Highly suggested reading for issuers that will be on the receiving end of investor engagement and voting, Ceres issued detailed guidance to investors and proxy advisors on what they should expect from, and how to engage with, companies on climate risk governance, i.e., the board’s oversight of climate-related risk, and the suggested proxy voting implications for companies that fail to “measure up.” The guidance, which Ceres indicates will be further updated, reportedly is based on the TCFD-recommended governance disclosures and the Climate Action 100+ Net-Zero Company Benchmark.
Among other expectations to avoid a potential “no” vote against directors deemed responsible for climate risk, governance, or board composition:
- Companies should disclose in the relevant board committee charter or corporate governance guidelines (depending on whether a particular independent committee is charged with oversight or oversight is retained at the full board level) the board’s oversight of climate-related risks and opportunities, including monitoring of GHG reduction targets. (See our recent report: “ESG Governance: Here’s How!”)
- Companies should disclose a cross-functional management committee responsible for climate risk management that reports to the CEO and has an indirect reporting relationship with the board committee or full board (as the case may be) that oversees climate risk. The guidance suggests the internal committee could include members from internal audit, HR, IR, finance/treasury, marketing, government affairs, legal, operations, product development, strategy, real estate, R&D, risk management, and supply chain management/procurement. (See our recent report: “ESG Governance: Here’s How!”)
- Companies should disclose in their proxy statements or sustainability reports how the directors’ experience, skills, qualifications, etc., collectively make for a climate-competent board. Importantly, the guidance notes: “No one director will make a “climate competent” board. Rather, a board should assess and be able to explain how the different directors’ experience contributes to thoughtful discussions and meaningful connections with the long-term strategy, given the unique climate risks and opportunities the company faces.” (See Ceres’ “Lead From the Top: Building Sustainability Competence on Corporate Boards,” which we reported on here, and our recent report: “What is a Climate-Fluent Board?”)
- Based on their risk oversight responsibilities, audit committees should have a role in overseeing climate risk, including ensuring that the impacts of climate risk on the company’s operations are evaluated and properly disclosed and reviewing all TCFD disclosures, wherever they appear.
Depending on the circumstances surrounding companies’ departure from the guidance, as well as mitigating factors, investors and proxy advisors are directed to consider withholding voting support for relevant board committee chairs or members, the independent board chair or lead director, the full board, or “directors with problematic or insufficient experience or expertise” (to the extent they have a role in overseeing climate risk, governance or board composition).
See Ceres release and additional resources on our Climate Risk & Disclosure and Sustainability pages.
This post first appeared in the weekly Society Alert!