The Dakota Access Pipeline: How CalPERS is engaging on the contentious project (Part 1)

“ETP is in violation of every one of our governance principles and investment beliefs, they probably hate puppies and kittens too, as far as I know, how far off our investment principles does a company have to be for us to consider divesting?” asked CalPERS board member Ron Lind.

This was in response to a presentation from Anne Simpson, CalPERS’ Investment Director, Sustainable Investment Program. She was presenting the fund’s joint engagement programme, involving more than 120 investors with over $653bn in assets, on the Dakota Access Pipeline (DAPL).

“We’ve had engagement,” she said, “with the banks who are financing the pipeline, we’ve had engagement with the master limited partnership [Energy Transfer Partners – ETP] we’ve had engagement with the Standing Rock Sioux tribe, we’ve had engagement with AFL–CIO and the Laborers Union, but because of the way the master limited partnership is constructed we do not have any voting rights so we cannot pursue our engagement in the normal way.”

Simpson added that: “Citigroup and the TD Bank have commissioned a special independent report to investigate how their commitment to the Equator Principles was considered in the investment decision-making process.”

She and her team had discovered that 13 of the 17 banks financing DAPL were signatories to the Equator Principles which, had they been adhered to, would effectively bar the banks from providing financing to ETP.

The Standing Rock Sioux Tribe also made a special trip to the Council of Institutional Investors (CII) and International Corporate Governance Network (ICGN) conferences to meet investors.

Simpson spoke to RI on the DAPL controversy, but before we turn to that, let’s turn to DAPL itself and try to understand how the situation got to this pitch.

In response to several lawsuits, from not just a group of Sioux tribes but also Iowan farmers seeking to prevent their land being taken from them via the rule of ‘eminent domain’, in November last year then-President Obama announced that his administration was monitoring the situation.

Later in the month, the US Army Corps of Engineers (USACE) announced that “the Army has determined that additional discussion and analysis are warranted in light of the history of the Great Sioux Nation’s dispossessions of lands, the importance of Lake Oahe to the Tribe, our government-to-government relationship, and the statute governing easements through government property.”

Energy Transfer Partners responded by criticizing the Obama administration for “political interference”. But the stay was expected to be of short duration: speaking to CBS News in November, ETP CEO Kelcy Warren claimed that it would be “100% that the easement gets granted and the pipeline gets built” when Donald Trump came into office.

In early December last year, the USACE announced that it would not grant an easement for the pipeline to be drilled under Lake Oahe and instead would undertake an environmental impact statement to look at possible alternative routes. On 18 January this year, the USACE filed its formal Notice of Intent to conduct the Environmental Impact Statement process, with a 30-day comment period.

The process would examine: alternative locations for the pipeline crossing the Missouri River, direct and indirect risks and impacts of an oil spill into the lake and the Standing Rock Sioux’s “water, treaty fishing, and hunting rights”, as well as their treaty rights to the lake, and impacts on sacred sites, some of which had already been disturbed by the pipeline’s construction.None of this was without protest from ETP. However, just a few days later, on 24 January, Trump signed an executive order to advance the construction of the pipeline under “terms and conditions to be negotiated”. The order was intended to speed up the environmental review that Trump described as an “incredibly cumbersome, long, horrible permitting process”. This was his second weekday in office. “I believe that construction and operation of lawfully permitted pipeline infrastructure serve the national interest,” Trump wrote in the memo accompanying the executive order.

Two days before the Trump administration approved the easement for DAPL to cross a reservoir near the tribal reservation, the US Department of the Interior withdrew a legal opinion that concluded there was “ample legal justification” to deny the easement. This was revealed in court documents filed in February by USACE.

In an interview with the Washington Post, Keith Benes, a former State Department lawyer who helped oversee pipeline permitting decisions under the Obama administration, said that opponents of DAPL “could mount a strong legal challenge because the only justification the Army gave for terminating its environmental review was the President’s Jan. 24 directive.”

The comment period was due to close on 20 February. “Supreme Court precedent is really clear that agencies can change their minds about policies, but they need to provide a reason,” Benes said.

“The president telling you to change your mind is not enough of a justification for changing your factual finding.”

That executive order is now embroiled in a whole new series of lawsuits.
With this in mind, CalPERS and virtually every activist and SRI investor in North America, as well as virtually the whole of ICCR and Canadian funds like Bâtirente, and funds from Europe, sent a statement to the banks financing the deal.
These are: Bank of Tokyo-Mitsubishi UFJ, BayernLB, BancoBilbao Vizcaya Argentaria, BNP Paribas, Citibank, Crédit Agricole, Industrial and Commercial Bank of China, ING, Intesa Sanpaolo, Mizuho Bank, Natixis, Société Générale, Sumitomo Mitsui Financial Group, SunTrust Bank, TD Securities, and Wells Fargo [ING has since announced the sale of its loan to the DAPL.]

The statement seeks “to protect the banks’ reputation and consumer base and to avoid legal liabilities. As investors, we are very concerned by the reputational and potential financial risks due to these banks being associated with DAPL.” The statement also notes that “there have been serious and credible allegations of irregularities regarding the environmental review for DAPL. We understand a number of the banks listed above,” it continues, “have commissioned a report by Foley Hoag on the adequacy of the consultation process followed by Energy Transfer Partners, the lead project developer.”

The signatories are concerned over the: “escalation of conflict and unrest as well as possible contamination of the water supply. North Dakota state and local governments have spent over $22 million on law enforcement costs since August 2016,” it notes.

There has been significant protest already, bank accounts worth over $53 million have been pulled from the banks and other customers are threatening to pull another $2.3 billion. ABN AMRO announced that it would discontinue its lending relationship to ETP in the absence of “an acceptable non-violent solution”.

The banks have also come under pressure, according to the Financial Times, from Seattle City Council and Bill de Blasio, the mayor of New York City. But the pension funds themselves have also come in for criticism, including demands to divest from ETP from the California legislature. Ownership and engagement, however, are ongoing, as we shall see from Simpson’s interview which we will run tomorrow.