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Investors Urge Kinder Morgan to Accept Climate Change Realities
By Holly Testa, Director, Shareowner Engagement

For the second year in a row, Kinder Morgan, which describes itself as “the largest energy infrastructure company in North America,” was faced with environmentally-focused shareholder resolutions at their Annual General Meeting ("AGM"):

  • First Affirmative asked for a report analyzing if and how the company’s capital expenditure strategies are consistent with the commitment made in 2010 by 196 United Nations member governments to reduce emissions so that global temperature increases are limited to below 2 degrees Celsius.
  • Miller Howard asked for a report on methane emissions.
  • New York State asked for a sustainability report to provide shareholders with material information on the company’s performance with regard to environmental, social, and governance (“ESG”) issues.

Kinder Morgan 4Each of the resolutions garnered over 20% support respectively from investors. If insider shares (defined as directors, senior officers, and any owner with more than 10% of the company’s voting shares) are excluded, the support level for each of these proxy resolutions exceeded 30%. While the resolutions did not pass, this level of support can often lead to companies entering into dialogue with investors, which can subsequently lead to positive action. So far, this has not been the case with Kinder Morgan.

The Energy Tollroad to Nowhere

Kinder Morgan describes its business model as a "giant tollroad." A third of U.S. natural gas travels through its pipes; it is also the largest transporter of carbon dioxide, and the largest carrier of petroleum products outside of the oil companies.
Betting heavily on the continued dominance of the fossil fuel economy, Kinder Morgan plans to spend over $18 billion in expansion and joint venture investments, including $5.4 billion towards the Trans Mountain Pipeline Expansion. Given increasing concern about fossil fuels and their role in climate change, these aggressive spending plans compelled First Affirmative to ask the following questions:

  • How is the company evaluating the risks to its expansion plans in a world where fossil fuel use is on the decline?
  • Will the planned expanded tollroad even be needed in a world increasingly powered by renewable energy sources?
  • What might be the consequences if these projects go ahead, but the infrastructure is not used to capacity?

Canadians Speak Out: No to Trans Mountain Pipeline Expansion

Investors are not the only contingent concerned about Kinder Morgan’s capital expenditure plans. Communities across Canada are standing up and saying “No” to the Trans Mountain Pipeline Expansion, a project designed to triple the capacity of the current pipeline system to move oil sands crude, arguably the dirtiest fossil fuel on the planet, to the West Coast of Canada for export.

By way of background, oil sands are deposits of bitumen—oil that is too heavy or thick to flow or be pumped without first being diluted or heated. The extraction process is energy and water intensive and destroys large swaths of boreal forest; and oil sands are far more carbon intensive when burned than standard crude oil.
More than 100 Canadian and American scientists—a group that includes one Nobel Laureate and five Canadian scientists who have been awarded Canada’s highest honors—recently called for an immediate moratorium on oil sands development. One member of the group, Thomas Fisk, Professor of Environmental Science at Northern Arizona University has said that oil sands should be one of the first fuels we discontinue developing because of its carbon intensity.

The increasingly vocal and organized opposition includes educational establishments, municipalities, and local First Nations tribes, whose research indicates that the pipeline expansion costs, and risks, far outweigh the benefits. For example:

  • A lifecycle study conducted by Simon Fraser University estimates that the pipeline would cost Canadians more than $6.4 billion in its first 30 years of operation. This estimate is in stark contrast to Kinder Morgan’s contention that this project, designed to triple the capacity of the existing pipeline, will provide $45 billion in increased revenues to producers over 20 years and $14.7 billion in additional revenue for government.
  • A report commissioned by the City of Vancouver concluded that a major spill from the Trans Mountain Pipeline Expansion project would expose up to one million Metro Vancouver residents to unsafe levels of toxic vapors and cause up to $3 billion in damage to Vancouver's international brand, now considered to be worth upwards of $31 billion.
  • The Tseil-Waututh (People of the Inlet) nation rejected the pipeline expansion after reviewing six expert reports on the impact. The nation has also filed a legal challenge of the Canadian National Energy Board’s review of the pipeline and tanker project. According to Chief Maureen Thomas, "Our nation has self-government authority to review and make decisions that affect our territory according to our own Law. Canada’s own environmental assessment laws confirm this jurisdiction, and the government’s failure to consult and cooperate with us as Governments has landed them in court. We are enforcing our own laws. We are enforcing Canadian environmental law."

Head in the [Oil] Sands

Kinder Morgan is currently proceeding as if approval of the pipeline is a foregone conclusion. CEO Richard Kinder was quoted as “astounded” at the opposition lining up, stating that opponents are using a “spurious argument” that fossil fuel use must be slowed down. He does “…not know what the hell they are going to replace [oil sands] with.”
Granted, Kinder Morgan’s raison d’être is serving the fossil fuel industry. However, while the replacements for oil sands may not be clear, the concept of transitioning away from fossil fuels can no longer be dismissed as magical thinking. As countries and companies identify and implement more sustainable fuels, many companies, including Kinder Morgan, will need to adapt in order to survive in a low carbon future.

Not Your Average Shareholder Meeting

Corporate annual meetings are generally uneventful, even boring. They can be highly orchestrated and often no shareholders are present, with the exception of company insiders. The agenda usually covers approving auditors and rubberstamping a slated of board of directors. Sometimes, however, the unfolding of the plot is a bit more exciting.

In this case, communities impacted directly by Kinder Morgan’s proposals joined concerned investors to make their voices heard. One of First Affirmative’s clients authorized Rueben George, a leader from the Tsleil-Wathuth nation, to represent her company shares at the annual meeting. Mr. George delivered the following message to the CEO: "I am here to let you know that the Tsleil-Waututh will never consent to the Trans Mountain project, because it will destroy our culture, our way of life and our spirituality. We are not alone and we have the legal tools to stop it."

Lisa Lindsley, from Sum of Us, an advocacy group organizing opposition to the pipeline expansion, was also present to deliver a 700 page, 60,000 signature opposition petition. Prior to the meeting, the Sum of Us joined with the Tsleil-Waututh to meet with some of the largest shareholders of Kinder Morgan, including Vanguard and Goldman Sachs, to express support for the shareholder resolutions, and to make their stance clear to these investors.

While Kinder Morgan heard the presentations from George and Lindsley, the content was clearly unwelcome; in fact, they were both escorted from the room afterwards.

What’s Next?

Kinder Morgan and the fossil fuel producers they serve will no doubt continue to be scrutinized closely as the environmental and financial consequences of a fossil fuel powered economy become ever more apparent. As the consequences for failing to manage and mitigate climate change risk increase, so too do the opportunities for divestment and reinvestment into energy companies whose innovations do not rely on fossil fuels. Kinder Morgan’s failure to act is a risk to the company’s long-term success.

As First Affirmative meets with our advocacy partners over the summer, strategies for continued engagement will certainly be on the agenda.

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: July 2, 2015