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April 7 — When former climate policy architect Heather Zichal moved from the White House to a corporate board room, one of her first challenges was figuring out what chair to sit in. Now, it’s figuring out how to bring climate change up in conversations about compensation and budgeting.
“It’s not always clear, especially for a new director, how do you actually start this conversation, and what does that look like?” Zichal, who joined the board of liquefied natural gas exporter Cheniere Energy Inc. more than a year ago, told Bloomberg BNA.
Before becoming the board's new climate expert, Zichal helped write the president's signature greenhouse gas policies.
“That was very obvious and clear to me,” she said, but on the board, “it's less clear to me what exactly to do.”
Concerns about how to deal with a changing climate, and the financial risks that come with it, are increasingly making their way up to the board level in the wake of a landmark international agreement inked by policy makers in Paris at the end of 2015.
“For those people thinking about long-term financial investments, you kind of have no choice but to think about climate change as a factor,” Zichal said.
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That hasn't typically been the case though, according to a 2014 survey by PricewaterhouseCoopers. The majority of directors said they didn’t talk about climate change at all and, among those that did, most said it came up “not very much.”
“In general, boards are very, very weak when it comes to dealing with climate issues,” said Richard Ferlauto, a former Securities and Exchange Commission official who also previously worked at Institutional Shareholder Services (ISS). Ferlauto is now teaming up with a network of institutional investors called the 50/50 Climate Project that wants boards of energy companies to respond more aggressively to climate change.
One of his partners in the project is the nation’s largest public pension fund, which just made board climate change expertise part of its voting guidelines for companies it invests in.
“Once Paris was agreed, the future of the energy industry was changed,” Anne Simpson, head of corporate governance at the nearly $300-billion California Public Employees’ Retirement System (CalPERS), said, “and we need people on these boards of energy companies who can look forward and be part of that change, not resisting it.”
Shareholders have tried repeatedly, and unsuccessfully, to get oil giants Chevron Corp. and Exxon Mobil Corp. to add to their boards an environmental expert like Zichal.
They may have a new way to do that after an unprecedented campaign for proxy access, which gives large shareholders the right to nominate their own board candidates under certain conditions. CalPERS and New York City's comptroller are leading the push .
“This is our Teddy Roosevelt approach, you know, speak softly but carry a big stick,” CalPERS's Simpson said in an interview. “Shareholders have not had a big stick until recently because they’ve neither had the right to vote against board members nor to put forward candidates.”
As of January, shareholders had won proxy access at almost two-thirds of the fossil fuel companies targeted last year, including Chevron Corp. and ConocoPhillips Co. At Exxon Mobil Corp., a proxy access proposal fell just short of passing and has been resubmitted this year.
“A highly visible and very important, if not the most important, vote of this proxy season will be proxy access at Exxon,” Ferlauto said in an interview, because “it would put significant leverage on the table for large institutional investors who are concerned about their business strategy in a way that’s never existed before.”
Despite the attention paid to climate expertise, “investors really don’t currently have a common definition for what a climate-competent board director would look like,” Candace Hewitt, a corporate governance and social responsibility analyst at TIAA-CREF, said in a recent webinar organized by the Boston-based nonprofit Ceres.
“So as investors, we may need to get our ducks in a row so that when we have these conversations with companies, we have a clear sense of what we’re looking for,” Hewitt said.
The 50/50 group is identifying a bench of what it thinks are climate-friendly director candidates that will be searchable by skill set, experience and sector. Potential candidates won’t only be experts in greenhouse gases but would bring value added in other ways, like diversity for example.
Corporate boards also need to be structured in a way that takes climate issues into account, Ferlauto said.
“Does the audit committee or the committee that deals with long-term risk have a charter that requires a look at climate risk?” he said. “Does the compensation committee link a carbon reduction strategy to its incentive package? Or is the incentive package for an oil company linked to more drilling?”
Corporate political spending and lobbying in relation to climate policy has been another area of focus for investors .
It’s easy to see when boards are succeeding at being “climate-smart,” according to Clinton Moloney, a sustainable business adviser at PwC. “When you have a climate-smart board in place, management is forced to up their game on how the company’s responses to climate change connect to long-term value creation and protection,” he said.
Ferlauto's project will soon reveal sector-by-sector research, done in collaboration with independent corporate governance experts, showing which boards are more climate-smart than others, starting with utilities. Boards are being evaluated according to their ability to deal with climate-related risks.
The National Association of Corporate Directors has seen a similar risk-based approach among its more than 17,000 members.
“Based on our conversations with members, climate change comes up in boardroom discussions most frequently in the context of broader discussions about major enterprise-level risks and company strategy,” Robyn Bew, who leads NACD’s research team, said in a statement. Bew added that as the operating environment for many companies becomes more “volatile, complex and uncertain,” these issues are taking up even more time on board agendas.
Ceres also has provided more direction for boards by issuing its own set of sustainability recommendations and by hosting note-sharing sessions among directors .
Still, Zichal said she wishes this kind of work was “happening times 50” because “this is a key area where you could drive a lot of change.”
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