By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
Shareholder proposals that require companies to disclose specific climate change risks will increase during this proxy season, especially for non-energy companies, according to this report from last week’s Wall Street Journal, More Shareholder Proposals Spotlight Climate Change.
As the Trump administration has backed away from extending even the modest efforts on climate change initiated by his predecessor– let alone initiating any policy even remotely adequate toward confronting the magnitude of the problem– three types of efforts loom larger. First, are those by other countries to move away from fossil fuels, toward renewable sources of energy. These are not limited to developed countries, but as I wrote here, now also include China and India, the world’s two most populous countries, each of which is attempting to curtail use of fossil fuels. admittedly often motivated by the price drop for renewable alternatives. Second, US states and localities are promoting their own climate change initiatives. And finally private efforts to force greater awareness and accountability concerning climate change risk are also coming to the fore, as discussed in last week’s Journal piece:
Investors in the U.S. so far submitted 66 resolutions about climate change in the 2018 proxy season, according to ISS Corporate Solutions, a consultancy unit of Institutional Shareholder Services.
Of that total, 17 are seeking risk assessments based on the 2-degree scenario embedded in the U.N.’s Paris Agreement, which aims to limit the average rise in temperatures to below 2-degrees Celsius of pre-industrial levels. There were 18 2-degree scenario proposals for all of 2017, eight in 2016, one in 2015, said ISS.
More shareholders are voting in favor of 2-degree scenario resolutions; support for the greater disclosures reached an average 45% in 2017, up from 32% in 2016, ISS said.
2017 Turning Point
The Journal notes that last year, three successful proposals at Occidental, Exxon, and PPL “were the first to garner majority votes on resolutions for annual disclosure of the impact on business from global efforts to limit the average rise in temperatures.”
BlackRock, the world’s largest asset manager, supported the general approach, and continues to spotlight the investment risks posed by climate change. Writing last month in Doubling Down on Two-Degrees: The Rise in Support for Climate Risk Proposals for the Harvard Law School Forum on Corporate Governance and Financial Regulation, ISS Corporate Solutions’s Cristina Banahan observed that in January:
BlackRock CEO Larry Fink released his annual letter to CEOs, an important signpost for investor priorities in the coming year. In his letter, titled “A Sense of Purpose,” Mr. Fink says:
“In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth.
The statement of long-term strategy is essential to understanding a company’s actions and policies, its preparation for potential challenges, and the context of its shorter-term decisions. Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends—from slow wage growth to rising automation to climate change [emphasis added]—affect your potential for growth.”
As investors such as BlackRock look deeper into strategy and climate change issues (and call them out specifically in their shareholder engagement activities), they are increasingly becoming more active in their support for calls for increased transparency and disclosure regarding portfolio companies’ preparedness for climate change. And, when shareholder proposals are filed calling for increased transparency and disclosure, support rates are increasing.
Banahan also discusses a recent survey on the increasing salience of climate change information to their investment decisions:
Marking a departure from previous trends, recent studies indicate that [Environmental, Social, and Governance (ESG)ESG and climate change considerations are gaining traction among investors. EY’s 2017 investor survey on ESG issues found that investors routinely included ESG considerations as part of their investment decisions. Shareholders are not only paying closer attention to non-financial indicators, but they are also more likely to take action on such information. According to the study, the percentage of respondents who consider nonfinancial disclosures to be seldom material or have no financial impact dropped from 60% in 2013 to 16% in 2016. Furthermore, the report found that, when faced with disclosures of risk or history of poor environmental performance, 15 percent of investors responded that they would rule out the investment immediately, while 76 percent would reconsider the investment. Similarly, 8 percent of investors responded that they would rule out an investment with disclosures involving risk from climate change, while 71 percent would reconsider the investment.
Actual voting data seems to confirm the study; many shareholders are coming off the sidelines on environmental and social shareholder proposals. The trend of abstain votes has been downward over the past eight years, and took a sharp decrease in 2017.
Source: ISS Voting Analytics
Quality of Disclosure Still Lacking
Now, just because shareholders have asked for greater disclosure– and prevailed in getting some companies to comply– does not necessarily mean that the quality of the disclosure is necessarily going to be particularly revealing. Companies and their securities law enablers have certainly perfected the art of crafting disclosure that while not outright misleading, is also not especially revealing. But there is a limit to how far companies can take this– as they do, at least in theory, face significant legal exposure if they stray too far down the path toward outright obfuscation.
Just as a final aside, 1n an interview last week with the Real News network (transcript here), Carbon Tracker CEO Anthony Hobley was skeptical about the quality of Exxon’s recent climate analysis for investors, 2018 Energy and Carbon Summary on Positioning for Lower Carbon Energy Future.
D. LASCARIS: Well, let’s talk in particular about Exxon’s most recent disclosure. It paints, I think it’s fair to say, a mostly rosy future for the oil and gas industry, saying that even aggressive climate policy poses little risk to the company. However, the report does not address, for example, the multiple lawsuits facing Exxon and other fossil fuel giants. Do you think that this is a realistic analysis of the future and the risk that arises from climate policy, and in particular do you think that appropriate account is being taken by Exxon of the risks of climate-related litigation?
ANTHONY HOBLEY: Well, there’s a couple of questions buried in there. My flippant answer would be yes and no.Yes, because, I think like most of the fossil fuel companies, there is now an acceptance of the concept of demand destruction, the fact that there will not be ever-growing demand for their products and the acceptance that there will come a time when there will be peak demand. We used to talk about peak supply, but actually I think what’s more realistic now is peak demand. As we know, fossil fuels have now lost their monopoly in energy generation. They’re facing competition from ever more efficient and cheaper alternative technologies. And that’s each in a way a demand for their products, as is a drive towards energy efficiency and even digital disruption.
We’ve seen digital disruption in the media. We will see it in our politics. We’re seeing it in the realms of photography. We’re actually now seeing digital disruption in the energy sector. And there is this recognition. But I think where the blue water exists between us and the likes of Exxon is how quickly we arrive at that point of peak demand.
We did some modeling with Imperial College here in London in our report around the disruptive power of new technologies. We felt, even with relatively weak climate policy — and we looked at different [levels], weak, medium level, and strong climate policy — there is still massive amounts of disruption from the emerging technologies of wind, solar, battery storage, electric vehicles that the companies have to respond to.
If the companies respond and accept that this is happening and they need to go X growth and recalibrate their business models accordingly, they can actually create a lot of value as part of the transition. But if they deny that or get that wrong, and continue to expand and develop resources we simply don’t need, they can destroy a lot of value as many U.S.-listed coal stocks have done over the last five or six years.
As more disclosure proposals are passed, it may become the norm rather than the exception for companies to disclose their assessment of the climate change risk to which they are exposed. Perhaps, over time, the scope and quality of such disclosure may improve, with greater attention also paid to what the company discloses about its strategic responses to such risks