Proxy season action on climate change will be hard to avoid

It will be hard for corporate directors to not take climate change personally this proxy season, as institutional investors and regulators ramp up pressure for them to take meaningful action — or get out of the way.

Investors are armed with a new metric for measuring a company's progress on climate change and a more collaborative approach for holding corporate directors and senior management directly responsible through proxy voting. And they are getting critical backup from regulators like the Securities and Exchange Commission, where climate risk is starting to feature prominently in both corporate reporting and enforcement priorities.

"Investors are really starting to wake up to the systemic nature of these risks. The way to protect their portfolios is to hold boards accountable. You are seeing leading investors adopt proxy voting policies that make (it) abundantly clear that failure to eliminate material contributions to climate change is a thing of the past. That is really the foundation of what we can achieve this year," said Eli Kasargod-Staub, co-founder and executive director of shareholder advocacy organization Majority Action in Washington.

Simiso Nzima, investment director and head of corporate governance for the $449.1 billion California Public Employees' Retirement System, Sacramento, agreed that "for anything to be effective you have to hold someone accountable," and said it is a long-standing CalPERS practice to vote against uncooperative directors on all sorts of ESG issues.

"We take it seriously that when we engage companies and there are not responses, we have no qualms" in voting against directors, he said. "We are excited to hear that other investors are going to have policies that allow them to do that."

CalPERS is a founding member of Climate Action 100+, an organization of more than 500 investor members with a collective $54 trillion in assets that flags key shareholder votes related to three key expectations for companies: that they implement a strong governance framework clearly articulating the board's accountability and oversight of climate change risks and opportunities; that they take action to reduce greenhouse gas emissions across their value chain; and they provide enhanced corporate disclosure that follows the Task Force on Climate-related Financial Disclosure recommendations.

Even better is when companies are able to meet more detailed expectations set by the Global Investor Coalition on Climate Change to help investors assess a company's business plan in a range of climate scenarios, under a five-part framework for climate risk management and disclosure.

In mid-March, Climate Action 100+ will unveil a net-zero greenhouse gas emissions benchmark to help investors assess how companies are preparing for climate risk and a net-zero transition, including not just commitments but actual capital expenditures and lobbying activity.

"The benchmark provides a way of engaging with the company to get them to either clarify further or push them if they are falling behind," Mr. Nzima said. "Once it is out, it's going to be clear, and different investors can use that."

Finding power in numbers, Illinois Treasurer Michael Frerichs and Vermont Treasurer Beth Pearce are leading an effort that includes CalPERS and Connecticut to get more public institutional investors to create proxy voting policies aimed at directors of companies failing to make progress, including disclosing their exposure to climate risk or setting emissions targets aligned to limiting global warming to 1.5 degrees Celsius, a key goal of the Paris Agreement.

"We have a core of states and large cities that are committed to this. It's all about partnership," said Ms. Pearce, whose office oversees the Vermont Pension Investment Committee, Montpelier, and the investment management of the $5.3 billion Vermont State Retirement Systems. "We are not looking for marketing, we are looking for tangible results," she said.

The focus goes beyond fossil-fuel companies, Mr. Frerichs said. "There is no company that will not be affected" by the net-zero emissions transition, including real estate firms with shoreline properties and insurance companies dealing with all kinds of climate-related risks.

"We have reached a time where boards need to act. We as a fiduciary and shareholder need to act. Climate risk is an investment risk. It's a systemic risk for the entire economy, but the transition also presents enormous opportunities for innovative companies and forward-thinking investors," Mr. Frerichs said.

Illinois and many other institutional investors are also turning up the pressure on asset managers to use their own proxy power this year to see more tangible progress on managing climate risk from companies.

"We are also calling on our asset managers, including BlackRock and Vanguard, to use their proxy to put their money where their mouth is" when it comes to pushing for change at companies, Mr. Frerichs said.

That has already happened in Vermont, where "we put our managers on the hook with respect to climate change," Ms. Pearce said.

"If more investors hold boards accountable, we will see change. We just need more investors to hold boards accountable," Mr. Nzima of CalPERS said.

Investors are encouraged by recent actions in Washington, including the Biden White House rejoining the Paris Agreement, and a new U.S. collaboration agreement with Canada to improve reporting and disclosure of climate risks. They also welcomed the naming of a special adviser for climate and ESG at the Securities and Exchange Commission.

In the new role, returning SEC official Satyam Khanna will advise acting chairwoman Allison Herren Lee on how climate risk fits into a regulatory framework. "That might actually provide tailwind," Mr. Nzima said.

SEC examiners will now focus more on climate and ESG-related risks to make sure that proxy voting policies and practices and companies' continuity plans serve investors' best interests "in light of intensifying physical risks associated with climate change," Ms. Lee said.

In late February, Ms. Lee also directed the division of corporation finance "to enhance its focus" on how public companies disclose climate-related issues, a bold move that sends "a clear message that the SEC is serious about updating guidance to meet investor demands for consistent, comparable and reliable climate-related disclosures," said Doug Davison, a partner at Linklaters LLP in Washington and counsel to former SEC Chairman Arthur Levitt.

Investors should also find an ally in the person tapped for permanent SEC chairman. Gary Gensler, who presided over the Commodity Futures Trading Commission during the global financial crisis, said at his March 2 confirmation hearing that he supports more climate risk disclosure, and pledged to have the SEC undertake economic analysis and seek public feedback on how to advance it.

"There are tens of trillions of investor dollars that are going to be looking for more information about climate risk," he said.