Topics:   Corporate Social Responsibility,Investor Relations,Risk Management,Strategy

Topics:   Corporate Social Responsibility,Investor Relations,Risk Management,Strategy

March 26, 2019

Investors Sound Alarm Bells On Climate. Are You Listening?

March 26, 2019

Let’s add the World Economic Forum to the list of organizations sounding a clarion call on climate change. Their recent risks report identifies climate change as one of the most severe risks that the world faces, and warns, “it is in relation to the environment that the world is most clearly sleepwalking into catastrophe.”

Investors heard the wake-up calls early, and have been raising the alarm with companies. Over the past decade, we have seen rapid growth in shareholder engagement on environmental, social, and governance (ESG) issues in general, and on climate change in particular.

One of the most important tools that investors have for engaging with companies on these issues is shareholder resolutions. In 2017 alone, investors filed a record 175 proposals on climate change with U.S. and non-U.S companies, with many of them receiving record-high voting support.

It is important to keep in mind that investor attention to climate change is not motivated by social good or altruism. As the owners of companies, investors, particularly long-term investors, have a financial interest in ensuring that the board and management can maintain corporate resiliency and build long-term value.

Shareholders file climate-related resolutions for economic reasons. They want to be sure company executives and their boards are doing all that they can to prepare for climate-related business and economic disruptions, including operational impacts, regulatory shifts, supply chain ripples, and potential reputation risks. By digging in and engaging on these questions, investors are looking for climate-resilient strategies that strengthen corporate performance and value creation.

Non-binding shareholder resolutions are hardly a new tool. In place for nearly a century under the U.S. Securities and Exchange Commission (SEC) Rule 14a-8, the process allows qualifying investors to submit resolutions that can be voted on by all company shareholders. It is a constructive, low-cost way for investors of all sizes to engage with company management and boards in a transparent way.

Unfortunately, this process is under attack by interest groups painting these resolutions as driven by investors with political agendas. We believe that this is incorrect, as it implies that investors who file these resolutions are fringe or minor players.

In fact, Wall Street icons such as BlackRock, State Street Corp., Fidelity Investments, Vanguard, and other large institutional investors are among those who consistently support climate resolutions. Collectively, these institutions manage over $16 trillion in assets.

Additionally, from our perspective, to say that climate resolutions are politically motivated is also untrue. While climate change has unfortunately been politicized in this country, the business and financial risks that it poses to corporate value are very real—and material.

Look no further than the recent National Climate Assessment showing that climate change is already impacting all parts of the United States. This report, which was developed based on contributions by 13 federal agencies, predicts that if significant steps are not taken to mitigate climate warming, the damage could shrink the country’s gross domestic product by as much as 10 percent by century’s end. That’s more than double the losses from the Great Recession a decade ago.

The business impacts are clear: In 2017, 73 companies on the S&P 500 publicly disclosed a material effect on earnings from extreme weather events, and 90 percent felt the effect was negative. Supply chain disruptions due to climate risk have increased 29 percent since 2012 according to Dow Jones.

In addition, the business case for proactive focus on climate and broader ESG issues is also strong. Academic and investment research—including studies by Bank of America Corp., Morgan Stanley, and JP Morgan—show that serious corporate attention to climate and ESG issues delivers higher stock returns, incurs lower capital costs, and lowers volatility risks.

So what should companies and boards do when faced with investors who are looking to engage with them, including through the shareholder resolution process, on climate change?

Previously, we wrote about the responsibility of the board to oversee material climate change risks and opportunities. The following suggestions build on those made in a previous article. 

  1. Engage. Research has consistently shown that boards and management make the best decisions when considering multiple perspectives. Rather than hesitate in the face of investors who are looking to engage on climate change, boards should remember that as owners of the company, investors, have an equal interest in the financial wellbeing of the enterprise, and have an important point of view to bring to the table. The sheer act of dialogue could serve to provide valuable information to boards and management and, importantly, generates goodwill. Ceres’ report Lead from the Top notes that shareholder engagement on climate and ESG is an important step to helping the board build its own fluency in these issues.
  • Disclose. Our economy and capital markets work best when companies engage in robust disclosure. Company management and their boards have critical roles in helping their companies provide the kind of climate risk disclosure that investors are requesting in shareholder resolutions. Frameworks like the recommendations from the Task Force on Climate Related Financial Disclosures (TCFD) provide an important starting point.

By partnering and engaging with investors, boards can help ensure that companies are more resilient, prepared, and profitable in navigating fast-changing global risks.

And being prepared is a win-win for everyone.

Mindy Lubber is the CEO and president of Ceres. Veena Ramani is the senior director for capital market systems program at Ceres. Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy.

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