State Street Issues New Recommendations for Enhanced Climate-Related Disclosures
On August 14, 2017, State Street Global Advisors, the world’s third largest asset manager, holding over $2.4 trillion in assets under management, issued new climate change disclosure guidance targeting U.S. and international public companies primarily in the oil and gas, utilities and mining sectors. This new guidance, entitled Perspectives on Effective Climate Change Disclosure, identifies “best practices” in climate-related disclosure and prescribes detailed disclosure methods in areas it deems pertinent to investors for evaluating whether “a company’s assets and long-term business strategy are resilient to the impacts of climate change.” In particular, State Street’s guidance emphasizes disclosure of climate change scenario planning and its impact on long-term strategy, which will carry significant business and strategic implications for U.S. public companies in these targeted sectors.
In recent years State Street has been signaling
to investors and companies worldwide its increasing interest in enhanced
climate-related disclosures from public companies. Its Global
Proxy Voting and Engagement Principles,
published in March 2016, made clear that State Street was engaging directly
with companies on enhancing environmental disclosures and would not be limited in
the future to expressing its views through non-binding shareholder proposals. State
Street’s January
2017 letter to corporate directors reiterated
that it was engaging directly with corporate boards to press for expanded
climate-related reporting, as well as for other improvements in governance such
as eliminating dual-class stock and enhancing diversity on corporate boards.
State Street’s new August 2017 guidance calls
for public companies in the so-called “high-impact” sectors of oil and gas,
utilities and mining to provide disclosure regarding: (1) governance and board
oversight of climate risk, (2) long-term greenhouse gas (“GHG”) emissions goals,
(3) assumptions regarding future carbon prices and (4) the impact of companies’
scenario analyses on long-term capital allocation decisions. The guidance
discusses the degree to which companies should provide voluntary disclosure on
board oversight of and director education regarding climate-related risk, and
the extent to which companies should establish and disclose company-specific
GHG goals that a company considers when making capital allocation decisions.
State Street’s expectations regarding scenario
analysis and related disclosures will pose the most novel and acute challenges
to public companies in the energy industry in 2018.1 Much
like the Task Force on Climate-related Financial
Disclosures sponsored by the Group of 20 in June 2017, State Street is
expecting companies both to assess the viability of their short- and long-term
business models in relation to hypothetical, near-future scenarios in which
demand for carbon assets is significantly lower and the price of carbon assets
is significantly higher or lower, and to publicly disclose the findings of these
analyses. One potential risk posed by this type of disclosure, from the
perspective of publicly traded companies, is that investors unaccustomed to
analyzing such disclosures will mistake the disclosures for a company’s actual
projections.
The new guidance reports that State Street has
held over 240 climate-related, direct engagements with 168 companies over the
last four years and has determined that “few companies can effectively
demonstrate to investors how they integrate climate change risk into long-term
strategy.” The guidance cites Norway-based Statoil ASA as establishing
international market best practices with its climate-related disclosure, but
states that the majority of U.S. companies “have yet to fully embrace
climate-related scenario-planning,” and that “by incorporating results from
scenario-planning exercises into long-term strategy, companies can better
position themselves to capitalize on opportunities and to mitigate risks.”
State Street intends to focus its “active
stewardship” on companies that have not satisfied its expectations with respect
to this new guidance, and claims that it will hold companies accountable
through its future proxy voting decisions. Such proxy voting decisions may not
be limited to environmental shareholder proposals and could also include voting
in director elections. There can be little doubt as to State Street’s
increasing willingness to use its position as one of the dominant shareholders
in corporate America to advance its objectives related to corporate
environmental, social and governance policy. As a case in point, in the 2017 proxy
season, State Street voted against the re-election of directors at 400
companies — over 10% of all U.S. public companies — for failure to take steps
to add women to their boards in adherence with State Street’s board diversity
initiative.
For public companies in these so-called “high-impact”
sectors, the prospect of State Street and other large institutional shareholders
demanding unprecedented policy reforms, disclosures and direct engagement related
to climate and other environmental priorities is no longer remote and now has a
tangible potential to influence expectations regarding public disclosures and internal
financial analyses, risk management and corporate planning. As an additional
example of the changing landscape of shareholder pressure, the Investment
Stewardship Annual Report released on August 31, 2017, by the Vanguard
Group has stressed that Vanguard will focus in the coming year on climate risk
disclosures. Given the complex and competing factors at work affecting business
strategy and environmental, legal, regulatory, tax, and investor relations objectives
and policies, public companies will need to make important decisions in the
coming year about whether and how to push back on shareholder pressure or change
their practices. Either way, companies will need to design their responses
through meticulous preparation and a comprehensive strategy developed with
input from the gamut of their in-house experts and other experienced advisors.
1 The V&E Climate Change Blog has previously
discussed aspects of these challenges in relation to the Recommendations of the
Task Force on Climate-related Financial Disclosures. See The
Task Force on Climate-Related Financial Disclosures Calls for Never-Before-Used
Scenario Analysis in Public Disclosures (Jun. 1, 2017) and IHS
Markit Challenges Recommendations of the Task Force on Climate-Related
Financial Disclosures (Jun. 1, 2017).