CalSTRS Takes Aim at Corporate Boards Over Climate Disclosure

California State Teachers’ Retirement System (CalSTRS), a behemoth in the pension fund world, has escalated its campaign for improved climate risk disclosure. The $341 billion fund cast a record-breaking 2,200 votes against boards of directors during the 2024 proxy season, marking a substantial increase from the previous year.

The pension giant's aggressive stance underscores a growing trend among institutional investors to hold corporations accountable for their climate-related risks and opportunities. By voting against boards, CalSTRS is signaling its dissatisfaction with companies that fail to provide sufficient information about their climate impact.

Climate change has emerged as a paramount issue for investors, as it poses significant financial risks. CalSTRS believes that transparent climate-related disclosures are essential for making informed investment decisions and mitigating potential losses. The fund's actions serve as a powerful message to corporations that climate change is no longer a peripheral concern but a core business risk.

As a leading pension fund, CalSTRS's stance is likely to influence other institutional investors to adopt similar voting strategies. This could lead to increased pressure on companies to enhance their climate disclosures and overall sustainability practices.

While the fund's focus on climate change is commendable, it remains to be seen how effectively these votes will drive meaningful change. The long-term impact of CalSTRS's actions will depend on the collective response of corporations and the regulatory environment.

Challenges Companies Face in Providing Climate-Related Disclosures

The growing pressure from investors like CalSTRS is forcing companies to enhance their climate-related disclosures. However, providing accurate and comprehensive information presents significant challenges:

Data Collection and Measurement

• Data Availability: Many companies lack granular data on emissions, resource consumption, and other climate-related metrics.

• Standardization: Inconsistencies in data collection and measurement methods make comparisons between companies difficult.

• Scope 3 Emissions: Assessing indirect emissions (Scope 3) is particularly complex and requires extensive data gathering.

Scenario Analysis and Financial Impact

• Complexity: Quantifying the financial implications of climate-related risks and opportunities under different scenarios is challenging.

• Forward-Looking Estimates: Predicting future climate impacts involves significant uncertainty.

• Integration into Financial Planning: Incorporating climate-related factors into traditional financial models requires new methodologies.

Disclosure Standards and Regulations

• Evolving Requirements: The rapid pace of regulatory changes creates challenges for companies to keep up.

• Global Differences: Variations in disclosure standards across jurisdictions can lead to inconsistencies and increased compliance costs.

• Investor Expectations: Meeting the diverse needs of investors with varying levels of climate-related information demands requires a nuanced approach.

Resource Constraints

• Cost: Developing the infrastructure and expertise to meet disclosure requirements can be expensive.

• Talent Shortages: Finding qualified personnel with the necessary skills to manage climate-related reporting can be difficult.

Despite these challenges, companies must recognize that climate-related disclosures are becoming increasingly important for investor relations, risk management, and reputation. By addressing these issues proactively, companies can enhance their resilience and position themselves for long-term success.

Successful Companies in Climate-Related Disclosures

Several companies have emerged as leaders in climate-related disclosures, demonstrating how it's possible to navigate the challenges and turn them into opportunities.

Leading Examples

• Renewable Energy Companies: Companies like NextEra Energy and Ørsted have been at the forefront of climate disclosure due to their business models. They often provide detailed information on emissions reductions, renewable energy generation, and the financial implications of climate change.

• Financial Institutions: Banks such as BNP Paribas and HSBC have made significant strides in climate risk disclosure. They have incorporated climate scenarios into their financial planning and have been transparent about their exposure to climate-related risks.

• Consumer Goods Companies: Unilever is a notable example of a consumer goods company that has embraced sustainability and climate disclosure. They have set ambitious targets for reducing their environmental impact and have been transparent about their progress.

Key Strategies for Success

These companies have adopted several key strategies to excel in climate-related disclosures:

• Early Adoption: Embracing climate disclosure early on has allowed these companies to build a reputation for leadership and transparency.

• Data-Driven Approach: Investing in data collection and analysis systems has enabled them to quantify climate impacts accurately.

• Scenario Planning: Conducting robust climate scenario analysis helps assess potential risks and opportunities.

• Stakeholder Engagement: Collaborating with investors, customers, and other stakeholders ensures that disclosures meet their needs.

• Setting Ambitious Targets: Clearly defined climate goals motivate companies to take concrete actions.

• Disclosure Framework Alignment: Adopting frameworks like the Task Force on Climate-Related Financial Disclosures (TCFD) provides a structured approach to disclosure.

By following these principles, companies can enhance their climate-related disclosures, build trust with investors, and position themselves for long-term success.

The Role of Industry Associations and Regulators in Climate Disclosure

Industry associations and regulators play crucial roles in shaping the landscape for climate-related disclosures.

Industry Associations

• Standardization: Industry associations can develop standardized frameworks and metrics for climate-related disclosures, enhancing data comparability across companies.

• Best Practices: By sharing best practices and case studies, associations can help members improve their disclosure quality.

• Advocacy: Associations can advocate for policies that support climate-related disclosure and invest in research to advance the field.

• Capacity Building: Offering training and resources can help members develop the necessary skills to comply with disclosure requirements.

Regulators

• Mandatory Disclosures: Implementing mandatory climate-related disclosure requirements can drive consistency and transparency.

• Enforcement: Enforcing disclosure rules is crucial to ensure compliance and deter greenwashing.

• Investor Protection: Regulators can protect investors by ensuring that climate-related information is accurate and reliable.

• International Cooperation: Collaborating with other jurisdictions can help harmonize disclosure standards and create a level playing field.

Examples of Impact

• The Task Force on Climate-related Financial Disclosures (TCFD): An industry-led initiative supported by regulators, the TCFD has developed a framework for climate-related financial disclosures that has gained widespread adoption.

• The Securities and Exchange Commission (SEC): The SEC's proposed climate disclosure rule would require companies to disclose climate-related risks and metrics, significantly impacting the disclosure landscape.

• The European Union: The EU's Sustainable Finance Disclosure Regulation (SFDR) sets out comprehensive disclosure requirements for financial products and financial market participants.

While industry associations and regulators play complementary roles, effective collaboration is essential to achieve optimal outcomes. By working together, they can create a clear and consistent framework for climate-related disclosures that benefits investors, companies, and the environment.