Boards Face "NO" Votes Due to Lack of Climate Governance Practices

Investors increasingly are ready to hold board members of U.S. public companies accountable for failing to appropriately oversee their companies’ climate-related risks and opportunities. 

This trend is accelerating in the wake of the 2021 proxy season. Last year, tiny Engine No. 1 waged a David-versus-Goliath battle with ExxonMobil, helping win the election of three board members experienced in clean energy and energy transitions – ousting ExxonMobil’s favored incumbents in the process. This move by investors on climate was just one important development from last year; the 2021 season wrapped up with a record-shattering 18 climate-related shareholder proposals winning majority votes.  

Against this background, the sustainability nonprofit Ceres published the 2022 Ceres Guidance for Engaging on Climate Risk Governance and Voting on Directors. This new resource helps investors directly engage portfolio companies on the risks and opportunities emerging in the transition to a net-zero emissions economy and inform their voting decisions on board nominees.  

The Guidance details 10 climate governance practices, ranging from board oversight to board expertise, that are critical to helping companies that want to effectively address the climate crisis.    

It builds on the governance recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which has strong support from investors and companies, as well as the G20 Finance Ministers and Central Bank Governors, and the Climate Action 100+ Net Zero Company Benchmark, which is backed by the world’s largest investor initiative. While investors already widely use these recommendations from the TCFD and the Benchmark in engagements with companies, the Guidance gives investors a tool to elicit more detailed disclosures of how companies are living up to governance expectations. In cases where companies do not meet expectations, the Guidance helps investors decide when to vote against relevant directors.  

The 2021 TCFD Status Report shows companies are not doing what’s asked by the TCFD and the Benchmark. Further, the two TCFD governance recommendations are among the least implemented of TCFD guidance. We believe that governance disclosures actually should be among the first steps executive teams and board members take. 

The Guidance calls for boards to provide independent and informed oversight of climate risks and opportunities, with responsibilities disclosed in a publicly available report. It calls on audit committees to direct internal audit departments and independent auditors to sufficiently test the impact of climate change risk on company operations. 

Investors, for their part, may want to pose questions about the 10 Ceres Guidance practices in their climate-related engagements with companies. This could be particularly useful when talking to companies with recent majority votes on climate-related shareholder proposals not supported by the board. 

The transition to a net-zero emissions global economy presents one of the greatest corporate governance challenges of all time. Investors and companies have available to them a good set of tools for new expectations.

 

Rob Berridge
Senior Director of Shareholder Engagement, Ceres

Rhonda Brauer
Founder and President, RLB Governance; former Corporate Secretary and Governance Officer at The New York Times Company