The momentum behind sustainable finance in today’s marketplace is due in no small part to the catalytic role of institutional investors, who early on recognised climate change as a systemic risk to their long-term investment portfolios – on which millions of future and current retirees depend. Now doubling down because the available information about climate risk is asymmetric, uneven in its credibility and reliability, investors, including Anne Simpson, managing investment director, board governance and sustainability at CalPERS, are articulating how climate change also puts at risk our financial system – the very lifeblood of our economy and society. She spoke to Marsha Vande Berg, deputy chair of OMFIF’s advisory council.
Marsha Vande Berg: In a few months, the signatories of the Paris agreement will meet for COP26 in Glasgow. What do you predict will be the outcome of the November meeting? Do you anticipate it will make your life at CalPERS easier?
Anne Simpson: First we need to remember what COP26 was intended to do. It was to be a check-in after five years on the commitments made in 2015 in Paris. Nations made individual commitments to hold any increase in global warming to below two degrees Celsius. We have had progress since then.
Japan came forward with a net zero by 2050 pledge. President Joseph Biden made the same pledge for the US. China came forward too, as did countries like South Korea, the UK and New Zealand. Ambition at the national level has ratcheted up. The question now is what actions will each nation take? What will be the policies that drive change?
Financial markets are looking for two things. One is information. We can’t postpone mandatory climate risk reporting. There are good efforts underway here and there. The International Financial Reporting Standards Foundation and the Securities and Exchange Commission see this as critical. We are expecting that COP26 will provide a commitment on that.
We know too that the COP26 team has been working on what’s kind of hilariously called a road map. Maybe they should be working on a pathway for more than electric vehicles – for walking and bicycles or other forms of low carbon transport. Each market needs a pathway to get to the point where they can integrate mandatory reporting requirements. That would be fantastically helpful.
The second thing is incentives. We know that markets work efficiently when incentives are aligned. We also are hoping for progress on carbon pricing and the removal of fossil fuels subsidies. These are two measures that have been on the to-do list ever since the Paris meeting.
We need to look at the incentives being set for executives and fund managers. The incentives that are put in place internally need to be aligned with external factors. Otherwise, we’re not going to get there.
Executive compensation is one of the measures called for by Climate Action 100+, namely that emission reductions at a company be a factor in executive compensation plans. We are getting companies to do just that. One example is BP which now has its top 14,000 executives in a bonus plan that ties rewards to emissions reductions.
The big agenda is twofold: Getting information to the market and ensuring incentives are aligned. Underneath all that is an enormous amount of investment and public policy to make sure the necessary infrastructure is put in place. That includes phasing out coal and providing support for developing countries so they have access to technology and expertise.
MVB: On or before the November meeting in Glasgow, there is the possibility of three initiatives establishing operable climate change disclosure requirements and mandatory corporate reporting to regulators. One initiative is well underway in the European Union. Another is the current work of the IFRS Foundation. Meanwhile, the SEC is considering its own disclosure requirements. How sanguine are you about the possibility of an outcome that harmonises these and any other initiatives?
AS: On the IFRS side, there’s going to be an effort to carefully coordinate with and draw on the expertise of various groups – the Value Reporting Foundation, Global Reporting Initiative, the International Integrated Reporting Council (now merged with the Sustainability Accounting Standards Board under the Value Reporting Foundation), the Carbon Disclosure Project and the Climate Disclosure Standards Board as well as the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.
Ultimately, the great prize will be integrating disclosures with financial statements. If we can get that done, then the question becomes do we have two sets of accounting standards. In recent years, we’ve seen not quite convergence but a harmonisation – or the dream of a common language being realised between IFRS and generally accepted accounting principles reporting requirements. The SEC, for example, acknowledged that progress has been made when it dropped the need for separate reconciliations.
That agenda has moved forward very well – and remember the SEC is represented on the monitoring board that oversees IFRS rules – so there is connectivity at the highest level as well as at the departmental level. I’m confident that the dream of a common language will be realised. We have global capital markets and investors don’t want to have to check their passports at a false border called the Atlantic Ocean or the border with Mexico. It’s a global market so we need global standards.
MVB: I’d like to ask about you, your ambitions and goals as one of the most prominent advocates globally of quality sustainable finance today. First, there’s your engagement together with other advocates which led to the Exxon shareholders’ stunning decision recently to reject the company’s director candidates in favour of three of the four candidates put up by fellow activists. Is this a David and Goliath story – or is there more to it than meets the eye?
AS: I don’t really view this as a David and Goliath story. The better comparison may be to Spartacus. You know, ‘I am Spartacus’ is what every investor who supported the new slate said. They stood up to say ‘I’m going to be counted on this’. This outcome followed years of engagement with Exxon on the part of large investors. BlackRock, for example, voted against certain board members over their lack of engagement. CalPERS also voted against the Exxon board members.
Prior, investors supported and ran campaigns on issues like majority voting so that we as shareholders would have the ability to vote against director candidates. If investors had not set out to establish these governance rights, we wouldn’t be in the position now of being able to reject corporate candidates.
Now the strategy and approach developed and brought forward by Engine One was nothing short of brilliant. They identified Exxon as a company at the tipping point. To their credit, they spent a lot of time in close conversation with large institutional investors like CalPERS, making sure that the investment case for change really did resonate with the broader investor community.
Climate Action 100+ also played a role. So the dynamics of the experience in the way the group worked with others was also a part of the conversation. As I said, this is more of a case of investors stepping up as fiduciaries both to manage risk and to help the company restore its financial fortunes than it is a David and Goliath story.
Marsha Vande Berg is Deputy Chair of OMFIF’s Advisory Council and a 2016 Distinguished Career Fellow at Stanford University.
This is an excerpt from a video interview which can be viewed here.