Recommendations of the Task Force on Climate-related Financial Disclosures

The Financial Stability Board’s industry-led “Task Force on Climate-Related Financial Disclosures” has issued its final report with standards and guidance for voluntary climate-related financial risk disclosures in SEC filings.  The most significant aspects are the imprimatur of the G20 and the credibility and support it lends to investor initiatives calling for portfolio companies to adopt its recommendations. The report notes:

As you know, warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors. It is difficult for investors to know which companies are most at risk from climate change, which are best prepared, and which are taking action.

The Task Force’s report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions. Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy.

The industry Task Force spent 18 months consulting with a wide range of business and financial leaders to hone its recommendations and consider how to help companies better communicate key climate-related information. The feedback we received in response to the Task Force’s draft report confirmed broad support from industry and others, and involved productive dialogue among companies and banks, insurers, and investors. This was and remains a collaborative process, and as these recommendations are implemented, we hope that this dialogue and feedback continues.

Since the Task Force began its work, we have also seen a significant increase in demand from investors for improved climate-related financial disclosures. This comes amid unprecedented support among companies for action to tackle climate change.

Envonet Simplifies Searches for Corporate Environmental Financial Disclosures – Envonet

Envonet™ has launched a free online web portal to allow easy comparison of corporate environmental financial disclosures. Envonet is a global tool that enables users to quickly access environmental and climate-related financial disclosures that are often buried deep within lengthy financial filings. Equally important, Envonet reveals where corporations have omitted information relevant to investors.

“Investors are urgently seeking more transparency from corporations about their material risks and risk management practices, particularly those related to climate change, but there are no simple tools to assist investors in collecting and assessing this information,” said Greg Rogers, co-founder of Envonet and a long-time champion of corporate financial transparency. “And, when disclosures are compared side by side, the contrast between many European companies and their U.S. counterparts leaps off the page. For investors, it makes evident which corporations are treating climate change as a material financial risk and which are not.”

Users can select several companies and compare their disclosures, side-by-side, such as the example provided at the end of this news release with data from BP, Chevron, Exxon-Mobil and Shell. And with a single click, users can jump to the specific location of disclosures in a corporation’s financial filings, where the information can be read in context.

Envonet displays climate-related disclosures in the areas of governance, strategy, risk management and performance measurement, found in mainstream financial filings (e.g., Form 10-Ks filed with the U.S. Securities Exchange Commission). It also features environmental-related accounting disclosures for asset impairments and environmental and asset retirement obligations. Envonet employs the framework developed by the Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD), a private sector initiative chaired by Michael R. Bloomberg, and presented at last week’s G20 Summit in Hamburg, Germany.

Envonet initially features financial disclosures from 2016 year-end financial filings for 40 listed companies in the electric utility and oil and gas industries across the globe. Utility companies include American Electric Power, CLP Holdings, Dominion Resources, DTE Energy, Edison International, Enel, Entergy, Eversource, Exelon, FirstEnergy, Fortis, Iberdrola, NextEra Energy, PG&E, Power Assets Holdings, PPL, Public Service Enterprise Group, Southern Company, SSE, and Xcel.Oil and gas companies include Anadarko, Apache, BP, Canadian Natural Resources, Chevron, Concho Resources, ConocoPhillips, Devon Energy, Eni, EOG Resources, Exxon Mobil, Marathon, Occidental, Phillips 66, Pioneer Natural Resources, Royal Dutch Shell, Suncor Energy, Total, Valero, and Woodside Petroleum.

There is no cost to use the Envonet portal, but users must register at http://www.envonet.com for access to the database. A companion social media group on LinkedIn (Climate-Related Financial Disclosure) adds opportunity for discussion and collaborative learning.

Source: Envonet Simplifies Searches for Corporate Environmental Financial Disclosures – Envonet

State Street: Meeting Environmental Goals Three Years Early

VEA Vice Chair Nell Minow interviewed the State Street executive who guided the company in meeting its environmental goals ahead of schedule, and wrote about it for Huffington Post:

Corporate executives and shareholders are increasingly aware that as a matter of strategy and branding they must play an active public role in addressing environmental risks. ExxonMobil’s Peter Trelenberg wrote to President Trump to ask him to meet the US commitments on the Paris accords. Occidental Petroleum shareholders voted in favor of a climate change shareholder resolution by an almost two-thirds majority. And State Street has announced that it has exceeded its environmental goals set for 2020, three years ahead of schedule, including reducing greenhouse gas emissions and water use by 20 percent per person and diverting 90 percent of waste sent to landfills. In an interview, Rick Pearl, Vice President, Corporate Citizenship at State Street Corporation, explained why this issue is so vital for State Street and how concerns about environmental risk are examined in operations and in evaluating investment risk and return in their portfolio decisions.
How were the environmental goals set and what was the baseline?
The environmental goals are set by our environmental sustainability (ES) committee and approved by State Street’s Executive Corporate Responsibility committee.  The ES committee evaluates company environmental data against contemporary international standards to determine its targets.  The 2020 goals were established against a 2012 baseline for CO2 emissions, water usage and waste diversion from landfill.  The new Science-Based Targets are set against a 2015 baseline with a 10-year time horizon (2025).  They were established in accordance with the Science-Based Target Initiative’s sectoral decarbonization approach which aims to limit global warming to 2 degrees Celsius over pre-industrial levels.
We think of environmental issues as being important for fossil fuel companies or manufacturing companies. Why does State Street consider this a priority?
Environmental issues are of increasing importance to our stakeholders, including employees, the communities in which we operate, clients and shareholders.  From a business standpoint, more clients are expecting their financial service providers to offer products and services that address environmental issues and State Street’s asset management arm, State Street Global Advisors (SSGA) – has several (low-carbon ETF, green bonds, etc.).  In addition, we have launched a program in our Global Exchange division that will help support clients in Environmental, Social and Governance (ESG) analysis and quantification of their investments.  Both clients (through the RFP process) and shareholders (through ESG indices) are expecting companies such as State Street to have strong operational approaches to environmental sustainability. It’s about helping out clients to do financially well, while doing good for the environment.
Does State Street factor environmental concerns into its assessment of investment risk or analysis of issues on corporate proxies?
Our shareholder engagement team at SSGA screens companies in client portfolios against a range of issues that could impact performance over time, including environmental factors such as climate change, water and energy consumption.
There is a popular conception that meeting environmental standards is expensive. Did you find that to be true? Were there cost savings?
State Street’s Environmental Management System is designed to capture efficiencies in its approach.  As a result, the business case can be cost neutral or there may be cost savings in the short and long term.  At this time, environmental factors have become part of our normalized decision-making processes (along with cost, etc.) in real estate, procurement and IT, to name three key areas.
What factors led to achieving the goals ahead of schedule? What’s next? 
Investments in new technology, designing new buildings that are more green and efficient, and creating greater awareness amongst our employee base are several of the factors that led us to achieve our 2020 goals three years ahead of time schedule.  As a result of our success, we are now moving to a Science-Based Target which is the new industry standard following the UN Climate Change Conference in Paris in 2015.

Shareholder Concerns About ExxonMobil: Pay, Performance, and Climate Change

VEA Vice Chair Nell Minow writes in Huff Post:

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I am proud to serve on the board of the shareholder advocacy non-profit 5050 Climate Project, which had a major success last week with the first-ever majority shareholder vote on a climate change-related proxy proposal, at Occidental Petroleum. They also released a major new report this week finding that five major utility companies have failed to develop and disclose their sustainability strategies. A new analysis of ExxonMobil (NYSE: XOM) by 5050 raises some important concerns for shareholders relating to pay, performance, and climate change.
1. ExxonMobil’s documented policy of preventing investors from engaging directly with members of its board to discuss company strategy, financial performance, risks and opportunities, and other topics germane to the board. This antiquated policy is out of step with widely recognized best practices for corporate governance and undercuts the board’s ability to gain valuable outside advice and perspectives. [Note: for several days last week the company’s website interface for contacting board members was not functioning and a call to inquire about it was met with a recording explaining due to technical difficulties they were unable to answer the phone, or, apparently, take messages. They did not respond to an email inquiry about these issues, though the website function has been fixed.]
2. Lack of clear and transparent succession planning for retiring board members, particularly given the mismatches we see between the skills and orientation of outgoing directors and the strategic challenges facing the company. For example, ExxonMobil’s outgoing Audit Committee chair lacked relevant financial expertise during a time of regulatory scrutiny and business model transformation, and though his and other board members’ retirement dates were known in advance, no replacements have been nominated for the 2017 annual shareholder meeting nor has the company discussed plans for the directors’ replacements.
3. Board compensation practices that may create perverse incentives as directors approach retirement. ExxonMobil provides that most director equity-based pay does not vest until the mandatory retirement age of 72, an unusual proviso, under which directors can potentially forfeit what can amount to millions of dollars in pay if they leave the board before retirement. As they approach retirement, directors’ time until payout shortens while the value of their equity compensation increases – a dynamic that can compromise director independence and objectivity, as directors nearing retirement may not voice dissenting opinions for fear of putting their impending payout at risk of forfeiture.
ExxonMobil’s own statements acknowledge the realities of climate change and, without being specific, their role and their obligation to respond. “Addressing climate change, providing economic opportunity and lifting billions out of poverty are complex and interrelated issues requiring complex solutions. There is a consensus that comprehensive strategies are needed to respond to these risks. “ It is an encouraging sign that they have added Dr. Susan Avery, Former President and Director of the Woods Hole Oceanographic Institution, to their board of directors. A good next step would be making her available to meet with investors to hear their concerns about strategy and transparency.
5050’s mission is to “help large investors create market-based demand for meaningful climate disclosures and greater climate competency on corporate boards.” These large investors, mostly pension funds, mutual funds, and endowments, are permanent investors with very significant holdings in just about all public companies. They cannot sell the stock if they disagree with management, especially if the price of the stock is discounted by failure to align pay with performance or to create strategies for sustainable growth. All they can do is engage with management and the board to raise their concerns and ask for better answers. Given potential regulatory rollbacks and the government’s reduced role in providing data and research on climate change, institutional investors who understand the quantifiable risks of failure to address climate change are finding that it is cost-effective to assess and respond to these risks rather than wait for corporations or government to act on their own.

For the First Time, A Climate Proposal Gets Majority Support: Occidental Petroleum

Emily Chasen writes in Bloomberg:

Occidental Petroleum Corp.’s shareholders approved a proposal Friday to require the oil and gas exploration company to report on the business impacts of climate change, marking the first time such a proposal has passed over the board’s objections.

The resolution, initiated by a group of investors including the California Public Employees’ Retirement System, received more than 50 percent of the votes at Occidental’s shareholder meeting in Houston on Friday, according to spokesmen for the company and Calpers. Occidental didn’t provide the tally, but said the exact figures will be submitted to the Securities and Exchange Commission in coming days.

“The board acknowledges the shareholders support for this proposal,” Eugene L. Batchelder, chairman of the board for Occidental, said in an e-mailed statement Friday after the vote. “We look forward to continuing our shareholder engagement on the topic and providing additional disclosure about the company’s assessment and management of climate-related risks and opportunities.”

The resolution came close to majority support last year. A crucial factor in exceeding the 50 percent mark was Blackrock, a major shareholder, who switched from voting against the proposal last year to voting for it. One reason might be the concerns that the new administration’s opposition to environmental regulation may mean that investors can no longer rely on the government to take care of the problem.

“The passing of this resolution is a sign of progress. It is a first in the United States. The vote at Occidental demonstrates an understanding among shareowners that climate change reporting is an essential element to corporate governance. I believe that we will see many more companies move in this direction. This vote shows that investors are serious about understanding climate risk.” – Anne Simpson, CalPERS Investment Director, Sustainability

Report from the CII Winter meeting: ESG

ESG stands for what used to be termed “non-financial” metrics: environment, social concerns like diversity and treatment of employees, and corporate governance issues like CEO pay and board independence. Institutional investors, skeptical of traditional financial measures following the Enron/WorldCom era scandals, the dot.com bubble, and the financial meltdown, are increasingly relying on non-traditional measures to help them evaluate risk and return in their portfolio investments. Wall Street securities analysts may fixate on quarterly returns, but large institutional investors investing pension money are concerned about the long term, and they understand how misleading the traditional metrics, based on accounting principles developed in the 19th century, can be.

One of the opening sessions featured an interview with Hiromichi Mizuno, head of Japan’s $1.3 trillion government pension fund, who supervised the transition of the fund from all-Japanese investments to deployment of half of its capital in stocks around the world. “Through that process, I came to realize that the best way to improve our performance was to focus on stewardship in investing,” he said. He was inspired by a meeting with former UN Secretary General Kofi Annan, who asked him “why Japan was so indifferent on environment and social issues. I thought Japan was the most environmentally friendly and inclusive country, but we had never stepped up internationally.”

Mizuno told the group that they have a 100-year sustainable investment scheme with a 25-year investment horizon. They are “the textbook definition of a universal owner” with near-permanent holdings in just about every publicly traded company. Investment restrictions and transaction costs make selling out of any individual stock impossible, so the only alternative is engagement with corporate managers to make sure their strategy is sustainable over the long term.

Mizuno “expects best in class stewardship from our asset managers,” which means they will reduce their business with those who fall short and are willing to pay more for managers who can show they effective exercise of ownership rights like proxy voting and communication with executives and directors. Regardless of any short-term adjustments a particular government may make to the rules around climate change, Mizuno’s fund will ask whether the business model is sustainable, not over the course of one administration but over the next 25 years.

The panel on “Next Generation Investing” echoed this focus on sustainability. State Street Global Advisors’ Chris McKnett told the group that “there are risks and opportunities that can be overlooked by confining yourself to traditional analysis.” And one of those opportunities is appealing to the millennials who will control as much as $7 trillion in investable capital in the next five years. The “client careabouts” they have identified for that group include a strong interest in sustainability. As Morgan Stanley’s Thomas Kamei put it, “I’m already voting my dollars as a consumer. Why wouldn’t I want to invest that way as well?” The information he wants to see on sustainability will connect it to tax consequences and free cash flow.

Another panel examined the push for better financial disclosures on climate impact and sustainability, including guidelines and proposals from GRI, IFRS, SASB, and TCFD, which are filling in the gaps left by GAAP. “Climate has become a systemic risk,” said Paul Lee of Aberdeen Asset Management. The panel agreed that they want to see climate risk reflected in financial statements, whether the business is direct, as with fossil fuels and beachfront property, or indirect, as with the banks and insurance companies that do business with the enterprises with a more central connection to climate issues. Fortunately, the sustainability reports are less often being written by the marketing department, and becoming the province of the same people who are responsible for other financial reports.

Anne Simpson, the highly influential representative of CalPERS, said, “The financial case around risk is powerful….And this is what the economy needs. Sustainable businesses create jobs and growth.” She noted that Exxon responded to her fund’s shareholder initiative by adding an atmospheric scientist to its board for the first time. Simpson appreciates the Paris accords as a roadmap for investors and companies, no matter what happens in the US. “We’re not changing course because one country is doing certain things,” said Neil Hawkins, Dow Chemical’s Chief Sustainability Officer. Like the CFA Institute’s Rebecca Fender, who called this movement “a slow-moving but unstoppable train,” the CII members consider climate change a material investment risk and opportunity that they must understand and respond to.

Large institutional investors are permanent owners of stock, many of them through index funds that track the market as a whole. That means their only opportunity for protecting and enhancing returns is by pushing the management and boards of those companies to do better over the long term. “We own the best stock and the worst stock,” said McKnett. “Why wouldn’t we want to make the worst stock a little less worst?”

PRI 50/50 Climate Project Webinar on Climate-Competent Boards

The PRI-50/50 Climate Project Webinar on Climate Competent Boards, moderated by VEA Vice Chair Nell Minow, is now available for replay.  It features:

  • Anne Simpson, Investment Director, Sustainability, California Public Employees’ Retirement System (CalPERS)
  • Kirsty Jenkinson, Managing Director and Sustainable Investment Strategist, Wespath Investment Management
  • Rakhi Kumar, Managing Director, Head of Corporate Governance, State Street Global Advisors
  • Michelle Edkins, Managing Director, Global Head of Investment Stewardship, BlackRock
  • Edward Kamonjoh, Executive Director, 50/50 Climate Project

 

Karla Jo Helms on CSR as a Brand

VEA Vice Chair Nell Minow interviewed Karla Jo Helms for the Huffington Post:

Karla Jo Helms, CEO of Tampa Bay-based international PR firm JoTo PR, says many companies are missing opportunities to tie national or community-focused programs to the company’s bottom line.

She says that 91% of global consumers will switch to brands that support a social or environmental cause. Another 90 percent will boycott a company if they think its business practices are immoral or irresponsible. Companies like Wells Fargo and Volkswagen have suffered incalculable damage to their reputations — and their brands — due to legal and ethical violations. The trust of the consumer is as vitally important as the value of its products. Helms says that 42% of a company’s reputation is based on consumer perceptions of the firm’s corporate social responsibility (CSR) efforts. She strongly encourages companies to not only give back, but communicate their CSR activities to increase the trust and public perception.2016-11-15-1479181677-2535438-151025KarlaJoHelmsHeadshotshootbyFelixKunze2362websize.jpg

In an interview, Helms explained what helps consumers and shareholders evaluate a company’s social/environmental record and what companies can do to use CSR to enhance their brands and strengthen their relationships with the people who buy from and invest in them.

How do consumers and shareholders find out about corporate social/environmental records?

Google and other Search Engines tell the story of a company’s persona. Goodwill stories, publicity pieces, news clips of stories and social media that push out those stories, videos and pictures of corporate social responsibility efforts with comments and kudos are a big social proof factor – good news spreads.

There is no better return on investment (ROI) than third-party credibility. Media articles carrying unbiased stories about a company’s greater good efforts are one of the biggest brand strengtheners and corporate reputation protectors today. In a world where everyone is looking for their news and information from credible online sources, publicizing CSR on digital platforms gains the best word of mouth.

55% of global online consumers in 60 countries pay more for products and services provided by companies that are committed to positive social and environmental impact.

Publicity and social media are key to retaining that “memory” in the search engines.

What do data show about how they respond to companies that they feel are not in line with their social and environmental views?

Actions taken by internet users worldwide in response to a company’s CSR efforts have been studied extensively:

• Bought a product with a social and/or environmental benefit 63%
• Boycotted a company’s product/services upon learning it behaved irresponsibly 53%
• Told friends or family about a company’s corporate responsibility efforts 47%
• Researched a company’s business practices or support of social/environmental issues 37%

Again – without publicity and social media, how would consumers know?

What are some examples of companies that have lost market share due to consumer social/environmental concerns?

Volkswagen: September 2015, the EPA discovered that many diesel engines of VW cars sold in America had a “defeated software” that was able to detect when cars were being tested and to change the performance of the engine, to improve the results of the test. The company at the highest levels deliberately set out to deceive emissions control to give the company an unfair advantage over its competitors; meanwhile it was poisoning the planet.

Wells Fargo: It was found that their customers nationwide were paying fees on a ghost account they didn’t even sign up for. Federal regulators said Wells Fargo (WFC) employees secretly created millions of unauthorized bank and credit card accounts – without their customers knowing it – since 2011.

Monsanto: Monsanto has a long history of generating public ill will. Today, Monsanto is perhaps most hated for its role in creating and utilizing GMO seeds and herbicides. Just look up any memes about Monsanto or the Millions Against Monsanto on Facebook and you see the public distrust and discord.

GrubHub: A 300-word email sent to the online food-ordering company’s 1,400 employees last week by the CEO led to a viral backlash with calls to boycott the food delivery service. The hashtag #boycottgrubhub was trending on Twitter through much of the next day. Whether Matt Maloney meant to or not, he made a statement about employees’ most basic social responsibility, which was their freedom and right to vote for whom they choose.

What are the social and environmental issues that matter most to consumers?

In the New Economy, studies show that being socially responsible has become essential for companies looking to meet consumer demand. Consumers say being socially responsible is an influence in their purchase decisions, rating

o “Being green” (83%);
o Reducing consumption (81%) and
o Contributing financially to nonprofits (65%) as important actions.

A study by Cone Communications and Echo Research of 10,000 global consumers found that 91 percent of shoppers worldwide will likely switch to brands that support a social or environmental cause. On the other hand, 90 percent of shoppers will boycott a company based off moral or irresponsible business practices. Hence the backlash on GrubHub.

What are some examples of companies that have incorporated social and environmental sensitivity in their brand messaging?

Starbucks: Starbucks did practically no advertising, but built its brand through good PR efforts. When annual sales hit around $1.3 billion, their advertising expenditures over a 10-year period totaled less than $10 million. See their site for all their CSR efforts and awards they do around the globe.

TOMS: Privately-owned shoe maker TOMS built its business model around social responsibility, giving a pair of shoes to a child in need for every pair purchased. Tom’s has given over 60 million pairs of shoes to children in need. (NOTE: Tom’s Shoes sell for $40 – $140 per pair.)

Nutiva: Nutiva aligns their CSR program with environmental and sustainability issues. Before ‘social responsibility’ was a Silicon Valley buzzword meant to put a face on faceless companies, John Roulac, CEO of Nutiva, has not only been outspoken about health fads and mainstream environmental causes, but has thrived on them, creating an empire.

Should CSR branding be closely tied to the industry or product?

What does your company do that can help in a broader way throughout the nation or in your own community? Does it align with your passions and the purpose of your company? What is your story for supporting it? If it doesn’t align with your company’s direction, you are really going to have to tell your story for getting behind it even better. CSR for the sake of CSR is as distasteful to the consumer public as lying, so companies need to have their CSR efforts make sense to the consumers and easily connect the dots on WHY they are doing it.

But sometimes it is the passion of the CEO that drives it – or a nationwide issue that employees get behind. Like with Outback Steakhouse (OSI Partners, LLC) when they made a $1 million donation in 2010 to Operation Homefront, a non-profit organization providing everyday and emergency support for active troops, veterans and their families. In June 2002, OSI launched Operation Feeding Freedom, sending a team of 15 Outbackers to Afghanistan to feed American troops stationed there. Over 100 members of the OSI team made another six trips serving troops in Djibouti, Afghanistan, Iraq, Kuwait and aboard the USS Nimitz in Bahrain. Overall, 137,000 troops were served at numerous bases and forward command locations. But as you can see, it still involved feeding people, so aligned with Outback Steakhouse’ line of business.

I have never been one to advocate PR for the sake of PR. In fact – I hate PR for those reasons. Public relations done to manipulate public opinion is for the birds, a crapshoot and the truth be told, the public can see right through it when it is superficial. So make it align – and if it doesn’t, really tell the story, because you will have to connect the dots for your consumers.

G7 leaders agree to phase out fossil fuels – FT.com

The Group of Seven industrial powers have agreed the world should phase out fossil fuel emissions this century, in a move hailed as a historic decision in the fight against climate change.

This refutes those who claim that environmental initiatives have any “agenda” other than an entirely justifiable and quantifiable investment analysis of the prospects for fossil fuel and the effects of climate change. Indeed, it is questionable whether any fiduciary can ignore the investment risk companies who fail to recognize the impact on their business model of political responses to climate change.

via G7 leaders agree to phase out fossil fuels – FT.com.