Impact Investing and the Dakota Access Pipeline
By Laura Isanuk
The Dakota Access Pipeline (DAPL) is a textbook example of environmental injustice within the United States. The treatment of sovereign Native American nations by the U.S. government has rarely been admirable over the past 200 years, but DAPL has sparked the interest of a broad swath of Americans interested in social justice and attracted thousands of people from around the country to stand defiantly in protest with the Standing Rock Sioux.
Fortunately, on December 4, 2016, the Department of the Army paused construction of the pipeline with a commitment to develop an Environmental Impact Statement "with full public input and analysis" and explore alternate routes for crossing Lake Oahe, an Army Corps of Engineers project on the Missouri River.
The Army Corp of Engineers and the Obama Administration Implement Consultation Clauses
In 2000, President Clinton signed Executive Order 13175 that required all Federal agencies to have a strategy for including native voices in regulatory decisions that would impact them. Flash forward to 2009, where President Obama signed a memorandum reaffirming this Order, leading to an official guide by the Army Corp of Engineers in 2012. The Corps laid down guidelines for government-to-government consultations when it comes to land management. There is an important emphasis on the role of the treaties that requires land management decisions be viewed through the lens of when the tribe signed the effective treaty.
In the case of DAPL, the guidelines were very clearly not upheld. The proposed 1,172 mile, 30-inch diameter pipe would connect the oil producing regions of North Dakota to Illinois. Mark Trahant, an independent journalist and a Journalism faculty member at the University of North Dakota has observed through his coverage that there was a gross misrepresentation by Energy Transfer Partners (ETP), the company building the pipeline. In fact, ETP did not even mention the tribe in their plan for DAPL.
During a tribal meeting in 2014, the Standing Rock Sioux voiced their opposition to the pipeline, noting that the pipeline defies treaty boundaries. The tribe expressed a desire to be consulted in aggregate on the project.
While the bulk of the pipeline was being built, ETP only notified the tribe of its progress rather than consulting with them. As a result, the Standing Rock Sioux decided to forgo participation in hearings ETP held to vet public opposition to the pipeline. ETP only tried to re-engage with the tribe in the conversation at the eleventh-hour – as the final permit was being sought to run the pipeline under the river.
Comments from the Chairman of the Tribe
Chairman Dave Archambault II of the Standing Rock Sioux Tribe spoke on a recent call with advocacy experts from the SRI community. He mentioned his pleasure with the Army Corp of Engineers refusal to grant the final DAPL permit.
By the Army's own guidelines, the pre-consultation requirement was not met. Archambault spoke of his frustration that ETP has no Corporate Social Responsibility department, no community relations procedures, and no human rights policies. This being the reality of the situation, one could have predicted that the company would try to push the pipeline through, in spite of any public opposition.
Archambault also talked about the travesties that the peaceful DAPL protestors experience in September-November, 2016 – from guard dogs with unlicensed and even untrained handlers, to the spraying of water on protesters in below-freezing temperatures. Utilizing such horrific tactics essentially forced conflict between law enforcement and protestors.
The Funding History
When looking at the motivations behind the push for constructing the Dakota Access Pipeline, it is worthwhile to look at the economic climate facing the oil industry over the past few years.
When the pipeline was first being planned, oil was $100/barrel. In recent months, the price of oil has had a tough time going above $60/barrel, even with OPEC's recent restrictions. The top three oil producers in the Bakken region of North Dakota have had credit downgrades. Clark Williams-Derry, Director of Energy Finance at the Sightline Institute and co-author of The High Risk Financing Behind the Dakota Access Pipeline predicts that "we will continue to see financial stress in this region for oil producers."
Oil production in Bakken region of North Dakota peaked in late 2014. Since then it has fallen 20% and continues to drop 1-2% each month. The rig count has also fallen dramatically, from 200 at the 2014 peak to just 40 today. Considering the fact that the productivity of a single Bakken oil well drops 50% in the first year, on average, oil drillers in the Bakken region "must drill relentlessly."
Backlash to Investors
With the construction delay, pipeline investors have cause to avoid or restructure their agreements. The original contractual deadline had oil from the Bakken region arriving in Illinois beginning in January 1, 2017. If prices stay low and production stays low, shippers are likely to be interested in re-negotiating contracts.
Due to elevated public awareness of the conditions on the ground at the Standing Rock encampments, banks financing the project are facing escalating reputational risk. How much are they able to mitigate/manage this risk? It depends on the contract. Many of the banks have already dispersed funds, which means that there is little they can do… However, that has not interrupted divestment campaigns, boycotts, and protests. It may be that many of these banks believe it is a bigger headache than it is worth, but they are legally obligated in confidential contracts.
An interesting hypocrisy for many of the banks backing the pipeline is that they are signers to the Equator Principles. An analysis by Sustainalytics of companies complying with the Principles found ETP at the very bottom of the list. For some investment analysts this shows serious gaps in the due diligence process of the banks involved.
What Now? The SRI Communities' Involvement in DAPL
With 39% of current oil production taking place on indigenous land, and 46% of preserves on or near indigenous land, sovereign rights is likely to become a bigger issue in the future.
DAPL offers all businesses an opportunity to learn how to be more inclusive and to listen to sovereign nations. DAPL proves that there can be real and material risk behind the "S" in ESG (Environmental, Social, Governance) factor analysis – namely, people affected by a project like this.
Any decision to reroute DAPL will require consultation and agreement with the affected tribes. This process could take months, even years. The timeframe will depend on the requirement for an environmental impact assessment. The assessment will require public hearings to include local government and tribal government. Even if the new administration in Washington, DC wants to move quickly to complete the project, it's now legally very difficult to do so.
What First Affirmative Has Done to Take a Stand
The November 2016 SRI Conference on Sustainable, Responsible, Impact Investing, an industry conference hosted by First Affirmative, included a standing-room-only strategy session called "Dakota Access Pipeline and the Future of Native Sovereignty in the U.S." Investors and other stakeholders discussed the risks related to DAPL and actions investors could take to support the Standing Rock Sioux Tribe. You can learn more about this conversation, and other steps activists have taken in our blog about the session here.
First Affirmative has also co-filed resolutions at Morgan Stanley and Goldman Sachs that address the financing of DAPL and similar projects on indigenous people's territories. We are asking Morgan Stanley to issue a report that assesses how its existing indigenous rights policy, which currently guides project financing, could be extended to the direct financing of other companies involved in projects on indigenous peoples territories.
We are asking Goldman Sachs to describe its financing of companies involved in the project and explain whether their existing indigenous rights policy was applied to the financing of these companies. The proxy resolution filed with Goldman also requests that the report includes options to improve implementation of its indigenous rights policy.
Boston Common Asset Management is leading a letter-writing campaign focused on banks and collaborating with First Peoples asking oil producers to refrain from using the pipeline until issues with the Standing Rock Sioux are resolved. First Affirmative will sign on to these letters.
Chairman Archambault explained that the tribe is "not opposed to energy independence, economic development, or national security concerns." He has reminded us that Native Americans "were the first people here. We know what is sacred and what is meaningful for us. This is not about money; it's about people."
First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?
NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.
Posted: December 30, 2016