& Securities

The biggest headline of the 2017 proxy season was a change in the policies, engagement efforts and voting of institutional investors and asset managers on environmental and climate change issues, which occurred against the backdrop of shifting U.S. policies on these issues. These changes, which resulted in majority-supported proposals at three S&P 500 companies, reflect intensified investor focus on sustainable business practices – a broad category in which environmental and social risks, costs and opportunities of doing business are analyzed alongside conventional economic considerations – as a key factor in long-term financial performance.

The predominant proposals of the season centered on climate change, with a total of 34 companies in the S&P 500 receiving such proposals.^[1] In striking contrast with the recent past, when climate change proposals enjoyed little success, this season three proposals – a proposal submitted to Occidental Petroleum by CalPERS and proposals submitted to PPL Corp. and Exxon Mobil Corp. by the New York State Common Retirement Fund – received majority support from shareholders.  Moreover, proposals submitted to five companies – Ameren Corporation, Devon Energy Corp., Dominion Energy Inc., DTE Energy Company and The Southern Co. – received over 40% support.

Generally speaking, the proposals received by these companies called for them to issue an annual report assessing the impact of long-term climate change on their asset portfolio and explaining “how capital planning and business strategies incorporate analyses of the short- and long-term financial risks of a lower carbon economy.” In particular, the proposals called for the report to outline “the impacts of multiple, fluctuating demand and price scenarios on the company’s existing reserves and resource portfolio” and provide a “2 degree scenario analysis” based on the Paris Climate Accord goal of limiting the increase in global temperature to two degrees.

The shareholder victories and near-victories can principally be credited to changes to the voting policies of large institutional investors and asset managers made ahead of the 2017 proxy season. Until this season, Blackrock, Vanguard and Fidelity, for example, had either abstained from voting or voted against such proposals. This year they changed their policies and, for the first time, supported climate change proposals. Annex A, available here, provides a snapshot of the policies of some of the largest institutional investors and asset managers on climate change and/or environmental-related shareholder proposals.

In explaining its support for the proposal at Exxon, Blackrock noted that it had voted against a similar proposal in 2016 in the expectation of meaningful improvements in Exxon’s climate risk reporting.^[2] In voting for the proposal this year, Blackrock cited Exxon’s failure to “substantially address a 2-degree scenario” notwithstanding improvements in its reporting. Blackrock also noted that its inability to meet with Exxon’s independent directors on strategic topics (including but not limited to oversight of climate risk) led it to vote against the election of both the lead independent director and board affairs committee chair. In explaining its support for the proposal at Occidental, BlackRock cited a lack of observed changes in climate-related reporting practices notwithstanding engagement on the topic over two years.^[3] In its engagement priorities for 2017-2018, Blackrock emphasized that “as a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite – when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations.”

CalSTRS and CalPERS, two of the largest U.S. pension funds, have committed to corporate engagement on climate change through policy advocacy, engagement with portfolio companies, and investing in climate change solutions. The New York City Comptroller’s Office, acting on behalf of the city’s five pension funds, has cited the failure of companies to address climate risks as a primary reason for its large and influential campaign to expand “proxy access” and has engaged with many companies on these issues resulting in the settlement and withdrawal of shareholder proposals.

What to Do Now?

The results of the 2017 proxy season leave no doubt about the heightened expectations of major investors for climate change risk disclosure and engagement. To meet these expectations, companies and their boards should consider the following:

• Incorporate material sustainability factors, including climate change, into the formulation and evaluation of business strategy and risk management.
• Take a fresh look at how the board oversees climate change and other sustainability risks, and expressly allocate responsibility to an existing board committee, a new committee or the full board, as appropriate. Memorialize the board’s decision in a committee charter or other governance document.
• Understand the policies of significant investors, including how these policies may relate to their investment analysis. Prepare to meet requests by these investors for substantive engagement.
• Recognize that investors expect companies to be proactive in providing enhanced disclosure, such as an annual sustainability or climate change report, as well as insights into how the board oversees the management of material risks posed by climate change. Note that investors are looking for such disclosure to address matters that they consider meaningful, such as 2-degree scenario planning.
• Keep abreast of efforts to create standards and benchmarks for reporting on climate change and other sustainability issues, such as those underway by the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB).
• Consider, and discuss with the disclosure committee, how the company addresses existing SEC interpretive guidance about climate change disclosure in its periodic filings (i.e., MD&A, risk factors).^[4]
• Understand the disclosures and policies of the company’s peers with respect to climate change risks and opportunities.
• Provide periodic updates to the board of directors on industry-specific issues and pressures with respect to climate change to enable directors to thoughtfully consider climate risks and opportunities faced by their companies.
• In connection with reviewing board composition and skills, consider whether the board has the necessary expertise and competency to address environmental and climate issues.

We thank Weil summer associate Shira Barron for her contributions to this blog.

[1] See ISS Governance Analytics (June 16, 2017).
[2] See BlackRock Voting Bulletin: Exxon Mobil, available here.
[3] See BlackRock Voting Bulletin: Occidental, available here.
[4] See Securities Act Rel. No. 9106 (Feb. 2, 2010)(“2010 Interpretive Release”), available here. For a discussion of the 2010 Interpretive Release, see Climate Change Disclosure: Nothing New Under the Sun (Feb. 24, 2010), available here.