Shareholder focus on climate metrics to intensify, as mandatory disclosure plans falter.
US companies’ performance on disclosing and reducing Scope 3 greenhouse gas (GHG) emissions is likely to be a point of contention during the upcoming proxy voting season, particularly in light of reports that plans to mandate climate disclosures by the US Securities and Exchange Commission (SEC) are stalling.
How much information the SEC can require companies to divulge and whether auditors should sign-off on Scope 3 disclosures have emerged as sticking points, potentially delaying the rule’s roll-out beyond Q1 2022.
In the meantime, shareholder proposals related to the Scope 3 emissions, which cover a company’s wider supply chain, such as purchased goods and services, business travel, employee commuting, investments etc, are being filed in increasing numbers.
“Scope 3 emissions can be challenging for some types of companies, so we will have to see how rigorously investors and proxy advisers hold companies to these commitments,” said Rob Berridge, Senior Director of Shareholder Engagement at US non-profit Ceres. “We do expect to see more investors asking for companies to set science-based targets for their full value chain.”
In January, 69.9% of shareholders in US retailer Costco voted in favour of a proposal asking the company to set science-based targets to reduce its GHG emissions. The retailer acknowledged that Scope 3 emissions represented the “overwhelming bulk” of its climate impact.
According to Ceres, this was the first shareholder vote on a proposal directly requesting that a company set targets that included emissions from its full value chain and that were aligned with achieving net zero emissions by 2050 or sooner.
Lack of governance
Ceres has released guidance for investor engagement with companies on the governance of climate risk, pointing out that disclosing climate-related risk governance is a key recommendation of the Task Force on Climate-related Financial Disclosures (TCFD).
However, the 2021 TCFD Status Report found that despite recommending disclosure of governance regardless of materiality, the governance recommendation remains “the least disclosed”.
Ceres’ guidance supports the view that governance disclosures should instead be among the “first steps” taken by executive teams and boards serious about their management and oversight of climate-related risks and opportunities.
Kirsten Spalding, Senior Program Director of the Ceres Investor Network, said corporate directors were responding to majority votes at AGMs and investors felt they were “getting results” through use of shareholder proposals.
“We expect there will be more than 50 GHG emissions reduction proposals put forward during this year’s proxy voting season, many of which have followed engagements by Climate Action 100+ signatories with companies,” she added.
Berridge predicted many investors would focus their attention on directors’ responses to 2021’s majority votes on climate, including on GHG reductions and climate lobbying. “Investors will be trying to determine how companies are going to implement changes reflecting the outcomes of the majority votes,” he said.
“A watershed moment”
Last year’s US proxy voting season was marked by a decisive defeat for the board of ExxonMobil, with the replacement of three directors with candidates nominated by Engine No 1, a impact-focused activist investor. This year may not see such headline-grabbing outcomes,
Berridge expects last year’s total of 172 environment-related proposals at US corporate AGMs to be eclipsed this year, said Berridge. Around 164 proposals have been filed to date, including proposals related to plastic. “For years, we loved it if we got double-digit votes on climate proposals; now we are getting majority votes,” he said.
2021 saw 18 majority votes on climate, versus seven the previous year. “If you are an investor bringing forward a GHG emission reduction proposal, you should expect to achieve a majority vote this year,” said Berridge. “And once you have a majority vote, there is tremendous pressure on a company’s directors to implement the proposal. This could be a watershed moment – if directors aren’t acting on majority votes, you will see those directors voted down.”
Spalding associated increased support for climate-related proposals with increased levels of cooperation among investors, contrasting with past efforts when individual institutional investors tended to file proposals in a “diffuse way”, often allowing AGMs to play out in ways corporate management favoured.
“Climate Action 100+ has focused investors on the heaviest emitting sectors, and proxy voting proposals are much sharper, with clearer priorities, now. The proposals are more likely to get support; investors realise the best way to deal with systemic risk to their portfolios like climate change is to act together.”