On August 14, 2017, State Street Global Advisors, the world’s third largest asset manager, holding over $2.4 trillion in assets under management, issued new climate change disclosure guidance targeting U.S. and international public companies primarily in the oil and gas, utilities and mining sectors. This new guidance, entitled Perspectives on Effective Climate Change Disclosure, identifies “best practices” in climate-related disclosure and prescribes detailed disclosure methods in areas it deems pertinent to investors for evaluating whether “a company’s assets and long-term business strategy are resilient to the impacts of climate change.” In particular, State Street’s guidance emphasizes disclosure of climate change scenario planning and its impact on long-term strategy, which will carry significant business and strategic implications for U.S. public companies in these targeted sectors.

In recent years State Street has been signaling to investors and companies worldwide its increasing interest in enhanced climate-related disclosures from public companies. Its Global Proxy Voting and Engagement Principles, published in March 2016, made clear that State Street was engaging directly with companies on enhancing environmental disclosures and would not be limited in the future to expressing its views through non-binding shareholder proposals. State Street’s January 2017 letter to corporate directors reiterated that it was engaging directly with corporate boards to press for expanded climate-related reporting, as well as for other improvements in governance such as eliminating dual-class stock and enhancing diversity on corporate boards.

State Street’s new August 2017 guidance calls for public companies in the so-called “high-impact” sectors of oil and gas, utilities and mining to provide disclosure regarding: (1) governance and board oversight of climate risk, (2) long-term greenhouse gas (“GHG”) emissions goals, (3) assumptions regarding future carbon prices and (4) the impact of companies’ scenario analyses on long-term capital allocation decisions. The guidance discusses the degree to which companies should provide voluntary disclosure on board oversight of and director education regarding climate-related risk, and the extent to which companies should establish and disclose company-specific GHG goals that a company considers when making capital allocation decisions.

State Street’s expectations regarding scenario analysis and related disclosures will pose the most novel and acute challenges to public companies in the energy industry in 2018.1 Much like the Task Force on Climate-related Financial Disclosures sponsored by the Group of 20 in June 2017, State Street is expecting companies both to assess the viability of their short- and long-term business models in relation to hypothetical, near-future scenarios in which demand for carbon assets is significantly lower and the price of carbon assets is significantly higher or lower, and to publicly disclose the findings of these analyses. One potential risk posed by this type of disclosure, from the perspective of publicly traded companies, is that investors unaccustomed to analyzing such disclosures will mistake the disclosures for a company’s actual projections.

The new guidance reports that State Street has held over 240 climate-related, direct engagements with 168 companies over the last four years and has determined that “few companies can effectively demonstrate to investors how they integrate climate change risk into long-term strategy.” The guidance cites Norway-based Statoil ASA as establishing international market best practices with its climate-related disclosure, but states that the majority of U.S. companies “have yet to fully embrace climate-related scenario-planning,” and that “by incorporating results from scenario-planning exercises into long-term strategy, companies can better position themselves to capitalize on opportunities and to mitigate risks.”

State Street intends to focus its “active stewardship” on companies that have not satisfied its expectations with respect to this new guidance, and claims that it will hold companies accountable through its future proxy voting decisions. Such proxy voting decisions may not be limited to environmental shareholder proposals and could also include voting in director elections. There can be little doubt as to State Street’s increasing willingness to use its position as one of the dominant shareholders in corporate America to advance its objectives related to corporate environmental, social and governance policy. As a case in point, in the 2017 proxy season, State Street voted against the re-election of directors at 400 companies — over 10% of all U.S. public companies — for failure to take steps to add women to their boards in adherence with State Street’s board diversity initiative.

For public companies in these so-called “high-impact” sectors, the prospect of State Street and other large institutional shareholders demanding unprecedented policy reforms, disclosures and direct engagement related to climate and other environmental priorities is no longer remote and now has a tangible potential to influence expectations regarding public disclosures and internal financial analyses, risk management and corporate planning. As an additional example of the changing landscape of shareholder pressure, the Investment Stewardship Annual Report released on August 31, 2017, by the Vanguard Group has stressed that Vanguard will focus in the coming year on climate risk disclosures. Given the complex and competing factors at work affecting business strategy and environmental, legal, regulatory, tax, and investor relations objectives and policies, public companies will need to make important decisions in the coming year about whether and how to push back on shareholder pressure or change their practices. Either way, companies will need to design their responses through meticulous preparation and a comprehensive strategy developed with input from the gamut of their in-house experts and other experienced advisors.