Boards Can Drive Science-Based and Risk-Aware Climate Lobbying
Amid the many shocks rocking our society and economy right now, directors may have missed some disturbing new research. In July, the World Meteorological Organization estimated that that the Earth’s average temperature could rise to 1.5-degrees Celsius above pre-industrial levels—considered the tipping point for the planet’s climate—during at least one of the years between now and 2024. This is years ahead of previous projections.
Climate risk is taking on entirely new significance. Accepted as a financial risk, understood to be a material risk, there’s an increasing consensus among central banks and other financial regulators that climate change is now also a systemic risk.
Why should boards and corporations care about this? When a risk is systemic, it affects the very stability of financial markets and there is no avenue to diversify from this risk. The current pandemic offers a useful analogy. Climate change could have such wide-ranging and compounding effects that everyone participating in global financial markets will be impacted.
Given this understanding and the rapidly shrinking window to act, a new Ceres report calls for all corporate action, including lobbying, to take into account the systemic risk of the climate crisis and therefore be aligned with the latest climate science. It calls for “risk-aware” climate lobbying. It asks the following questions: Does your lobbying, especially on climate change, fully consider the risks that global warming poses for your business? And is any of that lobbying actually contributing to creating more risk for your company or industry?
Investors are particularly conscious of how this disconnect between climate science and climate lobbying could create an investment risk.
In 2018, institutional investors with $2 trillion in assets under management called on the 55 top greenhouse gas-emitting European companies to “ensure any engagement conducted on their behalf or with their support is aligned with our interest in a safe climate.” As a result of this investor focus, Royal Dutch Shell, BP, and Total have conducted assessments on the extent to which their large trade association memberships align with their positions on climate change. Building on the success in Europe, in 2019, 200 institutional investors with a combined $6.5 trillion in investments asked 47 of the largest US publicly traded corporations to specifically align their climate lobbying with Paris Agreement goals.
But investors aren’t just asking—they’re acting. In a big win, 53 percent of shareholders at Chevron Corp. voted this summer for a resolution that would push the oil firm to ensure its lobbying activities around climate issues align with the Paris Agreement. This marks the first time a climate proposal won a majority of the company’s shareholder votes. Other climate-related lobbying proposals won support elsewhere this proxy season—at Duke Energy Corp. with 42.4 percent in favor, Exxon Mobil Corp. with 37.5 percent, Caterpillar with 34 percent, General Motors Co. with 33 percent, Delta Air Lines with 45.9 percent, and United Airlines with 31.4 percent.
What role can boards play in helping the companies they serve better align their lobbying activities with climate risk? Directors can do the following:
Assess. Understand your company’s risk management efforts on climate change, including whether and how climate change is assessed as part of enterprise-risk management. Boards could ask management whether that assessment considers the latest climate science and the evolving notion of climate change as a systemic risk. Companies are already starting to conduct climate change-scenario assessments, which could be a great avenue for integrating such thinking.
As a part of this, boards could also encourage management to assess whether their direct and indirect lobbying is aligned with the latest climate science. Ceres calls on companies to use “science-based climate lobbying”—or policies that align with the latest climate science—as the new north star and identifies a number of resources that provide updated details on what this could involve. These assessments should encompass direct lobbying and indirect lobbying done through trade associations.
Govern. Boards should look to see if their companies have the right systems in place to ensure that risk monitoring, sustainability, and government relations are cross-functional and collaborative, particularly in relation to climate lobbying. Boards should also engage management in conversations about how decisions around climate lobbying have the potential to mitigate or exacerbate the risks that a company faces.
Encourage action. Finally, boards should encourage management to act. These actions could include providing disclosures that affirm climate science and directly lobbying on policies that support climate science. Management should be encouraged to engage major trade associations on their own climate lobbying with a view to ensuring that these efforts are also aligned with climate science.
The pandemic shows us the critical value of leadership that combines a clear-eyed assessment of risks with the understanding of the very latest science. It is time to apply this lesson to climate lobbying.
Veena Ramani is a research director at FCLTGlobal. She is an expert in climate change, corporate governance, and ESG disclosure.