– To address your question directly, I personally do not think it would be fair to require financial institutions to step away from funding potentially environmentally un-friendly endeavors. The reason is simple: where could we draw the line? Even for Dakota Access, an argument could be made that the pipeline was creating jobs, that the energy company which owned the pipeline was spending money as part of its own Corporate Responsibility Program to support the communities in which it operates, and that the pipeline itself was providing a value-additive service for many oil and gas companies whose hydrocarbons had no other viable ways to market (and, at a lower cost than the alternative which was rail – ironically, rail is much more dangerous than pipelines are and can be equally as dangerous for the environment). I mention these things because every story has two sides, and it would be very difficult to draw some sort of objective line between “good” and “bad” investments. Another example: couldn’t we make an argument that a grand majority of WF’s investments – or any corporation, for that matter – could be deemed “environmentally unfriendly”? Consider a manufacturing company, or a company that hasn’t invested in “clean” office operations. These companies are contributing to the carbon footprint – should WF be barred from investing in them, too? Furthermore, even if the larger financial institutions were barred from investing in such projects, they would most likely just be able to find capital elsewhere if the economics justified it (assuming an efficient market) – negating the point of imposing restrictions on WF in the first place.
The question you pose “to what extent are financing institutions obligated to limit or cease lending to potentially non-environmentally sustainable projects and companies,” is a difficult one to answer and very much dependent on the economic climate. Today, it’d likely be difficult for Wells Fargo to have any marked impact in constraining the flow of capital to positive NPV projects that aren’t environmentally friendly. However a capital constrained economy would provide the opportunity for Wells Fargo to offer lower interest rates to projects that are aligned with their environmental objectives.
I have concerns about the “cease lending” portion of the question. In the event that Wells Fargo were to pull funding from clients with no material change in the business they initially agreed to lend to, the PR impact could have a devastating effect long-term.