Investors who follow climate risk have had a dizzying few weeks. Beyond the reports about record-setting floods in the Midwest and predictions of a climate apocalypse, there were climate-related shareholder votes at two big oil companies and a progress report on corporate climate disclosures.
Important as they were, these events held little good news for climate-minded investors. And they demonstrated the limits of voluntary action on climate change, which could open the way to more aggressive approaches.
At Exxon and Chevron, investors rejected resolutions proposed by climate activists that would have forced the companies to split the chairman and CEO roles and form a special board committee to examine climate risks. According to the headlines, the results were a victory for management and a sign that the wave of investor activism on climate had crested.
In reality, the vote probably reflected long held doubts on governance practices. Investors have mixed views on separating the chairman and CEO roles, and climate reporting was unlikely to produce a shift one way or the other. Creating special committees isn’t a guarantee of change either, and could have the perverse effect of separating climate considerations from a company’s strategic planning and risk management activities.
The Exxon and Chevron votes also exposed the gap between climate campaigners and conventional investors. Activists propose resolutions that focus on how a company harms the environment, while ordinary investors increasingly want to know how the environment harms the company. They are starting to understand that a changing climate can affect a company’s facilities, markets, supply chain, distribution system, and ultimately its bottom line.
That could explain why fund giants like BlackRock and Vanguard probably voted against the resolutions after backing calls last year for climate impact reports. (We won’t know until they report their votes this summer. BlackRock and others should get more scrutiny for the wide gap between their voting records on climate and their supportive public statements. But that’s a topic for another day.)
The SEC’s relaxed attitude toward climate risk also kept stronger proposals from getting a hearing. Exxon successfully petitioned the SEC to keep a proposal off the proxy that would have required the oil giant to set firm targets for emissions cuts.
But greenlighting stronger proxy proposals is minor-league stuff. Where the SEC could really make its mark – if it wanted to – is on disclosure. A well crafted comment letter questioning the adequacy of a company’s climate disclosure would have an immediate and noticeable impact. The SEC has the authority to act, and it provided guidance on climate disclosure in 2010. It just requires some spine.
A little prodding from regulators gets noticed in boardrooms. It’s no accident that UK companies in the UK and Europe are farther along in their climate disclosures than their US counterparts. Bank of England Governor Mark Carney has spoken clearly and forcefully about the risks to the financial system posed by climate change.
Which brings us to the Task Force on Climate-related Financial Disclosures (TCFD), the policy group sponsored by G20 finance ministers and chaired by Mr. Carney. It published a review of climate disclosures – the second since releasing its landmark report in 2017 – and flatly said “not enough companies are disclosing information about their climate-related risks and opportunities.” Where there is more climate disclosure, the TCFD said, the information isn’t useful to investors. Ouch. Sustainability reports aren’t giving investors what they need.
Investors want to understand how companies are exposed to the effects of a changing climate, and they have been raising the issue with managers and boards in private meetings. Climate risk consistently ranks near the top in investor surveys, and BlackRock and other big investors made climate disclosure an engagement priority two years ago. But, as the TCFD report confirms, there is little to show for these efforts.
All this suggests we might have reached “peak pleading” – the moment when the urging, cajoling and jawboning give way to something more potent. When voluntary steps yield to compulsory ones.
That could mean we will see more aggressive moves, perhaps in the form of legislative action, regulatory enforcement or tougher votes from big investors.
More proxy contests and lawsuits could be on the horizon, too. Exxon is facing multiple climate-change lawsuits, but one filed six months ago by the New York Attorney General is the first to allege securities fraud over the adequacy of the company’s disclosures. It’s unlikely to be the last.