A Hot Week in Climate Risk

"It's Getting Hot in Here, So Make Sure Y'all Disclose"

We love a good topical deep dive, but this past week was a whirlwind of climate risk news and developments, so a recap seems more in order.

Climate Activists: (at least) 2, Exxon: 0

Some less expected news this week are the “new incoming leadership” at ExxonMobil, one of the world’s largest polluting companies. Activist shareholders at sustainable investment firm Engine No. 1 (who own only 0.02% of the company’s stock) put forward several climate resolutions which ended up winning the support of major institutional shareholders like BlackRock (BlackRock did however vote to keep current Exxon CEO Darren Woods director of the board. Woods oversees Exxon’s current plan to continue increasing its greenhouse gas emissions, climate consequences be damned).

“[The] Company has failed to evolve with the industry’s transition, resulting in significant underperformance to the detriment of shareholders,” writes Engine No 1., “The energy industry and the world are changing. To protect and enhance value for shareholders, we believe ExxonMobil must change as well. We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation.”

As a result, Engine No. 1 can now appoint at least two members to Exxon Mobil’s corporate board of directors (and possibly as many as four, as two other shareholder votes are too close to call), assigning a first-ever level of corporate climate accountability to a historically destructive and denialist actor.

While Exxon has thirteen total corporate directors, making the climate activists still the board minority, having several votes go against Woods’ leadership and the company’s status quo non-climate strategy are quite meaningful. Resources and investment will get shifted, strategic decisions may be changed (or blocked), and this momentum may carry forward in future governance outcomes.

Best of all for the planet, if it can happen at Exxon, it can happen at any American public company.

Biden Also Backs More Climate Risk Assessment

U.S. President Joe Biden also recently signed an executive order requiring his administration to create a comprehensive strategy around climate risk, including risk measurement and assessment, as well as mitigation and disclosure by government agencies and other actors:

“The intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies — such as increased extreme weather risk leading to supply chain disruptions.  In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers.  At the same time, this global shift presents generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers. The failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.  In this effort, the Federal Government should lead by example by appropriately prioritizing Federal investments and conducting prudent fiscal management.”

With a focus on public traded companies, economic growth, federal budgets, and worker pensions, the order is keenly focused on the financial consequences of the climate crisis.

While this remains rhetoric for now, these are strong words coming from the White House.

Relatedly, the SEC’s also named ESG and climate disclosure one of its top 2021 priorities. A newly convened Climate and ESG Task Force in the Division of Enforcement will begin looking at ESG misconduct and particularly deliberate “greenwashing” false statements in corporate sustainability disclosures.

However, SEC Commissioner Hester M. Peirce remained clear this month the SEC has no plans (for now) to offer its own standardized requirements for ESG reporting. “Unlike financial accounting, which lends itself to a common set of comparable metrics, ESG factors, which continue to evolve, are complex and not readily comparable across issuers and industries,” writes Peirce, suggesting the SEC still plans to give companies and standards agencies a fair degree of empowerment and autonomy around how ESG is measured and communicated.

The UK and EU Also Pushing Ahead on Climate Disclosure

British Chancellor of the Exchequer Rishi Sunak submitted a new proposal to the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) asking the countries to adopt and impose mandatory reporting of environmental risks on big, publicly traded companies. While the proposal isn’t likely to accelerate things in the U.S. given the SEC’s latest stance and statements, England and the EU are continuing their push for greater public and corporate climate accountability.

Last month, EU leaders and Parliament's negotiators agreed to set into law the bloc's objectives to be carbon-neutral by 2050 and to reduce GHG emissions by at least 55% by 2030. This “MOU” or verbal commitment now needs to be written into law, which will likely exert more pressure on companies headquartered or operating in the EU and UK, as well as establish clearer 2030 and 2040 environmental targets.

For reference, the EU’s only managed to achieve a 25% GHG reduction over the last 30 years. EU carbon emissions are dropping faster in the energy sector (10% last year) as the bloc continues to phase out fossil fuels (and this week alone a landmark Dutch court ruled Royal Dutch Shell needs to cut its emissions 50% by 2030), but this new law will likely impose more stringent operating, decarbonization, and disclosure requirements on shipping, transportation, manufacturing, and other industrial segments of the economy.

Source: Bloomberg

We should also note science-based targets that align with keeping global mean temperature warming below 2° C encourage a ~66% EU emissions cut.

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