Jason Halper is partner and Sara Bussiere and Timbre Shriver are associates at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Bussiere, Ms. Shriver, Melis Acuner, Mark Beardsworth and Kevin Roberts. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).
As investors’ calls for greater climate-related corporate accountability grow louder, the “E” in ESG—environmental, social and governance—looms larger than ever, particularly from the perspective of directors facing oversight responsibilities and the challenge of providing adequate disclosure. That reality became even clearer when a little-known hedge fund with a relatively small stake in ExxonMobil successfully elected three insurgent directors at the company’s annual meeting after quietly garnering the support of other stakeholders by appealing to their interest in environmental and governance issues. [1]
Of course, investors have been signaling the importance of environmental issues for years. In 2007, the $240 billion California State Teachers’ Retirement System (“CalSTRS”) formed a Green Initiative Task Force focused solely on “managing sustainability-related risks, including climate risks, and taking advantage of appropriate sustainability-themed investments.” [2] Blackrock, the largest asset management company in the world by assets under management, has published guidance concerning its expectations with respect to climate-related disclosures, stating that “climate risk—physical and transition risk—presents one of the most significant systemic risk[s] to the long-term value of our clients’ investments.” [3] Earlier this year, Blackrock voted for two shareholder proposals requiring Berkshire Hathaway Inc. to issue disclosures addressing how the company is managing climate risk, noting that the company “is not adapting to a world where environmental, social, governance (ESG) considerations are becoming much more material to performance.” [4] Though neither proposal was approved, Blackrock’s dissatisfaction prompted other institutional investors to express their discontent, increasing pressure on the company to modify its approach. In 2017, research conducted by the Sustainability Accounting Standards Board (“SASB”) found that climate change “is likely to have material financial impacts on companies in 72 out of 79 industries, representing 93 percent of the U.S. equity market, or $27.5 trillion.” [5] And investors are increasingly demanding that companies change their approach to managing climate-related risks and more thoroughly disclosing those efforts. We expect these demands to hit a fever pitch following the “code red for humanity” recently issued by the United Nations’ recent Intergovernmental Panel on Climate Change (“IPCC”) report and in the months leading up to the United Nations’ Conference of the Parties 26 (“COP26”) in Glasgow in November of this year. [6]