Climate Governance Must Include Lobbying Oversight
One of the key themes of the 2021 proxy season was the dramatic surge in investor interest in climate lobbying. Five winning shareholder proposals asked companies to report on how their lobbying aligned with the Paris Agreement, a trend that is sure to spur even more investor action in 2022.
Ceres recently assessed publicly available information on 96 large, US-based companies to understand how they are engaging in climate policy. What we found is that while these businesses increasingly recognize the threat of climate change and are oftentimes reducing their own greenhouse gas emissions, they seldom advocate for ambitious climate policies.
More specifically, among the assessed companies, 74 percent publicly acknowledge climate change as a material risk to their enterprises, 88 percent formally charge their boards with the responsibility to oversee climate or sustainability, and 92 percent are setting emissions reduction goals for their own operations. Essentially, they recognize the problem and commit to individual action—steps that show enormous progress.
Unfortunately, we cannot solve the climate crisis unilaterally. Since emissions anywhere contribute to climate change everywhere, collective action is necessary to ensure a level playing field where all emitters act responsibly. Companies that face climate risks should support strong policy solutions, but they often focus on the constraints rather than the benefits.
Of the companies we assessed, only 40 percent have engaged directly with lawmakers on the importance of specific science-based climate policies (i.e., policies aiming to keep global warming within 1.5 degrees Celsius of pre-industrial temperatures). Twenty-one percent have lobbied in opposition to such policies, and these were often the same companies that were establishing targets and lobbying for climate regulation in other contexts. These misalignments raise serious issues around climate governance, which boards should address by taking the following three steps:
1. Assess the value-creation opportunities that open with climate regulation in place. Firms generally prefer free markets over increased regulation, but what would uncontrolled climate change really look like for your organization? Chances are, increased storm activity, wildfires, droughts, and populations displaced as a result of these climatic changes would negatively impact operations. Meanwhile, investment in low-carbon product development would be more challenging without government support—think of electric cars, which can benefit from public investment in charging infrastructure.
Boards can engage management to embed climate risks within the larger enterprise risk management (ERM) system. This embedding process should consider the latest climate science, including projections of the physical and transition risks of climate change that could affect a company’s operations and value chain. An assessment of the current regulatory environment and how that environment is projected to change in the coming years is similarly crucial. A helpful reference while conducting these assessments is the 2018 guidance on how to integrate environmental, social, and governance (ESG) issues into the traditional ERM process from the World Business Council for Sustainable Development and the Committee of Sponsoring Organizations of the Treadway Commission.
2. Systematize decision-making on climate change across the company. Boards with an explicit mandate to oversee both climate change and public policy are best positioned to consider these issues and the overlap between them regularly and robustly. If your company does not yet formalize this responsibility within the board, it’s time to consider embedding that language in the appropriate board committee charter.
Stakeholders, including investors and regulatory bodies such as the US Securities and Exchange Commission, are increasingly holding boards accountable for perceived greenwashing. Professing to have strong climate policies while supporting lobbyist efforts to the contrary potentially opens boards and their companies to criticism and consequences.
3. Regularly conduct an audit of the company’s climate positions to ensure consistency. A growing number of investors are calling on companies to conduct internal audits, which the board should oversee, into the extent to which lobbying efforts are aligned with science-based climate policy. These audits should cover both direct lobbying with policymakers and indirect lobbying conducted on a company’s behalf by the trade associations to which it belongs.
Boards should oversee these internal audits at regular intervals as the scope and context of climate impacts evolve, and they should systematize concrete steps and timelines to address any misalignment that the audits reveal. Amid investors’ growing interest in companies’ lobbying efforts, it is also strongly recommended that companies disclose the results of those audits as well as the steps companies plan to take to tackle any misalignment they find.
Ultimately, this helps satisfy investors and other stakeholders and mitigate the company’s own climate-related risk exposures.
Margaret Fleming is a governance associate with the Ceres Accelerator for Sustainable Capital Markets.
Melissa Paschall is manager of governance at Ceres.