Intense focus on the environmental prong of ESG is being driven by a constellation of private actors. Institutional investors, in particular, are making their voices heard through the 2022 proxy season by urging companies to demonstrate meaningful progress on climate and environmental sustainability. And in fact, many companies are already doing so in an effort to distinguish themselves in the competition for customers, talent and investor funds.
Beyond simply complying with changing regulatory minimum standards, making ESG a priority should include watching for signals from institutional investors, proxy advisors and other advocacy groups. Through their voting, investors are indicating:
- Companies are expected to focus on environmental issues and institute real, measurable advancements. So-called greenwashing, which the chair of the SEC’s ESG Task Force has defined as “exaggerating” a “commitment to or achievement of climate related goals,” is not acceptable.
- Companies should adhere to the standards set by high-quality reporting frameworks, such as the one established by the Task Force of Climate-related Financial Disclosures (TCFD), to make climate-related disclosure consistent and comparable.
- Oversight of climate-related issues cannot be an afterthought: Boards of directors (or appropriate board committees) must specifically address climate-related risks and balance advancing shareholder goals of environmental sustainability and financial performance.
Who Are the Most Influential Drivers of ESG Reporting?
Although the following list of climate-focused stakeholders is not exhaustive, these investors have a prominent voice regarding public company disclosure, governance and voting matters. So, when it comes to addressing environmental issues, best practice for public companies is to analyze investor priorities and then stay updated on their voting guidance, statements and initiatives.
The ones we are identifying include:
BlackRock
According to BlackRock, companies have a unique opportunity to aid in achieving global net zero emissions by 2050, and investors consider climate change as a “defining factor” in the long-term success of companies. Accordingly, BlackRock asks companies to disclose their approach to maintaining a sustainable business model in accordance with the TCFD framework and to evaluate how investors may be impacted by climate-related risks and opportunities in their business. BlackRock also requests that companies articulate how their business model can deliver long-term financial performance while simultaneously reducing climate footprint. Specifically, BlackRock tasks companies with establishing short-, medium- and long-term science-based targets for greenhouse gas (GHG) reductions and scrutinizes these targets when making voting decisions.
Vanguard
Vanguard considers climate change to be a fundamental risk to companies and the long-term success of their shareholders. Vanguard believes boards are responsible for addressing material risks of climate change to protect shareholder value. Generally, Vanguard recommends that companies have a climate-competent board of directors that demonstrates awareness of climate risks, provides robust risk oversight and mitigation measures and ensures that the company has effective and comprehensive disclosures preferably written in the framework of the TCFD. When assessing climate-related proposals, Vanguard considers the materiality of the risk, effectiveness of the disclosures and the reasonableness of the request.
State Street Global Advisors
State Street asks companies to examine climate changes as a significant risk to their business that requires action to protect shareholder investment. State Street breaks climate risks down into the following three categories for boards of directors to evaluate possible areas of change or topics needing enhanced disclosures: physical risks, regulatory risks and economic risks. Overall, State Street asks companies to treat climate change as a material risk and ensure that their assets and long-term business strategy are resilient to the impact of climate change. Particularly, State Street calls on companies to disclose:
- Governance and board oversight
- Long-term GHG emission goals
- Average and range of carbon price assumptions
- Effects of scenario-planning long-term capital allocation decisions
Council of Institutional Investors
CII, a leading institutional investor group, considers climate-related disclosures as relevant to long-term shareholder value. CII encourages companies to consider governmental reporting standards and independent, private-sector climate disclosure standards to provide investors with relevant and sought-after information. Generally, CII supports required disclosures of climate change risk metrics.
Institutional Shareholder Services
In its 2022 policy updates and voting guidelines, ISS included updated policies for climate-related proposals to reflect increased shareholder concern on climate risks. ISS evaluates shareholder proposals on a case-by-case basis. When considering these proposals, the firm evaluates the rigor of the company’s climate-related disclosures, actual GHG emissions, the burden of the request and whether the company has been the subject of any climate-related controversies or actions. For proposals related to board accountability on climate change, ISS considers the following to be “minimum steps” for boards to mitigate their climate risks:
- Disclosure of climate-related risks, including board governance, corporate strategy, risk analysis, current metrics and targets
- GHG emissions targets
Glass Lewis
Generally, Glass Lewis supports shareholder proposals requesting more information on climate-related lobbying and enhanced disclosure on climate-related issues, specifically requests for scenarios analyses and reports in line with the TCFD recommendations. When evaluating proposals, Glass Lewis examines a company’s current climate-related disclosures, whether the proposal will meaningfully benefit the shareholders’ understandings of climate risks; the potential impact on the company’s operations, disclosures and actions of peer companies; and the industry of the company. Glass Lewis recommends against shareholder proposals if existing climate-related disclosures or actions sufficiently address the goal of the resolution or if the resolution is not consistent with long-term shareholder maximization.
As You Sow
A shareholder advocacy group that is an active participant during proxy season, As You Sow calls on investors to take steps in combatting climate change by investing in companies that prioritize these issues. As detailed in its most recently published proxy voting guidelines, As You Sow supports shareholder resolutions that align with the Paris Agreement’s climate goals, prioritize emissions reduction, disclose risks to company operations associated with climate change, and investigate strategies for renewable energy.
Climate Action 100+
Climate Action 100+ is an initiative led by more than 600 institutional investors that engages companies on environmental issues, including proxy proposals and other resolutions. While Climate Action 100+ does not take a formal position on shareholder voting, it flags certain shareholder votes that reflect its goal of combatting climate change. Climate Action 100+ seeks to improve companies’ climate change governance and disclosures by requesting that these companies:
- Implement a strong governance framework that shows oversight of climate change risk.
- Take action to reduce greenhouse gas emissions.
- Provide enhanced corporate disclosure in line with recommendations from TCFD
What Are Best Practice Takeaways?
Every business will have its own focus with respect to environmental practices. But in general, the following approaches can help your organization maintain a positive relationship with investors while progressing toward your goals:
- Engage in continuous discussion with your investor base — your largest shareholders in particular. Go beyond the published proxy voting guidelines or CEO letter and understand what animates your investors. You should strive to understand their priorities and how they think about your specific environmental practices.
- Given the large number of interested stakeholders in this space, the overlapping of potential voting guidelines and evolving reporting standards, seek to balance competing stakeholder interests against your organization’s environmental goals. Understand what’s important to your organization and how to best drive meaningful progress toward those goals. Whether included in an ESG report or your filings with the SEC, be sure to tell your story in a way that makes sense to your most significant stakeholders.
- Management should keep the board updated on ESG matters and best practices, including opportunities to engage with subject matter experts across the ESG spectrum, relevant regulatory updates and disclosure practices. Given the importance of environmental matters in the board’s risk oversight, consider whether your directors could benefit from additional training or education.
Mai-Khoi Nguyen-Thanh 
Taylor Wirth
