Practicing Responsible Climate Policy Engagement in 2022
The 2022 proxy season was another record-breaking year for climate-related shareholder proposals. Shareholders filed 227 proposals, a 51 percent increase from last year, but they also withdrew a record number of proposals after winning commitments from their portfolio companies.
Among those withdrawals were six shareholder proposals that called for companies to report on the alignment of lobbying with the Paris Agreement, underscoring the growing movement among investors looking for insight into whether businesses’ climate lobbying is in step with their climate commitments.
Against this backdrop of successful shareholder and portfolio company engagements, Ceres is refreshing its benchmark assessment of the S&P 100 companies’ engagement on climate policy. A significant majority of companies publicly acknowledge climate-related material risks, and a large majority have governing systems in place for boards to oversee company climate strategy and risk management. Additionally, an even larger majority of companies are setting individual emissions reduction targets.
Responsible Policy Engagement
However, for most of the companies that Ceres has assessed, the persistent misalignment of public commitments and internal climate strategy with public advocacy efforts that work against effective climate policy continues.
When trade associations lobby successfully against regulatory and legislative frameworks, as was the case this year with the defeat of the US House of Representatives-backed Build Back Better proposal, the absence of a level playing field can serve to undermine a company’s climate strategy and amplify risks or negate opportunities. The climate proposals of that earlier, broader bill are still in play and the focus of negotiations in the US Senate while some funding for it remains the focus of trade associations’ lobbying. To address the risks introduced by lobbying misalignment and the increasing focus by investors on that misalignment, there are a key few steps boards can take.
Boards should begin by assessing the impact of climate change on their companies, including the impact of lobbying against climate policy. A cross-functional materiality assessment should be prepared by management and presented to the board for evaluation, ideally by the company’s sustainability team.
Management should conduct internal assessments of direct and indirect lobbying positions on climate policy, also for evaluation by the board. It is often effective for board oversight of climate risk to be organized within a specific climate risk committee or other standing committees. The board committee should work closely with management on climate risk assessments which can then be presented to the full board.
Boards should govern to systematize decision-making on climate risk throughout the organization and on lobbying. This means integrating climate risk analysis and decisions across functions and departments throughout the organization, and likely may include centralizing reporting. It also means that the process of oversight of decision-making by the board should be part of the regular board reporting cycle.
We believe that boards should act to align direct and indirect lobbying with science-based climate policies. The connection between internal climate strategy and external lobbying activity should be clear, fully evaluated by the board and misalignment identified and corrected by management. If lobbying activity is deemed appropriate and necessary, boards should require lobbying directly for Paris-aligned climate policies and expect management to engage with trade associations to align lobbying with climate science.
The role of the board within responsible policy engagement should begin by clearly defining the difference between the role of the board and that of management. It is the responsibility of management to develop strategies and tactics to ensure the short- and long-term success of the business across its stakeholders. It is also the responsibility of the board to represent the fiduciary interests of stakeholders and to hold management accountable for the successful execution of business strategy, but it is not the responsibility of the board to run the day-to-day operations of a company.
With respect to responsible policy engagement, it is the role of the board to exercise oversight of the lobbying activity of the company and ensure its alignment with company strategy. In the case of trade associations that have lobbied against effective climate policy and regulatory frameworks, it is the role of the board to require communication by management of lobbying misalignment and hold management accountable for the correction of misalignment in support of the success of the company’s climate strategy and mitigation of climate risk.
Yamika Ketu is now a senior associate with the Ceres Accelerator for Sustainable Capital Markets
Todd Miller is the governance manager for the Ceres Accelerator for Sustainable Capital Markets.