Kirkland partners Alexandra Farmer, Jennie Morawetz and Raya Treiser and associate Donna Ni explore how regulatory action under the Biden administration will boost market trends, pushing companies to take more action on climate change.
Policy changes expected under the Biden administration will impact public company requirements for climate-related governance and reporting. In the meantime, there are a number of steps companies can take to position themselves to navigate the expected increase in regulation and enforcement as well as to align their business strategy with market trends.
Public companies are already facing increasing pressure to improve their ESG performance in order to attract capital. According to the US Forum for Sustainable and Responsible Investment, one in three dollars invested in the US now includes a sustainable mandate, and Bloomberg has reported that the global sustainable debt market grew by 29 percent to a record $732 bn last year.
In many cases, companies can boost ESG ratings from providers such as MSCI and Sustainalytics through enhanced disclosures and, as a result, 90 percent of companies in the S&P 500 issued sustainability reports in 2020, up from about 20 percent in 2011, according to the Governance & Accountability Institute.
In addition, the increasing frequency and intensity of wildfires, floods and other extreme weather events and public calls for climate action have led investors to prioritize climate change. We have seen an increase in the influence of investor coalitions such as Climate Action 100+, which grew to include more than 545 investors with more than $52 tn in assets under management in 2020, and Say on Climate, which filed resolutions at seven US-listed issuers in 2020 and received a public commitment from Moody’s Corporation, its first S&P 500 company.
In response to these market forces, corporate climate commitments grew at least three-fold between 2019 and 2020 (from 500 to 1,541), with Amazon, global asset managers, banks and major oil & gas companies making noteworthy commitments. Companies particularly in the energy, oil & gas, materials & building and airline sectors are increasingly aligning their disclosures with the framework of the TCFD. As of October 2020, more than 1,500 organizations had expressed support for the framework, including nearly 60 percent of the world’s 100 largest public companies and more than 110 governments, including those in Canada, France, Japan, Sweden and the UK.
Certain governments, including those in New Zealand and the UK, have gone a step further and announced plans to make TCFD-aligned climate reporting mandatory. In his recent letter to CEOs, BlackRock chief executive Larry Fink reiterated his firm’s endorsement of TCFD in asking companies to disclose how their business models will be compatible with a net-zero economy.
Regulatory pressure to boost existing trends
The trends discussed above will likely gain momentum under President Joe Biden, who has created an unprecedented federal framework for climate action. In one of his first acts as president, he signed a number of executive orders that create a government-wide mandate to advance climate policies, directing each federal agency to ‘drive assessment, disclosure and mitigation of climate pollution and climate-related risks in every sector of our economy.’
Acting SEC chair Allison Herren Lee has acknowledged the ‘growing consensus that climate change may present a systemic risk to financial markets’ and the SEC has taken a number of steps to signal enhanced climate risk disclosure requirements and ESG-related enforcement, such as:
- Appointing Satyam Khanna as its first senior policy adviser for climate and ESG
- Directing the division of corporation finance to review the extent to which public companies are following the agency’s 2010 guidance on climate disclosures and update that guidance based on its findings
- Creating a climate and ESG task force within the division of enforcement that will focus on, among other things, material gaps or misstatements in issuers’ disclosure of climate risks.
Meanwhile, President Biden’s nominee for SEC chair, Gary Gensler, has said he will work to provide investors with meaningful climate risk disclosures, and the agency may find support on Capitol Hill for new rules to that effect.
Climate efforts at the SEC are likely to be supported by other financial regulators, including the US Department of the Treasury, Financial Stability Oversight Council, Commodity Futures Trading Commission and Federal Reserve, which have indicated an intent to address the risk climate change poses to financial system stability.
In addition, congressional leaders with SEC oversight responsibilities, including Senator Elizabeth Warren, D-Massachusetts, and Senator Dianne Feinstein, D-California, have indicated support for climate disclosures and at least one bill has already been introduced this term that would require enhanced climate disclosures.
Companies can take a number of actions now to enhance their climate governance and reporting to prepare for increased regulation and enforcement propelling existing market trends.
Evaluate and consider enhancements to climate governance structures
Certain investors favor companies that clearly delineate climate responsibilities within their governance structures and disclose information on board-level oversight. Many companies assign responsibility for climate strategy to the nominating and governance committee, although some assign it to a dedicated ESG/sustainability committee.
In light of increasing regulator and investor scrutiny, companies are also increasingly assigning some responsibility for oversight of published climate data to the audit committee.
Companies should evaluate committee charters to ensure they accurately reflect the company’s approach to governance.
Companies can further assess whether they need or want additional board-level climate expertise. According to a 2020 PwC survey, 67 percent of directors believe climate change should play a role in forming company strategy, up from 54 percent in 2019. But a study of Fortune 100 board directors by the NYU Stern Center for Sustainable Business finds that just five of the 1,188 directors evaluated have apparent climate expertise.
Companies should also consider the roles of management and counsel within their climate governance structures. Some companies find it helpful to organize key stakeholders within the company into a climate task force that reports to the relevant board committees.
Regularly assess climate risks and opportunities
Climate science and the regulatory landscape are evolving rapidly, which means it is helpful for companies to set up procedures to regularly assess climate risks and opportunities. As part of this process, some companies review the climate aspects of their ESG scores and conduct peer benchmarking to identify potential strengths and areas for improvement.
It is important to evaluate the climate policies of key current and prospective investors, customers and suppliers, too. As these external stakeholders increasingly make their own climate commitments, companies that position themselves to align with these policies may obtain a competitive advantage; companies that do not risk losing business or capital.
Companies are also increasingly working with internal and/or external technical advisers to conduct quantitative and qualitative climate risk assessment involving scenario analysis – a hallmark of the TCFD framework – to test their resilience to various climate scenarios and inform their overall climate goals, strategy and mitigation plans. It may be helpful to assess both physical risks to assets and supply chains as well as transition risks from policy, regulatory, legal and market changes caused by the shift to a low-carbon economy.
Develop and refine climate goals, strategy and mitigation plans
Companies can use their iterative assessments of climate risks and opportunities to develop and refine their climate goals. As noted above, companies are increasingly pledging publicly to carbon reductions, with 30 percent of Fortune Global 500 companies having committed to be carbon-neutral or meet a 100 percent renewable electricity or science-based target by 2030, as reported by Natural Capital Partners.
In setting goals, companies typically start with calculating their carbon footprints and then progress to evaluating their options for operational reductions, renewable energy, supply chain management and offsets that can be used to achieve reductions in a way that works best for their business strategy and operations. An increasing number of companies are obtaining third-party assurance of carbon footprints, targets and reductions in light of increasing scrutiny of these metrics.
Apart from climate commitments, investors and regulators increasingly expect companies to integrate climate change into their enterprise risk-management programs. Companies that do so effectively will often employ a variety of tools to manage climate risk, including crisis preparedness for extreme weather events, insurance and other contractual solutions.
Develop and refine disclosure strategy
Climate disclosures are increasingly appearing in Form 10K risk factors even absent additional SEC regulation. But detailed strategy disclosures more typically appear in proxy statements or, even more commonly, in sustainability reports posted to company websites and reports submitted to CDP.
Some companies also include climate information in blogs, social media posts and other marketing materials. Mandating specific climate disclosures in SEC filings, and policing misleading statements in climate disclosures, is likely to be a key focus of the SEC under the Biden administration.
Apart from the regulatory arena, climate disclosures can pose reputational and other market risks. Companies should thoughtfully select the media through which they disclose their climate goals, strategies and mitigation plans and consider working with counsel to ensure those disclosures are accurate, consistent and robust – regardless of where they appear – in order to mitigate risk while highlighting company strengths for investors and other stakeholders.
This article originally appeared on CorporateSecretary.com, here.