Investors Heighten Their Engagement with Companies over Climate Policies: MSCI

Investors are starting to flex their engagement muscles over the climate policies of the companies they invest in. A growing number of shareholder votes this year regarding public companies’ climate policies should give a clear indication of investor attitudes toward carbon reduction plans at the world’s largest companies.

While divestment from high-emissions companies remains an option, asset owners have many other engagement levers they can pull. And it’s clear that climate-focused investors are pulling those levers more and more to get portfolio companies to increase their disclosure, set more aggressive net-zero targets, and ensure that boards of directors are paying close attention to climate issues.

Indeed, last year brought a “significant increase” in the number of shareholder proposals asking that U.S. companies adopt targets for reducing their greenhouse gas emissions, says Chris Cote, Americas lead for ESG and climate research at MSCI. More than a third of these proposals passed even though management opposed them, he adds – an indication of “significant shareholder support for climate action.”

There’s other evidence that shareholders are willing to go against management on climate issues. In a new report, MSCI says it found 53 companies within its ACWI Investable Market Index that held management-sponsored votes on their climate plans over the past two years. None of them were rejected, but the average proportion of “no” votes rose more than three-fold, from 3.1% in 2021 to 9.6% in 2022.

Driving those no votes, MSCI says, was investors increasingly feeling that companies’ climate plans are not ambitious enough. “We found that investors tended to vote against climate plans in 2022 where the company’s emissions trajectory was misaligned with global temperature targets,” the report says.

A good example was Glencore. The mining giant published its first climate action plan in late 2020; at the 2021 annual general meeting a few months later, it passed with 94% of the vote.

In 2022, though, the company’s climate action plan received only about 76% of the vote at the annual meeting in April. That’s still approval, of course, but with significantly more opposition than the year before. The company itself said that much of that opposition came from shareholders who were seeking “opportunities to accelerate [the company’s] current total emissions reduction pathway,” which calls for a 50% reduction in carbon emissions by 2035 and a “responsibly managed coal decline strategy and associated targets.”

Glencore will release its 2023 climate action plan in March, ahead of the annual general meeting later in the spring. The subsequent shareholder vote on the plan will be closely watched.

MSCI, in its new report, says it will be keeping similarly close watches on such votes at other companies this year as well, looking to see “whether investor opposition to corporate climate strategies will continue to increase, or whether more investors will give companies the benefit of the doubt on their climate plans in challenging market conditions.”

Beyond shareholder votes

Corporate engagement around climate issues is increasing beyond just voting, MSCI says. “Investors are increasingly showing themselves willing to challenge board directors on their companies’ climate performance, including scrutinizing climate risk management disclosures or emissions-reduction plans in some markets,” the report says.

The hope among such investors is that companies, particularly climate laggards, will pay more attention to climate issues, from the board level on down.

Research shows that boards spending “significant time on environmental or sustainability issues and include directors with climate experience” often leads to reduced emissions and more focus on climate transition risks. But board composition is key here.

“Boards that include climate-savvy directors may be better able to build support for emissions targets, compared to those that do not,” MSCI says. “These factors could help companies respond to questions from investors about their approach to climate change.”

This is likely to be another area of focus for asset owners this year. And it’s already having an impact.

“This wave of engagement is helping to push more boards toward the realization that they need to become climate-focused sooner than later,” Cote tells CleantechIQ. “For some, the first step on this journey is simply to recognize that the board is accountable for the company’s climate performance and that effective climate governance can be a fundamental investor expectation.”

For corporate boards that have already cleared that bar, the trick is making sure they have the “expertise and subject command” needed to develop and execute a credible climate strategy. “This is leading to demand for more climate-focused director education resources and new director candidates who possess those hard-to-find skillsets,” Cote says.

Disclosure standards

Another key development for climate-focused investors this year will be what happens around disclosure standards

Last year brought draft proposals for climate disclosure standards from heavyweight organizations including the Securities and Exchange Commission, the European Financial Reporting Advisory Group and the International Sustainability Standards Board. For 2023, the big question will be what happens as those proposals move toward being implemented. A major concern for investors will be whether all these competing standards lead to “further convergence and consistency or added fragmentation,” the MSCI report says.

The European-focused proposal, known as the European Sustainability Reporting Standards, is the most detailed, according to an MSCI analysis of the three proposals. It also asks companies for full disclosure around items such as if their climate targets “align with science-based criteria,” the report says. The other two drafts don’t require that.

All three framework proposals do require companies to disclose “basic target information” such as target year and whether those targets are absolute or intensity-based, MSCI says. But all three also include room for companies to not disclose things like percentage changes in emissions from baselines.

And even though those proposals are still in draft stage, they are already having an impact. Within half a year of the SEC releasing its proposal that companies must publish emissions and climate risk data annually, many companies have started doing just that, according to Cote.

“While the SEC has yet to finalize the proposed rules, 25% of U.S.-listed companies disclosed at least some” of their Scope 3 emissions, he says. That’s up from just 15% prior to the publication of the draft regulations.

This is undeniably good news and a clear sign of progress. But these various disclosure regulations still need to be finalized and put into effect – and then they have to be enforced.

“While some advances have been made toward more consistent and more comparable climate disclosure standards, this clearly remains a work in progress,” MSCI says in its report. It’s an area that the company, along with investors around the world, will likely be watching closely this year.

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