While the direction of Trump Administration policymaking on climate risk appears to deny concern, the largest U.S. public equity funds are sharpening their focus and concern about this subject.
Last week BlackRock, the Nation’s largest funds group with $5.1 trillion in assets under management, updated its investment stewardship guidance and highlighted climate risk management as a priority for engagement with public company boards in 2017. This follows on similar ESG Guidelines released in late January by the Nation’s third largest funds group, State Street Global Advisors, which manages over $2.4 trillion in assets. These policy statements borrow from the December 2016 Recommendations Report of the Financial Stability Board’s Task Force on Climate-Related Disclosures (TCFD) that was chaired by Michael Bloomberg.
The following is a key statement from BlackRock’s guidance:
Climate risk awareness and engagement has advanced over the past several years and just as our thinking on climate risk continues to evolve, we believe that companies are also increasingly more aware of its business relevance. Climate risk will be one of the key engagement themes that the Investment Stewardship team will prioritize in 2017 and the team’s recent work on this issue and its engagement and contributions to external initiatives such as the TCFD will inform our assessment of shareholder proposals on the topic. Over the course of 2017 we intend to engage companies most exposed to climate risk to understand their views on the recommendations from the TCFD and to encourage such companies to consider reporting against those recommendations in due course. For directors of companies in sectors that are significantly exposed to climate risk, the expectation will be for the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. Assessments will be made both through corporate disclosures and direct engagement with independent board members, if necessary.
State Street’s guidelines offer the following:
[I]n 2017 we will be increasingly focused on board oversight of environmental and social sustainability in areas such as climate change, water management, supply chain management, safety issues, workplace diversity and talent development, some or all of which may impact long-term value. While none of us can state definitively “the answer” for a particular company, and we acknowledge that certain industries will face different issues, we believe that over time these areas can pose both risks to and opportunities for long-term returns. Therefore, as stewards we are convinced that addressing ESG issues is a good business practice and must be part of effective board leadership and oversight of long-term strategy.
To help investors better understand how companies are addressing climate risks, the TCFD report suggests four categories of recommended disclosures:
- Disclose the organization’s governance around climate-related risks and opportunities;
- Disclose the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy, and financial planning;
- Disclose how the organization identifies, assesses, and manages climate-related risks; and
- Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities.
The TCFD’s recommended disclosures inform State Street’s analytical framework for evaluating the degree to which company boards are adequately addressing climate and sustainability in company strategies. The State Street framework reviews and categorizes a company’s approach to sustainability according to three criteria:
- Has the company identified material environmental and social sustainability issues relevant to its business?
- Has the company assessed and, where necessary, incorporated the implications of relevant environmental and social sustainability issues into the company’s long term strategy?
- Has the company adequately communicated its approach to sustainability issues and its influence on strategy?
State Street then classifies companies into three tiers — Tier One companies have satisfied all three criteria, Tier Two companies have satisfied one or two of the criteria, and Tier Three companies have not satisfied any of the criteria. State Street will focus its active stewardship engagement on Tier Three companies and incorporate its assessment of company progress in proxy voting decisions.
While it is unlikely that the Securities and Exchange Commission will adopt any new climate risk or carbon disclosure rules during the Trump Administration, it appears that there may be growing demands by institutional investors for greater climate risk and carbon disclosure and active strategic management of these issues. CEOs, CFOs and board members should be prepared to address these subjects in their investor relations activities.