In the first quarter of 2022, two multinationals found climate on their agendas in new ways. In January, nearly 70% of Costco’s shareholders voted for a proposal to reduce greenhouse gas emissions, “the first shareholder vote on a proposal directly requesting that a company set targets that include emissions from its full value chain and that are aligned with achieving net zero emissions by 2050 or sooner,” according to sustainability-focused nonprofit Ceres.
In March, activists sued the directors of oil and gas giant Shell for failing to align corporate strategy with the net-zero goals of the Paris Agreement, grounding its case in the UK’s 2006 Companies Act. In 2006, the Act codified and revised law on the duties of corporate directors, including “clarifying and expanding upon a director’s duty to act in good faith and in the best interests of the company,” according to international law firm Gibson Dunn.
Both actions are believed to be among the first of their kind — but they won’t be the last. For companies in all industries, it’s a definitive warning shot. The webpage headline for BlackRock’s annual letter to clients couldn’t state the new awareness more clearly: “Net Zero: a Fiduciary Approach.”
This declaration by the world’s largest asset manager adds to increasing regulations, growing public and media focus and 192 countries plus the EU signing on to the Paris Agreement. Still not convinced? Here are three major reasons to make net zero a strategic priority.
Ignoring Net Zero Means Heightened Shareholder Activism — and Control
As the Costco and Shell examples show, climate-conscious activist investors are no longer satisfied by vague mentions of recycling and renewables in a company’s annual CSR report. They want to see tangible goals and action linked to net-zero targets. And for companies lagging in these areas, investors have been all too happy to fill in the gaps with proposals and resolutions.
“Climate change is topping the list among the record number of shareholder proposals filed so far,” according to S&P Global, reporting that such moves comprised 21% of all shareholder resolutions at the time of its article in early 2022. “Investors are asking companies to be more specific in how they set such goals: Emissions from entire value chains, detailed net-zero transition plans and aligning carbon reduction targets with the most ambitious goal under the Paris Agreement on climate change are now par for the course.”
A February 2022 article in Quartz cited dozens of climate-related shareholder resolutions up for a vote in the upcoming months. When companies fail to move proactively on climate today, they cede this power to activists and lose the ability to set goals and strategies on their own terms. Moreover, their actions send out a signal to asset managers — for voting against a company’s board members, auditing firms and more.
Ignoring Net Zero Has Capital Implications
Shareholders, regulators and the media aren’t the only ones closely watching companies’ net-zero goals and climate action. The financial community has been taking an increasingly keen interest as well.
“ESG is central to all we do at UBS… how the company [is] doing in terms of ESG vulnerability, how ESG lapses relate to its valuation,” Aneliya Crawford, global head of activism and defense at UBS, wrote in Insightia’s latest edition of The Activist Investing Annual Review.
The Insightia report cited how insufficient climate action and shareholder activist responses can put companies at risk of credit downgrades, poor stock performance and declining valuations. CEO of As You Sow Andrew Behar talked about how companies in the energy sector are especially at risk of becoming “non-viable,” and Kimmeridge Energy’s Head of Public Equities Mark Viviano told Insightia “We’ve talked about three pillars of reform — business model, environmental impact, governance. They’re all interrelated and until they’re addressed, the generalist investor isn’t coming back.”
BlackRock CEO Larry Fink’s recent annual letter to corporate CEOs states that doing good means doing well. There’s a theme building here: Net-zero goals save money. In Europe, for example, investments over the past year on renewables, energy efficiency and emissions reduction are expected to net companies $45 billion over their lifetimes — a saving of $20 for every avoided metric ton of carbon dioxide or CO2 equivalent. Net-zero goals also can lead to cheaper capital. With sustainability-focused loans, an increasingly popular lending product, the positive metrics for emissions reductions or overall environmental, social and governance (ESG) scores are resulting in favorable interest rates and loan pricing.
Ignoring Net Zero Means Lost Ground in Competition and Innovation
Finally, companies that ignore net-zero risk being left behind. “Importantly, how does the company compare to its peers?” UBS’s Crawford writes in the Insightia report. “If peers are aggressively improving their ESG profile and the company lags even in a relatively benign industry or with palatable ESG standings on an absolute basis, it is still a target.”
As Diligent detailed in a blog post earlier in this year, leading on sustainability gives your organizations a competitive edge with both customers and talent, two increasingly important competitive differentiators as the Great Resignation continues. Both groups increasingly expect companies and brands to do more to reduce their carbon impact and put people and planet before profit.
Such competitiveness is also a matter of risk management. ClientEarth lawyer Paul Benson shared his perspectives on Shell’s situation for the Guardian, pointing out physical risks to transitional risks to stranded asset risk. For the latter, “Their assets — for example their facilities, their physical infrastructure — the value of that is just going to reduce or it will become a liability as the net-zero transition progresses. And they are exposed to massive write-downs of those assets,” he said. “We think, frankly, the longer the board delays with this the more likely it is that the company is going to have to execute this sort of handbrake turn to retain commercial competitiveness.”
But managing risk is only one side of the competitive equation. Successful companies will also need to move with agility into the future, and net-zero action plays an important role here as well. “I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt, regardless of what industry they are in,” Larry Fink declared in his 2022 letter to CEOs. “The next 1,000 unicorns won’t be search engines or social media companies. They’ll be sustainable, scalable innovators.”
All of this comes back full circle to shareholder activism, which is proving Fink’s and others’ points. “Underperforming peers on key areas of ESG that are considered material for your company’s particular industry will likely attract activist attention,” Alliance Advisors Managing Director Etelvina Martinez writes in the Insightia report.
Start moving net zero up on your strategic agenda. Download Diligent’s Preparing for ESG Compliance white paper today.
