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Boards Lag on Climate Risk

Published October 18, 2018

At ExxonMobil, Occidental Petroleum and PPL, shareholders recently passed resolutions requesting assessments of how efforts to limit climate change, including the Paris Climate Agreement, could impact those companies’ business models and financial returns. Disclosure is how shareholders can verify that companies are addressing the financial and operational risks of climate change through long-term business strategy. Oversight of business strategy is a key responsibility of the board, yet many boards lack knowledge and experience around planning for climate risks.

At State Street Global Advisors, we encourage boards to regard climate change as they would any significant risk to the business. All companies can benefit from considering the impact of climate change on their business models. This planning is especially important for companies in the oil and gas, utilities and mining sectors, where long investment horizons could impair asset values, leading to potential write downs. Over the past four years, State Street has held over 240 climate-related engagements with the boards and management teams of 168 companies. Through these engagements we found that few companies effectively communicate to investors how they integrate climate risk into long-term strategy.

To help address this gap, we provide guidance to boards on best practices for disclosing climate risk to investors. Notably, our guidance is designed to complement, rather than replace, existing frameworks for disclosing risks from organizations such as the Sustainable Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosure (TCFD). Our goal is to contribute to the ongoing dialogue in the industry from an investor’s point of view.

Our guidance to corporate boards is organized around four key pillars.

  1. Governance and board oversight of climate risk
    We expect boards to be strong, effective and independent from management. Board members should oversee and mitigate key risks facing the company, including climate risks. For companies in high-impact sectors, we expect directors to have knowledge, expertise and training on all material risks including climate risks facing the company. Having climate-informed directors can strengthen a company’s oversight and planning.
  2. Establishing and disclosing long-term goals for reducing greenhouse gas emissions
    We believe every company should establish and disclose its own specific targets for reducing greenhouse gas (GHG) emissions. Without goals, actual emissions cannot be contextualized to evaluate the efficiency of operations. GHG goals also help companies demonstrate that their long-term scenario-planning processes are robust and can inform strategic decision-making.
  3. Disclosing the average and range of carbon price assumptions
    Establishing an internal carbon price is a way for companies in high-impact sectors to measure the costs and impacts of their activities related to climate change. Carbon pricing allows companies to express and incorporate these costs — such as those related to operations, compliance and future regulations — into strategic decision making. In nearly all sectors and markets, disclosure on carbon price assumptions can be strengthened to provide investors with more meaningful information.
  4. Discussing impacts of scenario planning on long-term capital allocation decisions
    The main purpose of scenario planning is to evaluate and incorporate the potential outcomes into long-term strategic business decisions. By incorporating results from scenario planning exercises into long-term strategy, companies can better position themselves to capitalize on opportunities and to mitigate risks.

Our patient, collaborative approach to company engagement and active ownership is designed to improve long-term outcomes for our clients. By encouraging better climate risk disclosure through our stewardship activities, we hope to help companies become more resilient to climate change, both now and in the future.

We applaud the voluntary recommendations issued by the Task Force on Climate-Related Financial Disclosures and recently issued a statement of support for the initiative. You can find our complete guidance for boards on effective climate change disclosure at our asset stewardship page.

 

Disclosures

The views expressed in this material are the views of Rakhi Kumar through the period ended 9/8/2017 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Investing involves risk including the risk of loss of principal.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.

There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.

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