No standard answers – what do potentially divergent disclosure rules mean for climate risk reporting?

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Companies hoping for harmonised climate disclosure rules face fresh uncertainty with recently-released draft regimes diverging on key requirements. The regulatory inconsistency is likely to embolden activist investors, many of whom are pressuring companies frustrated by inaction from governments and authorities.

The answer to the question ‘How does your Board oversee climate risks?’ might depend on who is asking.  New proposals from key standard-setters/regulators differ in how they expect entities to report on whether they have the skills and expertise to meet the climate challenge.

For example, the climate disclosure rule recently proposed by the US Securities and Exchange Commission (SEC) requires entities to say whether any board member has expertise in climate-related risks. To comply, disclosure must be in sufficient detail as to ‘fully describe’ the nature of the expertise. This is one of many proposed disclosure requirements which differs to the International Sustainability Standards Board’s (ISSB’s) exposure draft on climate-related disclosures. The ISSB’s version requires disclosure of how the Board ensures that appropriate climate skills and competencies are available to oversee the entity’s climate strategies.

Three things flow from this.

Firstly, companies may respond to the proposed SEC rule by giving more weight to climate expertise when searching for directors. This is particularly likely in sectors where climate strategy forms an integral and significant part of overall strategy, e.g. extractive and energy industries.

While many Australian companies won’t be caught by the US SEC’s proposed rule, it’s likely they will face investor expectations to raise voluntary disclosures to levels commensurate with mandatory rules. It’s also likely the direction set by the SEC will ultimately help to inform Australia’s own inevitable mandatory climate disclosure regime.

Secondly, it may spur more investor pressure on Board composition, as well as more action like that seen in the Exxon Board spill last year. In that case, 3 of the 12 Exxon directors were replaced with independent directors nominated by an activist firm targeting Exxon over its dependence on fossil fuels.

Already in 2022 activist investors have called for votes against two directors (the Lead Director, and Chair and CEO) at Chevron’s annual meeting on the basis (i) Chevron has failed to adequately respond to successive majority vote shareholder resolutions on greenhouse gas reductions and lobbying, and (ii) Chevron’s targets, investment plans and policy influence are demonstrably out of alignment with shareholder demands on climate impact. A Californian public pension giant also disclosed in the leadup to Chevron’s annual meeting that it would vote against four directors – the members of Chevron’s public policy and sustainability committee – in response to what it describes as Chevron’s failure “to adequately respond to the Climate Action 100+ engagement initiative”. Notwithstanding this, all of these directors were elected at Chevron’s annual meeting.

Closer to home, three of the four proxy advisers in Australia have said they will recommend votes against directors for climate oversight failures. Typically, such recommendations focus on the individual director most accountable for oversight of climate risk, for example the chair of the Board or the chair of the risk, sustainability or similar sub-committee.

Institutional Shareholders Services (ISS) Australia

Proxy Voting Guidelines

CGI Glass Lewis

Policy Guidelines

Australian Council of Superannuation Investors (ACSI)

Climate Change Policy

Proxy voting guideline/ policy relating to director or board failure in relation to climate risk oversight

Generally vote against directors individually, committee members, or the entire board, due to material failures of risk oversight, including in relation to climate change

Where it is clear that a company has not properly managed or mitigated environmental risks to the detriment of shareholder value, or when such mismanagement has threatened shareholder value, CGI Glass Lewis may consider recommending that shareholders vote against members of the board who are responsible for oversight of environmental risks (or, in the absence of explicit board oversight of environmental issues, CGI Glass Lewis may recommend shareholders vote against members of the audit committee)

Where companies consistently fall short of ACSI’s detailed expectations on climate change, ACSI may recommend a vote against directors of ASX200 companies, on a case-by-case basis. Recommendations will focus on the individual directors most accountable for oversight of climate-change related risks, for example company chairs, and the chairs of the risk and sustainability committees or similar

Similar positions are being taken among some of the world’s largest asset managers, with BlackRock not supporting the election of 281 directors globally in 2021 due to climate-related concerns. An example of this in Australia was BlackRock voting against the re-election of the longest serving director up for re-election (in lieu of a vote against the sustainability chair, who was not up for re-election) at the 2021 AGM of an ASX50 oil and gas company due to the company’s “inadequate progress on scope 3 target setting”.

Thirdly, it highlights an emerging issue with jurisdictions (e.g. the US and EU) pushing ahead to develop their own local disclosure rules and standards alongside the ISSB’s ongoing consultation on its exposure drafts. While the ISSB was established to drive a globally consistent and comparable sustainability reporting baseline, this won’t happen if jurisdictions jump the gun and put in place their own detailed sets of rules that differ from the ISSB’s ultimate standards.

Fortunately the ISSB is already moving to address this and has established a working group to enhance compatibility between the global baseline and jurisdictional initiatives. Members of the working group include the US SEC, the European Commission, the European Financial Reporting Advisory Group and others.

The G7 has also been quick to welcome the ISSB’s work to deliver a global baseline of sustainability disclosures, and has urged national and regional standard-setters to cooperate with the aim of reaching standards that can be implemented globally. The G7 includes, of course, the US.

The ISSB’s working group will need to move quickly to establish its standard before competition becomes entrenched. Consultation on the US SEC’s proposed rule ended on 17 June 2022, the ISSB’s feedback period on its exposure drafts running until 29 July 2022, and the consultation period for the European Sustainability Reporting Standards running until 8 August 2022. 

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