Climate Action 100+ reports that, last year, there were 22 climate-related weather disasters in the U.S. that "each caused more than $1 billion in damages-far and away a record. To investors, climate change poses not only physical risks of damage to assets, supply chains and infrastructure but also transitional risk if portfolio companies do not adjust rapidly enough as the economy decarbonizes and systemic risk posed to the entire economy." According to environmental nonprofit Ceres, as of April 21, 408 businesses and investors "with a footprint" in the U.S. have signed an open letter to the President indicating their support for the administration's commitment to climate action and for setting a new climate target to reduce emissions. The signatories collectively represent over $4 trillion in annual revenue, over $1 trillion in assets under management and employ over 7 million U.S. workers across all 50 states. The letter states that to "restore the standing of the U.S. as a global leader, we need to address the climate crisis at the pace and scale it demands. Specifically, the U.S. must adopt an emissions reduction target that will place the country on a credible pathway to reach net-zero emissions by 2050. We, therefore, call on you to adopt the ambitious and attainable target of cutting GHG emissions by at least 50% below 2005 levels by 2030." As reported by the NYT and others, the President announced today that the U.S. is setting a new climate target with a goal of reducing U.S. emissions by 50% to 52% below 2005 levels by 2030.  The target "calls for a steep and rapid decline of fossil fuel use in virtually every sector of the American economy and marks the start of what is sure to be a bitter partisan fight over achieving it."

Climate Action 100+ reports that, for this proxy season through April 2, 136 climate-related shareholder proposals have been submitted, based on an analysis from Ceres. A number of the proposals ask companies to commit to reductions in greenhouse gas (GHG) emissions; in some cases that includes alignment with the Paris Agreement goal of limiting global temperature rise to 1.5 degrees Celsius. Some also seek progress toward the Net Zero indicator on the Climate Action 100+ Benchmark.  Ceres also identified 20 proposals that relate to lobbying disclosure, including 12 that request a report describing how the company's lobbying activities (direct and through trade associations) align with the goal of limiting average global warming under the Paris Climate Agreement. In other words, are companies that publicly commit to reducing GHG emissions and taking other steps in support of the Paris Climate Agreement also privately funding trade associations and other groups that lobby politicians to support action contrary to the company's stated goals? In addition, Ceres found that, for 54 proposals, engagements with the subject companies led to agreements and withdrawal of the proposals prior to a vote. For those that are still moving forward, while shareholder proposals are almost always precatory, "research indicates that any proposal that garners at least 30% of shareholder support tends to lead a company to take action."

What is the Climate Action 100+ Benchmark? According to CA 100+, the Benchmark provides a mechanism for tracking climate goals by offering "comparative assessments of individual focus company performance against the initiative's three high-level commitment goals: reducing greenhouse gas emissions, improving governance, and strengthening climate-related financial disclosures." "Focus companies" are the 167 companies (with an aggregate $10.3 trillion in market cap) that CA 100+ considers to be "key to driving the global net-zero emissions transition" because they account for over 80% of corporate industrial greenhouse gas emissions. While the Benchmark shows that "companies are increasingly making ambitious climate commitments," it also shows that they "now need to deliver" on those commitments:  

"While there is growing global momentum around companies making ambitious climate commitments, the Benchmark assessments show that companies still have a long way to go in delivering on these  promises. No focus company assessed performed at a high-level across all of the nine key indicators and metrics that were used to evaluate each company. Further, the assessments show that no company has fully disclosed how it will achieve its goals to become a net zero enterprise by 2050 or sooner. This includes establishing short and medium-related targets to deliver ambitious emissions reductions within the next decade."

The Benchmark assessed 159 focus companies (excluding eight companies that were only recently added to the list) across nine key indicators, based on their public disclosures. The indicators included ambition to achieve net-zero greenhouse gas (GHG) emissions by 2050; long-term (2036-2050), medium-term (2026-2035) and short-term (up to 2025) GHG reduction targets; decarbonization strategy; capital allocation alignment; climate policy engagement; climate governance; and TCFD recommendations (see this PubCo post). To understand decarbonization investments, the Benchmark also looked at companies' capex and technology mix.

The Benchmark provided the following key takeaways from its most recent assessment of focus companies:

  • "Alignment of value chain GHG (Scope 3) emissions often remain a blind spot.   Overall, 83 of the focus companies (52 % of the total) assessed have announced an ambition to achieve net-zero by 2050 or sooner. However, roughly half of these commitments (44) do not cover the full scope of the companies' most material emissions."

SideBar

As described in the analysis for California Senate Bill 260-a bill making its way through the California legislature that would require companies with over $1 billion in annual revenues that do business in California to report their direct and indirect GHG emissions from their operations and supply chain to the Air Resources Board (ARB)-the "scope" framework was introduced in 2001 by the World Resources Institute and World Business Council for Sustainable Development as part of their Greenhouse Gas Protocol Corporate Accounting and Reporting Standard: "Scope 1 covers direct emissions from owned or controlled sources, such as fuel combustion, company vehicles, or fugitive emissions. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company's value chain, such as purchased goods and services, business travel, employee commuting, waste disposal, use of sold products, transportation and distribution (up- and downstream), investments, and leased assets and franchises." Providing information about Scope 3 emissions would seem to present the greatest challenge; however, according to the analysis, "research from CDP (formerly the Carbon Disclosure Project) found that scope 3 supply chain emissions are on average 11.4 times higher than operational (scope 1 and 2) emissions."

  • "Long-term ambitions need to be backed by clearer strategies and robust short- and medium-term targets.  
    • There is a critically important need for corporates to establish more robust short- and medium-term targets to achieve their ambitions; 
    • While 107 companies have set medium-term targets (2026-2035), only 21 meet all assessment criteria; 75 companies have set short-term targets (up to 2025), but only eight meet all assessment criteria. 
  • "Future investments need to be more clearly aligned with the net zero transition.   Only six companies explicitly commit to aligning their future capital expenditures with their long-term emissions reduction target(s), and none of these companies has committed to aligning future capital expenditure with the goal of limiting temperature rise to 1.5 degrees Celsius.
  • "Corporate boards and executive management teams need to improve climate change governance.  139 focus companies assessed (87%) have board-level oversight of climate change, but only a third of companies tie executive remuneration directly to the company's emission reduction targets." 

SideBar

How do companies determine which sustainability objectives are most material for them, and how do they transform those goals into measures for purposes of incentive compensation?  This new article from consultant Semler Brossy offers some advice. The authors point out that companies are under pressure from a variety of stakeholders to demonstrate their bona fides when it comes to sustainability, and it's not surprising that these discussions would develop into questions about driving change and establishing accountability by making sustainability a compensation metric: "if progress in ESG has become so important, shouldn't we measure and tie pay to it?" According to the authors, "[l]inking ESG metrics to executive pay is a powerful way to drive change. But compensation is a sensitive instrument, so we urge caution. As with any other new metric, a board should craft it to reflect the company's context and ESG priorities-and to complement the existing pay incentives. The board should also test a metric before including it in compensation, to reveal unintended consequences or the possibility of gaming. Rather than a single decision, new pay metrics involve a journey that begins with elevating certain issues internally and externally." As described by the authors, the journey undertaken by some early adopters began with "asking pointed questions, customizing ESG goals and metrics for their company, and measuring them. They began holding themselves accountable, and the board oversaw the process to make sure it happened. Eventually, where it made sense, they linked compensation to some of those metrics, along with other reward and recognition practices." (See this PubCo post.)

  • "Ambitious 1.5-degree pathways are often missing from climate scenario planning.   Almost three quarters (72% of the total) of companies assessed commit to align their disclosures with the Task Force for Climate-related Financial Disclosures (TCFD) recommendations and/or support the recommendations. However, only 10% use climate-scenario planning that includes the 1.5-degrees Celsius scenario and encompasses the entire company." 

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