“This is a watershed moment for investors and financial markets,” said Allison Herren Lee, a commissioner at the US Securities and Exchange Commission (SEC), on 21 March as the country’s top financial watchdog submitted a proposal that, if approved, would oblige all the country’s publicly traded companies to report their greenhouse gas (GHG) emissions.
The move is seen as a potentially seminal moment for the climate agenda, with the world’s largest economy looking to join the likes of New Zealand, Japan, India and the UK in forcing domestic companies to report on their environmental impact.
It also represented one of a few recent examples of investors using their collective financial clout and influence to push for increased climate action from the private sector. Following the launch of the Glasgow Financial Alliance for Net Zero (GFANZ) – backed by $130trn of global capital – at COP26 in November 2021, these developments are evidence that the investor-driven climate action agenda is starting to have a substantive impact – but is it too little too late?
Investor climate breakthroughs
Under the SEC’s proposal, publicly traded companies would have to report their GHG emissions and get independent verification of their estimates. Companies would be required to disclose their direct and indirect GHG emissions, known as scope 1 and 2 emissions, while the largest companies would also have to disclose their scope 3 emissions – such as the carbon footprint of suppliers, business travel and any assets a company leases – if they are “material”.
Approved by a three-to-one vote, the US public now has up to 60 days to comment on the proposed rules – which, if approved, could take weeks or months to enforce.
Prominent Republicans and the US Chamber of Commerce have accused the regulator of overstepping its authority and vowed to fight the proposal. SEC chair Gary Gensler said the agency was reacting to investor demand for consistent information on how climate change will impact the financial performance of companies they invest in. The regulator issued voluntary guidance for emissions reporting in 2010 but these would be the first mandatory disclosure rules.
“The latest proposal is the largest and most concrete action regarding climate disclosures in the Commission’s history,” said Kyle W Danish, Michale L Platner and A J Singletary of prominent US law firm Van Ness Feldman in an editorial. “Many investors have asked for more disclosure requirements and oversight since 2010.”
On 14 March, a week before the SEC’s announcement, global investors had stepped up pressure on corporate climate lobbying by launching a 14-point action plan for companies to adhere to or risk having shareholders vote on their actions.
The Global Standard on Responsible Climate Lobbying urges companies to commit to lobbying in favour of climate action, disclose support for trade organisations lobbying on their behalf and take action if it goes against the world's goal of capping global warming at 1.5°C above pre-industrial levels.
Led by Swedish pension scheme AP7, BNP Paribas Asset Management and the Church of England Pensions Board, the standard was backed by investor groups that collectively manage $130trn of assets.
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“Corporate lobbying can significantly influence public climate policy,” said Clare Richards, senior engagement manager, Church of England Pensions Board. “We want the standard to set a high bar for companies, and to encourage a move away from ‘negative lobbying’ towards actively engaging in ‘responsible lobbying’ through supporting policies aligned with the goals of the Paris Agreement.”
On the same day, more than 680 financial institutions – including Allianz, Amundi, AXA, BNP Paribas, CalPERS, Capital Group, State Street and Vanguard – announced they would be requesting 10,400 companies worldwide, worth $105trn in market capitalisation, to disclose data on their environmental impact in 2022.
The letters to the companies’ boards asked them to disclose data on climate change, deforestation and water security through CDP, the non-profit that runs the world’s environmental disclosure system for companies, cities, states and regions. Almost 100 more financial institutions put their name to the disclosure request than last year, which already saw 13,000 companies representing some 64% of global market capitalisation report their environmental impact through CDP.
“Investors have an important role to play in driving corporate transparency and action on environmental issues,” said Jean-Jacques Barbéris, head of institutional and corporate clients coverage and ESG supervisor at asset manager Amundi. “We need this comparable, consistent and clear data for our investment decision-making, our research, our product development, our corporate engagement and our regulatory compliance.”
Investors are stepping up
These developments are indicative of a more concerted push for climate action by global investors in the past year and a half. In fact, in a recent Europe-focused report, CDP itself singled out the accelerated progress on climate action made by the financial sector. In a 50% annual improvement, 44% of European financial institutions now report ‘financed emissions’ and 32% of disclosing financial institutions report specifically encouraging companies in their portfolios to set emissions targets in line with 1.5°C.
Investors are also increasingly engaging with companies at a shareholder level to get them to up their climate game. Last year, a record-breaking 98% of investors in General Electric backed a climate-related resolution; chemicals company BASF set a net-zero target following engagement with concerned shareholders; Chevron’s shareholders forced it to set tougher emissions goals; and, in a stunning David and Goliath upset, tiny activist investor Engine No. 1 won three seats on the board of ExxonMobil to push the oil giant to create “a credible strategy to create value in a decarbonising world”.
Proxy Preview, an initiative that tracks ESG resolutions at US-listed companies, described 2021 as a “record-breaking year”. It saw 34 majority votes for disclosure or action on ESG issues, up from 2020's record of 21. Nearly 20 votes garnered more than 70% investor support – up from two the year before – with six supported by more than 90% of investors.
Too little, too late?
However, for all the improvement, much of the investor community could and should be doing a lot more. Voting data from Proxy Insight reveals that out of the 46 asset owners that made up the Net Zero Asset Owners Alliance (a predecessor and now constituent part of GFANZ) as of September 2021, only 13 directly exercised their voting rights on climate-related shareholder proposals. Overall, the group actually opposed about 30% of climate-related resolutions, and votes in favour were more likely to call for a company to do less anti-climate lobbying than require substantive changes to its operations or carbon footprint.
The individual track records of the world’s three biggest asset managers – BlackRock, Vanguard and State Street, all GFANZ members – is particularly poor. BlackRock, for one, opposed 47% of climate resolutions, State Street 58% and Vanguard 62%. In addition, according to responsible investment charity Share Action, some signatories of the Net Zero Asset Managers Initiative – now also subsumed into GFANZ – have committed under 2% of their assets to be managed in line with net zero, falling far short of the ambition needed to meet the scale of the climate crisis.
According to Morningstar’s Proxy Voting Database, support for environmental and social shareholder resolutions has increased from 20% to 34% in the seven years since the Paris Agreement. That is headed in the right direction, but, put simply, the world does not have the time to allow for such a slow rate of change. The IPCC has warned that emissions need to be cut in half by 2030 if global warming is to be kept to a maximum of 1.5°C, beyond which even half a degree will significantly worsen the droughts, floods, extreme heat and poverty experienced by hundreds of millions of people.
Analysis from UN High Level Climate Action Champions, experts appointed to bolster climate action among non-state actors, has found that the private sector could deliver 70% of the total investments needed for net zero. In light of that, the recent progress seen in the investor-driven climate agenda cannot be sniffed at – particularly the SEC’s proposed disclosure rule, given its potential economic reach. However, most of these developments are still focused on getting companies to be transparent about their environmental footprint, not actually requiring them to do anything about it.