Late Last month, SEC Commissioner Allison Herren Lee announced that the current proxy season had affirmed that there had been “a sea change on climate and ESG” that has moved the agency to consider “potential rulemaking to improve climate and other ESG disclosure for investors.” That is as clear a signal as any that corporate boards may soon be required to engage investors more vigorously on ESG-related issues that may have been brushed aside in the past.
Commissioner Lee told attendees at the Society for Corporate Governance national conference that proxy voting results on ESG-related proposals and the actions of activist investors who increasingly challenge directors for board seats “place ever greater responsibility on companies, and therefore boards, to integrate climate and ESG into their decision-making, risk management, compensation and corporate transparency initiatives.”
Commissioner Lee highlighted the following reasons boards should begin integrating climate and ESG into their business models:
• Climate activists won three seats on the ExxonMobil board of directors in a proxy fight over the company’s climate strategy;
• Shareholders approved a resolution seeking disclosure of the strategy to achieve net zero emissions at General Electric (98 percent approval) and at ConocoPhillips shareholders approved a resolution requesting emissions reductions in accordance with the Paris Climate Agreement (58 percent approval);
• Shareholder resolutions seeking racial equity audits nearly won majority support at JP Morgan and Duke Energy;
• Institutional investors BlackRock and State Street made it clear that that they would begin holding directors more accountable for failing to incorporate ESG into their business model or underperforming their peers on ESG standards;
• Proxy advisory firms ISS and Glass Lewis announced they would recommend investors vote against the reelection of directors deemed responsible for governance failures;
• The connection between ESG issues and shareholder interests has become evident by increased shareholder actions.
Going forward, there is an expectation that corporate boards will manage the risks associated with climate change and other ESG-related issues. An analysis of this proxy season gives directors several hints at which ESG policies boards should consider incorporating into their business operations voluntarily before shareholders lose patience and attempt to vote them off the board. If the largest institutional shareholders in the world and the most influential proxy advisors in the world are in agreement that failure to address ESG matters deserves ouster from the board, smaller shareholders are more likely to go along with that agreement, which places directors under a new type of pressure to make reforms.
Now that Commissioner Lee says the most influential government agency in the U.S. is interested in standardizing rules around climate and ESG disclosure, what more proof do boards need to make developing a strategy to mitigate risks and maximize opportunities regarding climate and ESG issues a priority? When government agencies, proxy advisors and shareholders agree on the same things, it’s time for boards to move. It would be wise for directors to come up with models for the types of climate and ESG disclosures that they are willing to live with, before government mandates disclosures they would rather live without.