All eyes on brown spinning: do banks have a net zero duty to act?

Executives and shareholders of the Royal Bank of Canada (RBC) will gather tomorrow in the Canadian province of Saskatchewan for the company’s annual general meeting. 

On the agenda: a climate-related shareholder proposal focused on so-called 'brown spinning', a term that reflects investors’ concerns over publicly owned companies selling carbon-intensive assets to their less regulated, private counterparts.

The proposal highlights the lack of investor confidence in divestment as a corporate climate-risk management strategy. Investors do not want corporates to simply sell their carbon-intensive assets. Individual companies on the other hand have been hesitant to take on a more systemic level approach.

As a facilitator of such transactions, banks such as RBC have skin in the game. Their exposure has become ground zero for a new chapter in institutional investor engagement.

'Brown spinning' concerns

The proposal was filed by B.C. General Employees’ Union (BCGUE), a trade union with 85,000 members and an associated pension fund. The union's central claim is that when public companies sell their carbon-intensive assets to private companies, the assets go dark. Private companies face lower regulatory burdens regarding emissions disclosure in most jurisdictions.

“Certain issuers have sold polluting assets or are contemplating doing so. When these polluting assets are sold to private enterprises, investors are concerned about the lack of disclosure that results”, the proposal reads.

The motion draws much attention to the term 'brown spinning', which entered the debate through a research paper in March 2022. In it, experts from the European Corporate Governance Institute outlined the lack of emissions-related “disciplining mechanisms” in private markets. Institutional investor engagement and regulatory compliance, for example, tend to be constrained.

All this implies that when carbon-intensive assets change hands from public firms to private ones, investors are concerned that the systemic effect on emissions is minimal.

RBC’s exposure

One approach to solving the brown spinning problem is to push for disclosure rules in private markets. 

However, that fight has hitherto been characterized by legal and political roadblocks. The US Security and Exchange Commission’s attempt at indirectly increasing private market transparency is a prime example.

Instead, investors have shifted their focus to financial services companies who finance and facilitate such transactions. 

In the proposal, BCGUE recommends that “when RBC plays an M&A advisory or direct lending role on brown-spinning transactions, RBC will take reasonable steps to have parties to such transactions takes steps and make disclosures."

In effect, this would mean leveraging its position as a lender to incentivise private market transparency.

This goes beyond the company’s existing policy on what it calls 'sensitive sectors'. 

RBC’s existing approach, which includes a reduction in financing fcoal power projects, has been criticised for its weak commitments. Advocacy group Reclaim Finance has stated that the policy is “extremely far from doing what is needed."

'Not our job, not our place'

On its part, the RBC board has urged shareholders to vote against the resolution. The board’s counter argument is that “it is the role of those who have direct influence or control over the asset to encourage the actions that would support decarbonization of the economy and progress towards net zero by 2050."

In other words, controlling brown spinning is not RBC’s problem.

Secondly, the board suggests that private market disclosures are for governments and regulators to act on. “The bank does not believe that the financial industry is positioned to regulate board governance matters or bridge the disclosure gap between public and private entities”, the board says.

How shareholders vote on the proposal come Wednesday, will set a vital precedent. It will determine the extent to which investors believe the financial sector, in addition to regulators, can control brown spinning.

The question to be asked in Saskatchewan– “does the one who finances the transaction, have the ability to discipline?”, will have an audience far beyond.

The vote is expected to take place tomorrow late afternoon GMT.