State Street Global Advisors is sending a clear signal to corporate boards: get serious about climate change, now.
State Street, which manages $2.8 trillion in assets, released its Climate Change Risk Oversight Framework for Directors this week. The report details why the institutional investor regards climate change as a material risk to companies, and what it believes directors should be doing about it. This is a clear effort by State Street to exert leverage on boards that do not appear to have developed a strategy to combat the potential negative impacts climate change may have on the long term growth of their companies.
In the report, State Street makes clear that, “Climate change will continue to be a priority for our asset stewardship and company engagement program in 201 as we seek to promote effective environmental and sustainability practices and better company performance on behalf of our clients and other stakeholders.”
Now that State Street has identified climate change risk as a priority in the evaluation of its portfolio of companies, what does this mean for directors?
• Corporate boards should expect other institutional investors to endorse State Street’s framework and begin pressuring companies they invest in to adopt much of its principles. Over the next 10 years, the way boards respond to climate change-related issues will only increase in importance.
• It might be a good time for directors to engage with their company’s largest investors to determine their climate-related concerns and then respond accordingly. Engaging with other stakeholders like suppliers and customers could yield positive information as well. Making sure all companies in the supply chain are minimizing climate-related risks in ways that meet the expectations of investors and customers will produce multiple benefits.
• Since the State Street framework offers “Guidance for Directors on Evaluating Climate Risk and Preparedness of a Company,” this takes away most excuses boards may have had for not addressing the three primary climate-related risks in their corporate strategy – physical risk, regulatory risk and economic risk. Boards that continue to ignore requests for explanations of how their company business model is dealing with climate change risks could potentially risk facing shareholder proposals mandating specific responses to climate change in a proxy vote. In February this year, ISS Analytics reported that there were 59 climate-related shareholder proposals filed, so expect that number to increase. In industries most sensitive to climate change risks, directors might even risk facing “No” votes when coming up for re-election.
• Directors may also notice higher scrutiny of the board’s composition. Investors may want to ensure that the board is prepared to properly assess all climate-related risks in the future, and that might require adding directors to the board who are more experienced with climate related issues. Shareholders may push for directors with experience minimizing climate-related risks and recognizing climate-related economic opportunities.
It is clear that State Street and other investors that have filed climate change shareholder proposals believe that climate change risk presents a significant obstacle to the future growth of most companies. Climate change risk will likely be on every board’s agenda for 2020.