Climate Change for your board.

Climate Week 2020 is over. But, your investors will continue to have interest in your company’s approach to Climate Change. They may:

• Invest more in or divest (Unless investor is an index fund, in which case, see #2.)
• Engage regarding role of climate in your strategy
• Vote FOR or AGAINST the nominees on your director slate
• Vote FOR or AGAINST your Say of Pay proposal
• Submit or vote on climate-related shareholder proposals
• Ask for additional disclosure about climate-related risk
• Ask how your climate-change goals inform your lobbying

Investor interest in Climate Change has implications for your board’s 2020 and 2021 agenda.

Here we explore 7 ways that your board can address your investors’ interest in Climate Change by incorporating Climate Change into board agendas. We suggest using various agenda topics (from the Foresight® library of agenda topics) to do that.

1. Understand How Your Investors Use Climate Change Risk to Screen Portfolio Companies

More investors, especially long-term investors, favor companies that are more climate-risk aware. They believe such companies are likely to perform better over the long-term. They are looking for companies with climate-risk aware boards. So, more investors are using some sort of climate-risk or broader ESG screen to determine which companies to invest in, retain, or divest.

Agenda Topic: Review investor base and priorities

Include information in briefing materials and board discussion about how climate-related risk influences your investors’ (and target investors’) Invest/Divest decisions.

Agenda Topic: Review strategically significant environmental, social and governance (ESG) risks

This report by management elevates for board review the company’s environmental, social and governance (ESG) risks — including Climate Change. ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance – such as the company’s response to Climate Change. Those issue could include various topics, including, for example: product packaging, water usage, health and workplace safety policies, supply chains practices (e.g., labor, raw materials, emissions, waste).

2. Prepare for Effective Investor Engagement

Reflecting their interest in climate-related risk, investors may want to learn more about your company’s approach to climate-related risk or to encourage your company to take action to identify and more aggressively address climate change risk. Prepare!

Agenda Topic: Review annual shareholder and proxy advisory firm engagement program

Include information in briefing materials discussion about how the company’s plans to bring its climate-risk message to investors – during analyst calls, at outreach meetings with the proxy voting teams at major or investors, and in conversation with proxy advisory firms.

3. Present a Climate- Informed Director Slate

Investors are increasingly looking hard at board composition – including looking for directors with experience that prepares them to effectively oversee climate-related risks and strategic opportunities.

Agenda Topic: Review board composition and refreshment – including diversity

Take a look at your board. Your directors do not all need to be Climate Change experts. But, your board and company benefit from directors with relevant experience dealing with and leading through scientific challenges and opportunities in the business context. In-depth discussion of your board’s talent and needs can produce a rigorous, short- and long-term director recruiting plan designed to bring beneficial and useful climate-relevant experience and perspectives onto the board.

Agenda Topic: Recommend director development plans

If the board does not include directors who understand and can effectively converse in the boardroom and with investors about science in a business context, consider adding science-focused training to your board’s and directors’ annual development plans.

Agenda Topic: Approve director nominees for inclusion in proxy statement

The governance/nominating committee may want to describe how climate-related experience impacted nominee selection and include infomration about all nominees’ climate-related experience.

4. Consider Whether Compensation Programs Can Incentivize Climate-Friendly Behaviors and Programs

Investors recognize that compensation programs reflect corporate priorities and drive behavior. For some companies, which may mean incorporating climate-related goals and measurements into compensation metrics.

Agenda Topic: Approve compensation philosophy

“What gets measured gets managed.” As the company advances its thinking about the role of climate change (even as a subset of Sustainability) in its strategy and operations, the compensation committee may want to incorporate climate-change or sustainability-related goals and measures into its compensation philosophy.

 Agenda Topic: Recommend say-on-pay proposal and disclosure for inclusion in the annual proxy statement

Annually, the board explains and submits its executive compensation actions to investor scrutiny. If climate-change or sustainability metric(s) are included in the company’s compensation program, note that and explain why. And, explain how those metrics impacted executive compensation.

5. Anticipate and Respond to Shareholder Proposals on Climate Change

During the 2020 proxy season, investors filed some 140 climate-related shareholder proposals. Those proposals addressed topics such as carbon asset risk, lobbying disclosure, board oversight of climate and sustainability, greenhouse gas emissions, clean energy, plastics, and recycling, financed emissions, deforestation, water risks, and sustainability reporting.

• The average vote FOR was 30% (up from 26% in 2019).
• Several won majority FOR votes (up from only 1 in 2019). A proposal requesting a report on the alignment of Dollar Tree’s business strategy with constraints posed by climate change earned a 73% FOR vote.
• Proponents withdrew about 40% of the shareholder proposals when negotiations resulted in companies committing to address the proposal’s issue.

Though the SEC’s recent rule changes may alter the shareholder proposal landscape somewhat, the overall cadence will likely remain: indication of investor concern, submission of shareholder proposal, possible submission of no-action request by company, negotiation, and, absent an agreement to withdraw, a vote on the proposal.

Agenda Topic: Review annual meeting preparations

Late in 3Q or early in 4Q, the governance committee generally looks ahead to the next annual meeting and considers evolving issues. That discussion should cover any new or challenging topics likely to be the subject of a shareholder proposal and consideration of the value of proactive outreach.

Agenda Topic: Review shareholder proposals and approve statements in opposition

If a shareholder proposal meets Rule 14a-8’s requirements, the company may seek to negotiate withdrawal. If negotiation fails, the board may include a statement in opposition in the proxy materials (if it does not support the shareholder proposal) or a statement in support (if it supports the proposal).

6. Consider What Investors Wants to See about Climate Change in Your Disclosure

Numerous ESG reporting frameworks have been developed by different organizations. They vary in emphasis, complexity, scope, and depth. None satisfies everyone. It is good for the board to be acquainted the board with the leading models in this space and with your investors’ climate-related disclosure preferences. Here is one example. According to Vanguard’s 2020 proxy season investment stewardship report:

• “Vanguard expects companies to disclose to the market how their board oversees climate-related strategy and risk management. We look for companies to provide quantitative disclosure of their performance metrics and progress against goals.”
• “A number of widely recognized industry frameworks provide useful guidelines for companies that seek to improve their sustainability disclosure. We support the framework created by the Task Force on Climate-related Financial Disclosures for disclosing strategy, risk management, governance, metrics, and targets. We expect the TCFD to continue to gain acceptance as a global standard (see the table on the next page). The Sustainability Accounting Standards Board produces useful industry-specific, materiality-oriented sustainability disclosure standards. We also support industry efforts with broad adoption, such as the Edison Electric Institute’s sustainability reporting template for U.S. electric utilities.”

Agenda Topic: Approve SEC Form 10-K

In connection with its review of the company’s Form 10-K, the board may want to consider what materials climate-change related information should be included in the Form 10-K or provided to investors in other formats, e.g., on the website, in a separate report.

7. Consider What Goals Inform Your Company’s Lobbying

Every business is subject to regulation of some sort in every jurisdiction in which it does business. That regulation can have impact on the Company’s results, reputation, strategy, product mix, and more.

Agenda Topic: Review annual report on regulatory environment

At least annually, management reports to the board (or a board committee) regarding the current and anticipated regulatory environment. That report should include information about significant company (and industry group the company supports) initiatives to influence the regulatory environment related to Climate Change.

Conclusion

Incorporting Climate Change elements into board agenda topics can improve your company’s preparedness and position with investors. It can also help your board address climate-related risk and strategic opportunities. Foresight’s agenda topic library, agenda management capabilities and curated information resources can make this approach easy for Corporate Secretaries and General Counsels.