By Bartlett Naylor
Commerce pivots on money, making the financial sector a command center. Businesses that bankers fund can thrive while those they deny may falter. In turn, bankers pivot on their paychecks. When those paychecks tie to inappropriate activity, the results can be damaging for the economy and even society.
The financial crash of 2008 grew from fraudulent mortgage lending, fraudulent because bankers knew many of the mortgage packages –securitizations– were stuffed with loans the borrowers could never repay. But pay incentives all along this chain of securitization promoted the fraud. Mortgage brokers made more money with each mortgage, and more if the mortgage carried high rates (generating better fees for the mortgage broker). Those additional mortgages fed securitizations for which the bankers also reaped heavy personal fees. And bank traders made more in the merry-go-round of the market, even when the bubble burst, as some successfully bet on the downturn. As the economy lay in ruins, Wall Streeters bought yachts, (with bonus money effectively guaranteed by government bailouts).
Pay incentives lurk behind other tragedies, from mine disasters, to airplane crashes, exorbitant health care prices and more, as reviewed in a Public Citizen survey.
Humanity’s existential crisis, namely climate change, also links to pay incentives. Among the first experts to understand that carbon emissions were warming the planet through the greenhouse effect were oil company scientists. Major drillers hoped to extract oil from the Arctic, a forbidding prospect given the prevailing freeze. Their scientists’ studies, beginning in the 1970s, showed that the prospect might improve as they documented persistent warming. Only as other experts began to understand that the planetary threat from global warming, which dwarfed the benefit of shaving costs from Artic drilling, did these same companies squash the studies, and even financed a public campaign to deny, or at least question climate change science.
Why oil company executives would knowingly continue to feed (and deny) an existential crisis that would imperil themselves, their own progeny, and, needless to say, the world, may be as simple as this: they were paid to.
Since drillers began extracting oil from places such as Titusville, Pa in the mid-19th century, entrepreneurs were paid to find and sell more. Even today, major oil companies largely pay their executives based on how much more fossil fuels they locate and sell. Pay for the CEOs of the largest oil producers is now around $20 million. In 2015, for example, the CEOs of the 30 largest oil companies made nearly 10 percent more than the average S&P 500 CEO, and the heads of Exxon and ConocoPhillips made double that average. Median pay at these firms can also be substantial, nearing $200,000 at Exxon, one of the world’s largest employer in this sector. (The median means half are paid more, and half less.) Incentivized by these pay structures half of all fossil fuel infrastructure has been built since 2004, a period long after scientists had reached consensus on the severity of the threat from human-driven climate change.
Major oil executives no longer deny their contribution to climate change, at least not as fully voiced as before. Instead, they peddle false solutions and use their lobbyists to delay meaninginful action. But enlightened shareholders, including some institutional shareholders, have begun to focus on the link between how these executives face their responsibility to repair the atmosphere and how they are paid. As You Sow, for example, presses companies through shareholder resolutions to reform their pay practices. As You Sow is a non-profit shareholder activist organization.
Despite this work, this path to reform may be long. Fully 90 percent of the 30 largest oil and gas producers continue to reward their executives for increases in production and reserves.
Another path may be through bankers and their paychecks. As with other industries, Wall Street provides funding that oil and gas firms use for exploration and production. According to the Rainforest Action Network’s report “Banking on Climate Chaos,” the largest 60 banks have allocated $3.8 trillion in financing for the fossil fuel industry. Individual bankers, undoubtedly, reaped bonuses based on this massive allocation. Given the global threat, this may be, to understate, “inappropriate.”
As it happens, Congress approved the Dodd-Frank Wall Street Reform and Consumer Protection Act in the wake of the 2008 financial crisis to grapple with this very problem. The bill includes a suite of reforms aimed at bridling the structure of executive compensation that fueled that tragic market crash. One provision, namely Section 956, directs agencies that oversee banks to bar executive compensation plans that “encourages inappropriate risks.” What’s “inappropriate” can cover a host of activity, from fraudulent mortgage-making, to loans for firms bent on misconduct. Surely, funding planetary destruction is inappropriate. This is one of many tools that Dodd-Frank has given financial regulators to police dangerous risk-taking (or risk-creating) that applies to climate-related financial risk no less than other types of financial risk.
Public Citizen actively confronts the intersection between financial regulation and funding for fossil fuel companies, as do other organizations. As the world transitions to clean energy, many fossil fuel firms have struggled and failed, making loans to this sector dubious, even before considering the ways that continued fossil fuel finance exacerbates the physical harms of the climate crisis. In a step in the wrong direction, using government pandemic emergency money, the Trump administration pumped $100 billion into this sector to prop up failing firms, according to one Public Citizen report.
As it happens, an opportunity to combat the pipeline between banks and the oil industry may be available through Section 956. While Congress mandated that this important rule be finalized by May 2011, the responsible agencies have failed to deliver. The agencies proposed two weak versions during the Obama administration, and then Trump appointees ignored this mandate altogether. Now, Chair Gary Gensler of the Securities and Exchange Commission (SEC) lists it on his agency’s agenda. The SEC is also attuned to climate change issues and plans to require disclosure of climate risk, which will help expose which firms are taking long-term risks for short term profit. Ideally, this thinking will ensure that banker paychecks will be tied to appropriate risk taking. Funding the end of civilization as we know it surely does not qualify as appropriate.
Public Citizen advocates for a strong rule implementing Section 956, one that will ensure that bankers are only rewarded for appropriate risk taking. We encourage our members and the general public to submit comments when the agencies, including the SEC, proffer a proposal.