Topics:   Audit,ESG,Investor Relations,Risk Management

Topics:   Audit,ESG,Investor Relations,Risk Management

June 12, 2019

Talking About Climate Change to Get Investors to Listen

June 12, 2019

Proxy season ought to be the best time of year for both companies and investors.

On one hand, investors are looking to talk to companies about their approaches to emerging risks, new opportunities, and overall strategies. On the other hand, companies want to talk to investors about their approaches to emerging risks, new opportunities, and overall strategies.

But these efforts clearly don’t always line up.

Consider the issue of climate change, an escalating risk.

Given investor concerns about climate change as a financial and systemic risk, it has been a central issue at corporate annual meetings this spring—with fossil fuel companies getting a lot of the attention.

In larger and larger numbers, institutional investors are calling on oil-and-gas companies and other fossil fuel firms to adjust their strategies to reduce their climate risk exposure. And more companies are responding to shareholder requests, many of them organized by Climate Action 100+, an investor network representing $33 trillion in assets.

Last month, BP’s board and management supported a shareholder resolution asking the company to align its business strategy with the overall goals of the Paris Climate Agreement. An overwhelming 99 percent of shareholders supported the proposal. In March, in response to a similar proposal, Royal Dutch Shell announced short-term carbon reduction targets for both its direct operations and for consumers using its products. Delivery on its climate targets is also being linked to executive pay packages.

When investors feel companies are not adequately addressing climate risks, they are letting management and boards know. Last month, 41 percent of Exxon Mobil’s shareholders supported a proposal to separate the company’s board chair and CEO roles, in part as a way to express their dissatisfaction with the way that the company’s management and the board have addressed climate change.

Investors are increasingly looking to corporate disclosures as a way to assess whether companies are handling issues like climate change as a strategic risk, or whether their efforts are more superficial. This assessment has been kicked into high gear by financial sector-led efforts such as the Task Force on Climate-related Financial Disclosures (TCFD), which produced formal guidance for improving corporate climate disclosure. These efforts make good sense; companies and investors cannot make smart decisions if they don’t have smart, robust information to act on.

But it is simplistic to think that better corporate disclosure is enough. Companies may have solid environmental and social strategies in place, but their value will be limited if they are not being communicated effectively. In fact, companies frequently complain that investors don’t pay attention to their disclosures on climate and other environmental, social, and governance (ESG) issues.

This conundrum is avoidable. As businesses ramp up their responses to these issues, they should also be mindful of how they are communicating their strategies to investors. Instead of portraying these issues as extra-financial, they should be explaining why they are material and core to business strategy and long-term growth. Rather than burying these issues in corporate social responsibility reports, they should be integrating them across all types of investor engagement.

A recent Ceres report, Change the Conversation, outlines how companies can disclose strategies and performance related to climate and other ESG matters in ways that investors will respond to.

  • Demonstrate how climate change and other key ESG issues are being integrated into the company’s business strategy. As noted in previous blogs, investor attention on issues like climate change is based on impacts they are already seeing on corporate values, whether from operational impacts, regulatory shifts, supply chains ripples, or reputational risks.  Corporate disclosures should dig into providing clear answers to these questions by outlining climate-resilient strategies that will strengthen corporate performance and long-term value creation.
  • Provide disclosure in places where investors are already looking. Companies should articulate the material impacts of climate and ESG issues and be sure to disclose them in financial filings, quarterly calls, and investor updates. Aligning disclosures with recognized reporting standards will help ensure that disclosures are picked up and used by ESG data consolidators.
  • Implement a proactive investor engagement strategy. Companies should be talking about climate and ESG issues in more of their engagement platforms with investors, including annual general meetings, direct dialogues, and during investor days. They should leverage C-suite executives and board members who can act as key messengers on these issues. And they should be ready to speak authoritatively on these topics, using language that investors understand and value.

“If the CEO says it’s important, it carries more weight,” said one of the investors interviewed for the Change the Conversation report. “Wall Street cares about what the person in charge has to say, otherwise how important can this be if the CEO is not willing to take the time to speak about it?”

No doubt, companies are boosting their responses to climate change and other ESG challenges. But until companies and their leaders make it a core part of their day-to-day interactions with investors, they’ll be shortchanging the hard work being done and missing potential competitive advantages. They must show that they understand these issues are the bottom line.

Veena Ramani is Senior Program Director, Capital Market Systems, at Ceres.