Investor Focus on Climate Change Continues to Rise

Climate change has long been an area of focus for investors. Over the past several months, companies have come under greater scrutiny and have begun to face increased pressure from investors, regulators, activists, and the public to make commitments to programs, policies, practices, and disclosures regarding climate change. While historically, companies' boards of directors were not expected to oversee climate issues, today, it is widely accepted among investors that such issues fall squarely within the purview of boards' responsibilities. There are now ever-growing expectations that boards consider, engage with, and oversee their companies' respective approaches to climate change.

Institutional Investor Positions and Voting Policies. The largest and most prominent institutional investors, including BlackRock, Inc. and The Vanguard Group, Inc., have clearly expressed that they consider climate issues to be material to their voting decisions.

BlackRock, the world's largest asset manager, believes that climate risk is investment risk and that climate change has become a defining factor in companies' long-term prospects. It endorses the recommendations of the Task Force on Climate-related Financial Disclosures ("TCFD") and the standards put forth by the Sustainability Accounting Standards Board ("SASB") as appropriate and complementary frameworks for companies to disclose financially material sustainability information. It also requests that companies: (i) disclose the identification, assessment, management, and oversight of sustainability-related risks in accordance with the four pillars of TCFD (Governance, Strategy, Risk Management, and Metrics and Targets); and (ii) publish SASB-aligned reporting with industry-specific, material metrics and rigorous targets. BlackRock has indicated that it will vote against directors it considers responsible for climate risk oversight in cases where corporate disclosures are insufficient to make a thorough assessment, or a company has not provided a credible plan to transition its business model to a low-carbon economy. BlackRock has also stated that it may support stockholder proposals that it believes address gaps in a company's approach to climate risk and the energy transition.

Vanguard similarly believes that climate change represents a profound, fundamental risk to investors' long-term success that should be overseen at the board level. It supports the use of the TCFD reporting framework, including its four pillars, and finds the SASB industry-specific disclosure standards useful. Vanguard has indicated that it is likely to support stockholder proposals that request: (i) disclosure on how climate change risks are incorporated into strategy and capital allocation decisions; (ii) an assessment of climate impact (including scenario analysis); and/or (iii) a feasibility analysis for environmental disclosure.

Stockholder Proposals and Activism. Investors have multiple channels through which they can advance their climate-related initiatives and pressure companies and boards to adopt new policies and practices, including by submitting stockholder proposals, engaging in activism efforts, and divesting from a company altogether. The number of climate-related stockholder proposals on company ballots has increased significantly in recent years—more than 80 such proposals were submitted during the 2021 proxy season compared to approximately 50 such proposals in 2020. These proposals covered a variety of requests, such as for: reports on climate change and/or greenhouse gas emissions; annual nonbinding advisory votes on a company's climate disclosure and strategy (a so-called "Say-on-Climate" vote); and companies to adopt quantitative climate-related goals. On average, climate-related proposals that went to a vote in 2021 received approximately 50% support from stockholders. This trend of increased stockholder support of climate-related proposals is expected to continue in 2022.

Activist stockholders can also act in a more direct and coercive manner to influence companies to take action on climate change. For example, in 2021, activist investor Engine No. 1 won three board seats at Exxon Mobil Corporation in a proxy contest that was prompted, in significant part, by stockholders' concerns regarding Exxon's approach to climate change (e.g., a potential over-reliance on carbon capture and storage) and management of climate-related issues.

SEC Disclosure Rules and Enforcement. Recognizing the growing investor demand for climate-related disclosures, the Securities and Exchange Commission ("SEC") included climate change disclosure as a rulemaking area on its latest regulatory agenda. Earlier this year, the SEC solicited public input on climate change disclosures, and Chairman Gensler subsequently asked the SEC staff to develop a mandatory climate risk disclosure rule. Through this rulemaking, the SEC is seeking to create consistency and comparability across companies regarding climate risk and other related disclosures that will be both qualitative and quantitative. Recent SEC public statements and comments regarding climate change provide a preview of the anticipated rules, which may relate to: (i) the effects of transition risks (e.g., policy, regulatory, and technological changes, as well as market trends) and litigation risks related to climate change; (ii) direct and indirect effects (including physical effects) of pending or existing climate change-related legislation, regulations, and international accords on business, financial condition, and results of operations; and (iii) past and/or future capital expenditures for climate-related projects. Proposed new rules are expected late 2021 or early 2022.

In addition, in March 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement, the initial focus of which is to identify any material gaps or misstatements in companies' disclosure of climate risks. Enforcement actions resulting from these examinations are anticipated in the coming year.

Greenwashing. While investors continue to push for companies to prioritize climate change, they have also become wary of "greenwashing" (overstated or misleading climate change and sustainability claims). In particular, there is growing market skepticism about climate change-related goals set by companies and whether they are true commitments with a reasonable likelihood of attainment (particularly with respect to long-range goals, e.g., "by 2050"). It is likely that the SEC climate-related rules will eventually require disclosures regarding the path to goal development and achievement, including associated capital expenditures and risks (inviting increased scrutiny of and potential liability for companies that have overstated or set unrealistic goals).

There are a number of steps companies can take to mitigate potential greenwashing risks, including: (i) ensuring factual statements related to climate change are accurate and avoiding statements that potentially overstate the company's progress relative to its peers or the market; (ii) describing goals as aspirational; (iii) establishing goals that are reasonably attainable, devising a clear plan to attain such goals, and measuring progress; and (iv) disclosing assumptions, risks, and uncertainties related to goal attainment.

Conclusion. Climate change and related issues are expected to remain a top priority for investors in the coming months and years. Proactive steps to establish appropriate board oversight procedures, prepare for new disclosure rules, and set realistic goals may help companies reduce scrutiny and litigation risk, and position themselves for constructive investor engagement. 

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