- March 21, 2018
This guidebook showcases memos written by institutional investors concerned about the risks and opportunities of climate change-related issues to companies in their portfolios. The goal of each memo is to present the business case for a shareholder proposal that will go to vote during the 2018 proxy season. The resolutions discussed are just a sampling of more than 190 climate-related (broadly defined) resolutions filed during the 2018 proxy season.
Topics covered in the memos include carbon asset risk, clean energy, coal ash, deforestation, greenhouse gas emissions, methane, and sustainability reporting.
In addressing carbon asset risk, the global consensus has quickly evolved around the use of scenario analysis as a key tool for oil, gas, and electric utility companies navigating the transition to low-carbon energy. The average vote on 17 shareholder proposals requesting two-degree scenario analyses filed during the 2017 proxy season was 45%, and three proposals achieved majority support. Carbon Tracker estimates $1.6 trillion of future capital expenditures are at risk of being wasted, with private sector fossil companies bearing far more of the burden than state-owned companies.
Setting company-wide greenhouse gas (GHG) reduction goals is necessary for companies to disclose to investors that they are truly preparing for a lower carbon future. Without these goals, investors have no way of knowing whether a company’s various actions, in the aggregate, are sufficient to address the risks. In addition, goals are a critical management tool for actually reducing emissions. The Science Based Target Initiative reveals that hundreds of large companies have committed to set GHG reduction goals and provides resources to assist companies. CDP reports that carbon reduction actions tend to be more profitable than a company’s core business.
Investing in clean energy is the primary strategy for most companies to achieve emissions reductions goals and capture the associated benefits. Improving energy efficiency generally generates a very high return on investment with little risk.
Sourcing renewable energy can reduce the variability of energy spending, and the (unsubsidized) prices for wind and solar power are now competitive with coal and natural gas in many regions around the globe including large portions of the United 5 States, according to Lazard. Renewable energy can also provide important reputational benefits for companies.
Reducing methane emissions is important for three key reasons: 1) leaking methane can make natural gas worse than coal in terms of climate impact, thereby damaging companies’ reputations and social license to operate; 2) leaking, venting or burning gas that could have been sold represents lost value to the operator and the shareholder; 3) failing to control methane losses also creates regulatory, safety and health risks, as illustrated by the far-reaching impacts of the Aliso Canyon leak.
Global supply chains often create a minefield of risks for companies. The risks include: human rights abuses, the sourcing of illegal products, and environmental destruction. Deforestation is at the nexus of all three of these risks and can also result in companies contributing to species extinction, corruption, and massive greenhouse gas emissions. Deforestation creates more GHG emissions than the global transportation sector. As a result, companies who use commodities produced in regions where deforestation is occurring need robust policies and management systems to ensure they are not responsible. Addressing deforestation risks helps companies to protect their reputations, ensure uninterrupted supplies and reduce regulatory and legal risks. Four of the riskiest commodities for driving deforestation are those derived from cattle, palm oil, soy, and timber.
The sustainability reporting process, in all its forms -- stand-alone reports, web pages, and ESG elements integrated with financial reports -- underpins both environmental, social and governance (ESG) investing and management of ESG issues by firms. You cannot manage (or wisely invest in) what you cannot measure.
In 2017, 82% of S&P 500 companies engaged in sustainability reporting according to the Governance & Accountability Institute. Lack of ESG disclosure now contributes to poor scores for companies on leading mainstream investment platforms offered by Bloomberg, Google Finance, Morningstar, Moody’s, MSCI, and Yahoo Finance.
Numerous studies link strong ESG performance with strong financial performance. Partly as a result, more than 1 in 5 dollars invested in U.S. markets are linked with some type of ESG investing.
Larry Fink, CEO of BlackRock, wrote in his 2018 letter to CEOs: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their 6 stakeholders, including shareholders, employees, customers, and the communities in which they operate.”9 Companies need strategies, policies, goals, metrics and robust disclosure to realize and demonstrate benefits to their stakeholders. All five of are critical elements of the sustainability reporting process.
The following memos elucidate the themes above and cover several other key ESG issues as well. Each memo represents a chance for shareholders of the featured companies to encourage sensible risk disclosure and mitigation. These are the kinds of actions backed by over 1,400 institutional investor signatories of the Principles of Responsible Investing (PRI), who collectively manage more than $60 trillion.
To see details of these and other climate- and ESG-related shareholder proposals, please visit: https://engagements.ceres.org.
