Shareholder Engagement ESG: Stepping Stones, Trip Wires and Unpaved Pathways
A Conversation Between Christopher P. Skroupa, Skytop Editor-in-Chief, and Jason M. Halper, Partner, Cadwalader, Wickersham & Taft LLP / June 8, 2022
Jason Halper is the co-chair of Cadwalader’s Global Litigation Group, head of the Corporate and Financial Services Litigation Practice, and a member of the firm’s Management Committee. He also leads the firm’s climate change litigation and advisory practice. In three decades of practicing in the areas of financial services and securities law, complex commercial disputes and corporate governance, clients consistently return to engage Jason because of his track record of obtaining results that meet each client’s unique needs — as described in Chambers USA, he “takes the time and energy to really understand the client” and “focuses on what is important.”
Jason also is an experienced trial lawyer. A member of the Trial Bar of the Northern District of Illinois, he has tried cases to jury verdict or other decision in federal and state courts, regulatory tribunals and arbitrations around the country, including among others, the Southern District of New York, the District of Columbia, the District of New Jersey, the Southern District of Ohio, and the Western District of Oklahoma; the Delaware Court of Chancery; state courts in California, Connecticut, Maryland and New York; and arbitration panels under the auspices of FINRA, NYSE, AAA, JAMS and others.
Jason is a Lecturer in Law, focusing on corporate governance, climate change, compliance and ethics, at the University of Pennsylvania Carey Law School, and a frequent speaker and author. He is a member of the Advisory Board of Harvard Law School’s Program on Corporate Governance and a regular Guest Contributor to the Harvard Law School Forum on Corporate Governance and Financial Regulation. He has published there as well as in, among others, Bloomberg, Thomson Reuters, The New York Law Journal, Law360, Columbia Law School’s Blue Sky Blog on Corporations and the Capital Markets, The Review of Securities & Commodities Regulation, Insights: The Corporate and Securities Law Advisor, The M&A Lawyer and Transaction Advisors. He has been recognized for his legal abilities by numerous publications and associations.
Christopher Skroupa: Asset management is confronting the challenges presented by climate change. Why now and what are the greatest challenges for them?
Jason Halper: The asset management industry has been sounding the alarm for some time about the risks and opportunities posed by climate change. Asset managers have been signaling the importance of issuers disclosing environmental impacts for more than a decade—creating focus groups to study sustainability-related risks, pushing for guidance from regulators concerning climate-related disclosures, and publicly supporting shareholder efforts for increased transparency concerning climate-related risks. The regulatory and public company responses to these calls for improved climate-related disclosures have been slow to arrive and inconsistent in substance—issuers are disclosing different amounts and types of information, and using different methodologies and metrics to measure, for example, greenhouse gas emissions, with little guidance from regulators. Because sustainability-related disclosures made at the fund level necessarily depend on issuer disclosure, the lack of standardized and consistent disclosures has posed significant challenges for the asset management industry.
Christopher: How are asset managers confronting these challenges?
Jason: Confronted with these challenges, asset managers’ calls for action have intensified in recent years. In June 2021, 457 investors representing over $41 trillion in assets under management (“AUM”) signed the 2021 Global Investor Statement to Governments on the Climate Crisis (the “Statement”), which urged governments to work with institutional investors to “raise ambition and accelerate action to tackle the climate crisis” by, among other things, “reduc[ing] global net carbon dioxide emissions by 45 percent from 2010 levels by 2030.” The signatories observed that “more investors than ever before [are] embedding net zero goals and strategies into their portfolio decisions, engaging companies to cut their emissions and calling on policymakers to deliver robust climate action[,]” and that investors are “urgently seeking to decrease their exposure to climate risk as a core fiduciary duty and benefit from the opportunities associated with the transition to a net-zero emissions economy.” The Statement asked governments to take a number of actions to support a net-zero transition, including “implementing mandatory climate risk disclosure requirements aligned with the [Financial Stability Board’s] Task Force on Climate-Related Financial Disclosures (“TCFD”) recommendations, ensuring comprehensive disclosures that are consistent, comparable, and decision-useful.”
Christopher: What about oversight with asset managers?
Jason: Asset managers are experiencing increasing regulatory oversight with respect to various policies, procedures and practices, including concerning (i) the consistent use of climate change terminology and messaging; (ii) whether a firm diligences, selects and monitors its investments in a manner consistent with its sustainability disclosures; and (iii) whether a firm’s proxy voting processes are in line with its disclosures and marketing materials. Increased regulatory scrutiny requires asset managers to carefully consider the disclosures of the companies in which they are invested and the disclosure they must, in turn, make to regulators and their clients.
Christopher: What must asset managers do to make sure they meet the demands of regulatory oversight?
Jason: Asset managers must take pains to accurately assess the environmental, social, and governance characteristics of their products and the issuers in which they invest. Any sustainability-related claims should be supported by reliable data and metrics and associated investor communications should aim to clearly articulate a fund’s sustainability objectives and portfolio characteristics. Disclosures must be sufficiently clear, precise, and tailored to an adviser’s and its clients’ specific sustainability investment guidelines, mandates and restrictions. As discussed herein, there are numerous third party frameworks that asset managers can follow to ensure compliance with current demands .Asset managers should consider the adoption (and related disclosure) of policies, procedures and practices concerning sustainability and the use of related terminology. This could include the due diligence they will undertake to evaluate the sustainability characteristics of their investments, the sustainability-specific factors relevant to investment decisions, and the processes they will employ for monitoring investments either given a firm’s disclosed investing approaches or its objectives regarding the sustainability characteristics of its investments.
Christopher: Are asset managers doing enough in advancing climate change initiatives?
Jason: Certain institutional asset managers are playing a leading role in advancing climate change initiatives and agendas and exerting influence well beyond the asset management industry. BlackRock, Vanguard and State Street, to name just a few, regularly publish information regarding their climate stewardship activities, and the annual letter to CEOs from Laurence Fink, BlackRock’s Chairman and CEO, much of which has been devoted to climate change in recent years, is virtually required reading for large swaths of business executives. For example, BlackRock publicly advocates that issuers disclose climate change information by adhering to the TCFD framework, and State Street has disclosed that it will be carbon neutral for Scope 1 and 2 emissions (e., total direct and indirect greenhouse gas emissions from the company’s operations) this year. All three signed on to the Net-Zero Asset Managers Initiative, whose goal is to convince the companies they invest in to achieve net-zero greenhouse gas emissions by 2050. According to Mr. Fink’s most recent letter, “climate risk is investment risk,” necessitating proactive industry action along these lines— “[w]e focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients.” If anything, we expect key players in the asset management industry to be as or even more vocal and proactive in the near and medium term. But with that high profile comes increased scrutiny, and asset managers need to exercise caution regarding the accuracy of their disclosures and their governance practices in this area.
Relatedly, one aspect of the industry’s proactive approach to climate change is the increasing willingness of asset managers to express views on issuers’ sustainability activities. State Street, for example, states that it has engaged with over 600 companies in multiple industries since 2014 regarding climate change issues and it has expressed a willingness to vote against the reelection of directors if its communicated climate change concerns go unaddressed. State Street also claims that it votes on every shareholder climate change proposal for companies in its portfolios, including say-on-climate proposals (e., where shareholders seek periodic non-binding votes on a company’s climate transition plan and progress) or proposals that would permit shareholders to vote on the company’s climate plans. Likewise, BlackRock indicated that in the 2020–2021 proxy year, it voted against 255 directors and 319 companies based on climate-related concerns that could negatively impact shareholder value. It also voted for 64% of climate-related shareholder proposals in that same period. And, in the same vein at Vanguard, “where climate matters present material risks, the funds are likely to support shareholder proposals that seek reasonable and effective disclosure of greenhouse gas emissions or other climate-related metrics. The funds may also support proposals that ask companies to pursue climate risk mitigation targets, such as those aligned to the goals of the Paris Agreement.” The bottom line is that many asset managers will continue to be increasingly vocal and active in terms of engagement and voting and appear likely to hold accountable issuers that are perceived to be laggards in climate transition efforts.
Christopher: Where do you think this proactive approach will lead?
Jason: Perhaps the logical culmination of the industry’s proactive stance could be instances of collaboration with, or at least support of, activist investors in certain situations. While climate-focused activism is increasingly a feature of the investment and governance landscape, so too may be the alignment of the goals and views of institutional asset managers and activist investors. The most notable example involves Engine No. 1’s successful effort to install three directors on the board of Exxon Mobil based on criticism of the company’s climate transition efforts and its related impact on long-term shareholder value. But that success depended on obtaining the support of the company’s large institutional shareholders, including BlackRock, State Street and Vanguard. Engine No. 1 reportedly reminded these institutions that its campaign aligned with their own stated goals based, in part, on their membership in the Net Zero Asset Managers Initiative. The extent to which we see increasing instances of cooperation or support by institutional asset managers for activist campaigns remains to be seen, but we anticipate that the Engine No. 1 situation will not be the last time such an alliance occurs.