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Investors play long game in climate disclosure push

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Investors play long game in climate disclosure push

Investors pushing companies to analyze and disclose their climate risks said they believe that those moves have set up a dynamic that will lead to changes in corporate operations.

Big investors such as BlackRock Inc. in recent years have joined the effort — through shareholder resolutions, public letters and behind-the-scenes conversations — for energy majors and top performing companies in other sectors to analyze and disclose the risks they face under the Paris Agreement on climate change, which seeks to limit global warming to no more than 2 degrees Celsius above pre-industrial levels. Many companies that are heavily invested in the mutual and index funds also want companies to establish environmental, social and governance, or ESG, operational standards. Investors use ESG criteria to screen companies in their portfolios for economically sustainable and environmentally and socially responsible operations.

"It's not just about creating a marketplace that thrives economically," said Tracey Rembert of Christian Brothers Investment Services Inc., which manages investment assets for a number of Catholic institutions. "Our investors care about economic justice, social justice, they care about impacts to the world's poorest people, the most vulnerable," she said in an interview.

Investors said 2017 marked a turning point for the climate disclosure push. Not only did shareholders of publicly traded companies pass three climate disclosure proposals that year, but the average percentage of votes cast in support of environmental measures climbed to 39.2%, from 27.5% in 2016 and 16.7% in 2015, according to The Conference Board. Exxon Mobil Corp. on Feb. 2 published its 2-degree scenario analysis after shareholders in 2017 passed a disclosure resolution by 62%, and Duke Energy Corp. plans to release a climate report in 2018.

Shareholders are not holding back this year and, according to a Ceres resolution tracker, have submitted nearly 50 climate-related resolutions for the 2018 proxy season, which typically runs from late April through early June.

Disclosure is step one, said Rembert of Christian Brothers, which backed the 2017 Exxon disclosure shareholder proposal. "But all the process that you had to go through as a company," including cross-team meetings, risks assessments and "thinking about disruptions that you hadn't really considered before ... that's the starting point for them to continue that exercise of kicking the tires and figuring out what all these changes are going to mean."

Experts say clear data and metrics are key to screening whether companies have economically sustainable and environmentally and socially responsible operations and can be used to hold their feet to the fire.

"I think there are enough savvy investors out there who have been looking at this quite carefully and are not going to be brushed aside or brushed off with facile responses from the companies they invest in," Michael Wilkins, head of global research on environmental and climate change risk at S&P Global Ratings, said in an interview. "Companies such as BlackRock have got whole teams looking at this ... and many others who really focused on this as an issue, and they're going to be requiring companies to do specific scenarios."

Good data is key to Paris accord goals

Investors and experts said the goals of the Paris agreement could prove costly for companies with carbon-intensive portfolios and supply chains if they do not take steps to address them early-on.

"As the parties go into the negotiations and move into this next phase [of the Paris agreement], that focus is increasingly going to be on action, and flows and outputs," Brian Deese, who heads up sustainable investing at BlackRock, said at a Jan. 31 Investor Summit on Climate Risk in New York City hosted by Ceres, the United Nations Foundation and United Nations Office for Partnerships.

Companies and investors need to find a better way to "harness data to drive additional disclosure and then build that into greater capabilities to actually model and demonstrate the risks and opportunities associated with the transition to a low-carbon economy," said Deese, a former energy and climate advisor to former President Barack Obama. "Orienting around those concrete outcomes is going to be important."

Norwegian government pension fund manager Norges Bank Investment Management is pushing companies and investors to focus on pulling strong numbers with more details, Norges CEO Yngve Slyngstad said.

"We have to move from words to numbers," Slyngstad said at the climate risk summit. "Words are, of course, important to encourage activities, but from our point of view, to go from words to action, you have to have the middle step of getting the numbers in place."

Investors mull expanding divestiture plans

Some investors are expanding their divestiture and disclosure push to other sectors.

State Street Global Advisors, which is the investment management arm of State Street Corp., in 2018 will begin pressing for more disclosures from the insurance, transportation and agriculture sectors, SSGA president and CEO Cyrus Taraporevala said. Danish pension fund manager PKA Ltd. is shifting its divestment focus from coal alone to also include oil and gas, said Peter Damgaard Jensen, CEO of PKA and chair of the Institutional Investors Group on Climate Change.

"I think if they're not going to have any kind of strategy for a 2-degree future, we might also end up divesting some of these companies," said Jensen, referring to the oil and gas companies.

PKA is among the more than 250 investors representing more than US$30 trillion in assets that have signed onto the Climate Action 100+ push, a five-year investor-led initiative to get the world's largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.

One Japanese pension fund manager is urging the mutual and index fund managers, sometimes referred to as passive investment managers, to add their voices to the push for companies to disclose their ESG-related risks, of which climate change is one component.

"When we started demanding passive managers to engage with companies on those climate risk issues, the industry responded quite negatively or defensively, saying, 'we are not paid enough to do that,'" said Hiro Mizuno, executive managing director and chief investment officer of Japan's US$1.4 trillion Government Pension Investment Fund of Japan. But the fund is not backing down. Because investors "depend on the passive management, the passive manager has no choice but to step up as an active owner if they wanted to continue receiving ... business from us," Mizuno said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.