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WHAT TO WATCH: ISSUE #2

May 29, 2019

Read the first installment of the “What to Watch” series here.

First it was sustainability, then corporate social responsibility (CSR), and now environmental social governance (ESG). Investor expectations around environmental accountability — in particular, aspects related to climate – are increasingly relevant to your share price.

Both of these things are true: 

  1. Publicly traded oil and gas majors have a fiduciary responsibility to generate profits for their shareholders.       
  2. Investors in oil and gas companies are increasingly demanding environmental stewardship related to climate change.

The problem: 

As we discussed in What to Watch – Private Financing, individual investors are making more demands of the funds in which they invest. In competing for these investors, funds and institutional investors are ramping up the pressure on the publicly traded companies in which they invest. Individual investors expect their funds and institutions to distinguish themselves with regards to climate action.

Many of the pressures are similar to those discussed in Issue #1, but publicly traded companies have more financial stakeholders and therefore face a brave new world of unique demands. Some of the pressures are direct; others are indirect. Among pressures your company can expect to face in the next 18 months:

  • Pressure to go to 100% renewables. While it is unlikely that your shareholders will ask you to commit to 100% renewables, they are asking your customers to. RE100 has signed up 174 companies including GM, Johnson & Johnson, and Facebook. Peruse their list, and you’ll see an awful lot of financial institutions. This sector concentration both reinforces that beyond-fossils narrative from my opening installment and raises the stake for the growing expectations for your company to be “environmentally responsible.”
  • New disclosure expectations. The Task Force on Climate-Related Financial Disclosures (TCFD) has normalized the idea of assessing climate-related investment risk. The TCFD is voluntary and looks at physical, liability, and transition risks related to climate. This covers a broad array inclusive of infrastructure vulnerability to extreme weather, legal liability for adding carbon to the atmosphere, and business implications of a no-carbon energy policy. Because companies including BlackRock, Dupont, Shell, and Total have joined over 500 supporting companies for the TCFD, you can anticipate these disclosure expectations are coming to you.
  • Energy transition investor support. There is a mushrooming community of organizations designed to encourage or pressure institutional investors and companies to accelerate to a low-carbon transition. Examples include:
  • Board makeup and governance priorities. The Climate Majority Project is a non-profit organization focused on the role that corporate governance can play in addressing climate change.
  • Accelerating investor action. The Investor Agenda developed guidance for institutional investors to act in alignment with achieving the goals of the Paris Agreement.
  • Direct engagement. Climate Action 100+ is an investor-led initiative that engages directly with publicly-held companies on climate action. They have recently garnered comprehensive emissions reductions commitment from BP, Royal Dutch Shell and Equinor (formerly Statoil).

Publicly traded companies also get hit by divest action and shareholder initiatives, which I’ll address in my next two installments of Both of These Things Are True.

It matters because

In the absence of a compelling culture and narrative around climate action, many institutional investors will simply choose not to invest in fossil-fuels based companies. While the financial implications may be minimal, these divestitures fuel public pressure on regulators to stop oil and gas projects. They also propel the conversation about energy further into “beyond fossil fuel” territory.

The critical mistake companies are making: 

  1. Companies are dismissing the scope and scale of the expectations of investors and the public.
  2. They are playing whack-a-mole with shareholder initiatives and requests, missing the opportunity to build a proactive, responsive internal infrastructure and leaving activists frustrated with superficial responses.

Seize the daySuccessful companies will:

  • Proactively engage with your institutional investors. One institutional investor we interviewed said, “If a company wants to meet with us, they immediately get credit for being proactive on environmental goals.” Taking the initiative with your investors will help your team better understand the building pressure.

  • Create a proactive environmental, social governance (ESG) strategy. In my last installment, I recommended that your company chart an authentic ESG strategy rooted in your company values in a way that will drive company culture. As part of your executive-level risk assessments discussed in that issue, assess your top five vulnerabilities with your institutional investors. 

  • Get ahead of the interviews and questionnaires. The queries are coming —when they do, you want to be ready to respond to the tough questions. Take your five vulnerabilities and articulate how you are addressing them.
  • Get to work. Even better, when the institutional investors come knocking to discuss climate — if you start now — you will be ready to say: “We have addressed this item and continue to track our progress with these metrics.”

Institutional investors are managing the external pressures they feel — and adjusting their expectations of your company as a result. I’d like to hear what your institutional investors are saying to you. With your permission, I’ll share excerpts with our audience.

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