Expect Aggressive Shareholder Actions on Climate-Related Risk Disclosure in 2022

Shareholders are not just going after directors’ board seats—they are also seeking to hold them legally responsible for failing to address climate change related risks.

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Evidence is building that climate-related risks have become a greater focus of shareholder groups in 2022. Last year saw a record 18 climate-related shareholder proposals win majority votes, and events this year show that shareholders are willing to push companies to take action on climate issues in a number of ways.

Chevron shareholders are attempting to remove Chairman and CEO Michael Wirth and board member Ronald Sugar from the oil company’s board because the company has failed to address climate change quickly enough. Shareholders allege that the board’s plans for a reduction of as little as 5 percent of the emissions from its energy products doesn’t address the results of a shareholder vote last year calling for Chevron to “substantially reduce the greenhouse gas (GHG) emissions of their energy products.” More than 60 percent of Chevron shareholders voted for substantial reductions in carbon emissions last year. Dissatisfied with the board’s response to a concern shared by the majority of shareholders, a more aggressive climate-related proposal to oust board members was filed at Chevron this year. The apparent message: move quickly on climate change or face efforts to quickly remove you from the Chevron board.

Shareholders are not just going after directors’ board seats – they are also seeking to hold them legally responsible for failing to address climate change related risks. Oil giant Shell’s shareholders have filed suit against the company’s 13 executive and non-executive directors – attempting to hold them personally liable for failure to implement a climate strategy in alignment with the Paris Agreement on climate change. Although the Shell lawsuit may be the first to potentially link the board’s failure to address climate-related risk with a breach of fiduciary duties, don’t expect it to be the last.

Trying to remove a CEO from his own company board and seeking to make board members personally liable for climate-related impacts to their company demonstrate the unprecedented measures shareholders are willing to use in order to speed the transition away from fossil fuels. These aggressive shareholder actions regarding climate-related issues could be a signal that:

• Boards that commit to climate-related changes will be held to a high standard. Corporate board members should expect to see shareholders at a broad range of companies move more aggressively to hold directors accountable if they suspect boards are “slow-walking” or ignoring the need to develop a solid business plan to transition away from fossil fuels. Climate-related risks are fast becoming viewed as material to the future growth of a company. Most guidance on this issue calls for boards to provide a publicly available report that discloses the impact of climate change risks on company operations along with how the board intends to provide independent and informed oversight of climate risks and opportunities (including details regarding who on the board has appropriate climate-change expertise). If they haven’t already, boards should begin formulating their approach to communicating how the company will transition away from fossil fuels and what the impact on the company business model will be immediately.

• Directors will have to engage with large institutional shareholders, proxy advisors and climate change advocates to avoid proxy fights. In the current environment of hyper scrutiny, large institutional investors like State Street Global Advisors have already stated that they will start voting against directors at companies that don’t publicly disclose emission reduction targets and how their boards will oversee climate change related risks. Institutional Shareholder Services (ISS) has also said that it will recommend shareholders vote against incumbent directors at companies that have inadequate climate change disclosures or do not commit to emissions reduction targets. Companies that do not disclose how they will handle climate-related issues will likely be called out publicly, putting director appointments at risk. While few directors have lost board positions on these matters, ExxonMobil’s loss of three board seats to dissident shareholders over its handling of climate change strategy last year proves that the conditions are right for the same thing to happen again.

• The success of climate-related proposals last year will produce more similar proposals in 2022. Climate change advocates are so serious about getting companies to address climate-related risks that they are providing substantial resources to help shareholders confront boards on the issue. For example, the website www.sayonclimate.org offers a say-on-climate resolution template that shareholders can modify and file at companies they are invested in. With these types of “ready-made” resolutions available, shareholders of any size can challenge company governance practices at almost any moment. Boards need to prepare comprehensive plans on how they would handle climate-related risks before shareholders accuse them of ignoring the issue entirely.