Key Governance Developments - December 2021

COP26 crystallises pressure on companies to embrace emission reductions

In retrospect, 2021 may be seen as a pivotal year for corporate engagement, with efforts announced by multinational organisations, governments and civil society to curb climate change and achieve net zero carbon emissions by 2050 in order to have a chance of keeping global warming to within 1.5ºC of pre-industrial temperature levels. November's COP26 conference in Glasgow saw the announcement of a wide range of pledges and commitments by companies and sectors, especially from the financial industry, to undertake far-reaching change to their practices and business models as part of a transition to sustainable energy use - although details and timetables are mostly still lacking. The corporate world was pushed by increasingly active institutional shareholders, most notably when hedge fund Engine No. 1 succeeded in getting three of its nominees elected to ExxonMobil's board, as well as by legal action, with Shell being ordered by a Dutch court to double the speed of its emission reductions between now and 2030. In many cases the spur for corporate change is not just concern about the environmental and social impact of a hotter planet, but multiple business risks, from reputational damage to stranded assets and climate threats to physical infrastructure.

Key Governance Developments

UN secretary-general promises global standards to assess corporate net zero pledges

UN secretary-general António Guterres announced at the COP26 climate conference that he would create an expert committee to develop global standards for measuring corporate pledges to reach net zero carbon emissions. He says that recent climate action announcements could create a false impression that large swathes of the global economy have fully embraced net zero targets, warning that a lack of credibility and harmonisation of standards for emissions reductions and targets is creating confusion among investors and policymakers.

Best source: City A.M.

European Commission adopts sustainable finance and taxonomy measures

The European Commission has adopted the EU Taxonomy Climate Delegated Act, the Corporate Sustainability Reporting Directive proposal, and further measures covering fiduciary duty, investment and insurance advice intended to boost capital flows into sustainable activities. The taxonomy covers solar, biomass and thermal energy, but the Commission has not included more contentious energy sources, notably nuclear energy and natural gas, whose inclusion is the subject of dispute between EU member states and is due to be covered by subsequent legislation.

Best source: European Commission

UK financial institutions and large companies must publish net zero plans by 2023

Large companies and financial institutions in the UK will be required by 2023 to publish detailed plans to reach net zero carbon emissions, under proposals unveiled by the country's finance ministry. Companies' plans will be submitted to an expert panel but net zero commitments will not become mandatory, allowing companies and their shareholders to decide whether and how to achieve the transition.

Best source: BBC News

European banks fear increased capital requirements for clients with elevated climate risks

European banks are ending their relationships with corporate clients with elevated climate risks, according to European Banking Authority director of economic and risk analysis Jacob Gyntelberg. He says institutions are either refusing loans or raising charges for entire sectors as well as individual clients, fearing the prospect of being required to set aside more capital for exposure to heavy polluting industries. The coal industry has already been affected, and upstream oil and gas projects are losing popularity among lenders.

Best source: Bloomberg (subscription required)

International Organization for Standardization introduces governance benchmark

The International Organization for Standardization has introduced the ISO 37000:2021 benchmark for corporate governance as a global reference point for all organisations. The corporate governance standards incorporate requirements for internal controls, risk management, compliance and financial controls, as well as ethical and responsibility standards for companies and other organisations.

Best source: International Organization for Standardization

See also: Wall Street Journal (subscription required)

Sustainability activist investors back legislation targeting corporate tax shifting

Sustainability-focused investors are backing members of Congress pushing legislation that would require public companies in the US to disclose whether and where they shift profit internationally, and how much tax they pay, as part of a campaign to curb aggressive tax optimisation. More than 60 investors with $2.9trn in assets have announced their support for the draft Disclosure of Tax Havens and Offshoring Act, a component of a larger bill on ESG provisions already approved by the House of Representatives in June. However, the measure has failed to make progress in the Senate.

Best source: Bloomberg (subscription required)

Engine No. 1 claims third seat on ExxonMobil board

After winning a third seat on the board of ExxonMobil with a mandate to push for action on climate change, the founder of activist investment firm Engine No. 1 says strong corporate strategies to curb climate change make good business sense. Chris James argues that the debate should not be ideological but that companies should consider their impact on communities and the environment.

Best source: The Guardian

Legal & General divests from companies with poor climate engagement

Legal & General Investment Management has divested from Commercial Bank of China, Pennsylvania electricity utility PPL, insurer AIG, and Chinese dairy company China Mengniu Dairy. The UK’s largest asset manager says the companies failed to respond adequately to corporate engagement or breached LGIM’s red lines on involvement in the coal sector, making carbon disclosures or links to deforestation. The asset manager has already divested from nine other companies, including ExxonMobil.

Best source: ESG Clarity

Dutch court orders Shell to make bigger reductions in emissions

A Dutch court has ordered Shell to reduce its carbon emissions by 45% from 2019 levels over the next decade, effectively requiring the oil producer to double its planned emission cuts of 20% between now and 2030. The lawsuit, filed by Friends of the Earth Netherlands, is the first time a large petroleum company has been ordered by a court to comply with the Paris Agreement targets to curb climate change. The Anglo-Dutch company was told it had a duty of care under human rights law and that its emissions reduction policy should cover its suppliers and customers.

Best source: Fast Company

See also: The Guardian

Shareholders revolt against big executive bonuses during pandemic

Shareholders have increasingly been voting against the awarding of execessive bonuses to CEOs and other executives during the Covid-19 pandemic. UK estate agent Foxtons, BAE Systems, AstraZeneca and British American Tobacco have faced calls from institutional investors including Legal & General Asset Management and Fidelity International to limit bonuses, particularly if their businesses have been particularly affected by lockdown restrictions. However, some remuneration committees seem unconcerned. Norwegian Cruise Lines lost $4bn last year, but CEO Frank del Rio received $36.4m, and Yum! Brands awarded CEO David Gibbs a one-off payment of $9.5m, despite the group missing targets as earnings dropped by 25%.

Best source: Financial Times (subscription required)

See also: Financial Advisor

See also: CBS News