September 19, 2018

KEEPING CURRENT: Beyond COP21: What Corporate and Securities Lawyers Need to Know

Tricia Dunlap

In late November 2015, the 21st session of the Conference of the Parties (COP21) to the U.N. Framework Convention on Climate Change (UNFCCC) convened in Paris, France, to address the threats posed by climate change. Although COP21 signatories are nation-states, it was widely acknowledged by government and business leaders that private sector action is essential for translating the Paris deal into reality.

In fact, business leaders’ support was key to achieving COP21’s result: 195 nations pledged specific actions to keep global warming under two degrees Celsius. Although COP21 does not directly alter the legal landscape for corporate and securities lawyers, it represents a significant shift toward corporate norms that look profoundly different than they did when the first Conference of the Parties convened in Berlin in 1995. For business lawyers, its impact will be primarily felt through increased accountability, transparency, and disclosure, as corporations align their policies and operations with COP21’s “2-degree” goal and regulators start implementing new national commitments. 

The Business Voice at COP Meetings 

Though COP meetings are ostensibly government functions, the presence of business leaders at parallel meetings has become commonplace. In Paris, the visibility and advocacy of CEOs surpassed that of previous COP meetings. CEOs from nearly every industry met in a wide variety of fora held parallel to the official delegates’ conference. Their presence and voice demonstrates the now widespread belief among business leaders that “business cannot succeed in a society that fails,” a profound shift away from Milton Friedman’s famous argument in 1970 that business “cannot have [social] responsibilities.” 

This change is due, in part, to the maturation and capacity expansion of business-focused organizations founded in the mid-1990s. CERES, a coalition of investors committed to engaging companies around environmental sustainability, the World Business Council for Sustainable Development (WBCSD), the Prince of Wales Corporate Leaders Group, and more recently the We Mean Business coalition, among others, routinely bring business leaders into the climate change discussion. In addition to institutional leadership, individual CEOs have become more vocal in support of climate change mitigation, building on a trend that began over a decade ago. 

For example, in September of 2010, a chance meeting between Muhtar Kent, CEO of Coca Cola, and Jim Rogers, CEO of Duke Energy, led to “Business Action for Climate” a forum at COP16, in Cancun. Rogers and Kent believed that business leaders had to speak up about climate change. The result was a keynote speech from Mexican President Felipe Calderón followed by a panel discussion moderated by Charlie Rose and featuring Kent and Rogers as well as Andrew Liveris (CEO of Dow Chemical) and Jose Antonio Fernandez (CEO of FEMSA, a leading Latin American firm). All four CEOs called for a price to be set on greenhouse gas (GHG) emissions, arguing that such a market signal would drive corporate investments in efficiency and innovation while also reducing GHG emissions that cause climate change. Just a few days later, business leaders convened for a two-day World Climate Summit – a business conference held alongside every COP meeting since then. 

Prior to COP21, many corporations already had pledged, like some governments, to reduce GHG emissions, increase investments in low- or no-carbon technologies, divest from fossil fuels, reduce water use, achieve zero waste-to-landfill impact, and ensure net-zero deforestation in their supply chains. By November 30, 2015, 81 U.S. companies had signed the American Business Act on Climate Pledge. Collectively, the pledge signatories have operations in all 50 states, employ over 11 million people, represent more than $4.2 trillion in annual revenue, and have a combined market capitalization of over $7 trillion. 

The pledge signatories represent 30 percent of the S&P 500, hail from nearly every industrial sector, include a mix of public and privately held companies, and are some of America’s best-known and most valuable brands, including (but not limited to): American Express, Apple, Best Buy, Cargill, Coca-Cola, Facebook, GE, Google, International Paper, General Mills, Kelloggs, Hershey’s, Levi Strauss & Co., Mars, McDonald’s, UPS, Walmart, and the Walt Disney Company. Given the market forces supporting new patterns of corporate behavior that have emerged over the past twenty years, we can expect to see more commitments like these. 

Building on these trends, key meetings for business leaders and investors were held at COP21 alongside the core negotiations among governments. WBCSD hosted meetings almost every day throughout the 12-day COP. On December 7, 2015, almost 200 CEOs joined WBCSD for a full day’s conversation on business leadership. In addition, the Corporate Leaders Group hosted a conversation on fossil fuel subsidy reform. The CDP (formerly known as the Carbon Disclosure Project) also had multiple meetings focused on managing the transition to a low-carbon economy, decarbonizing investment portfolios, and corporate adaptation (among others). The We Mean Business coalition discussed clean energy. L’Oreal hosted a meeting on supply chains. The business voice was heard throughout COP21. 

Market Forces Are Driving Greater Transparency and Disclosure

Over the past 15 years, pressure from regulators and investors have steadily pushed corporate norms toward increased transparency and disclosure. In 2001, 35 institutional investors managing $4 trillion in assets supported the launch of the CDP with the goal of soliciting voluntary corporate disclosure of climate change impacts. Today, CDP represents 822 investors who control $95 trillion in assets. In 2015, more than 5,500 companies from all over the world responded to CDP’s annual request for information on GHG emissions, and CDP has added disclosure programs on water use, supply chain resilience, and deforestation. 

In addition to CDP disclosures, corporate annual sustainability reports are now a best practice no matter where a company is located. In 2015, 95 percent of the Global 250 and 81 percent of the S&P 500 published sustainability reports, and even among smaller companies, the level of sustainability reporting is growing annually. However, merely issuing a report is not enough.

Increasingly, investors demand decision-useful, metric-driven disclosures so they can compare performance among companies within similar industries. In the United States, the recent emergence of the Sustainability Accounting Standards Board (SASB) voluntary reporting framework, with its industry-specific reporting metrics keyed to “material” issues that would trigger mandatory disclosure under U.S. federal securities law seeks to provide investors with data on nonfinancial issues. With the necessary data, SASB hopes investors can reach more accurate conclusions about corporate value, thus providing markets with the information needed to direct capital toward higher-performing companies and away from companies that do not demonstrate their understanding and management of all material risks.

Recognizing that nonfinancial (“sustainability”) issues may impact financial performance, some companies have gone beyond a separate sustainability report. Instead, they publish one annual report – a so-called “integrated report” – that combines and connects both financial and sustainability performance. 

Regardless of the details, today’s marketplace expects corporations to report on environmental, social, and governance (ESG) performance, and ESG data is often compiled in widely available datasets used by investors to track corporate performance. We are in a Seussian “push-me-pull-you” world where stakeholder demands for data prompt more disclosure which, in turn, increases the demand for even more data. Corporate lawyers inclined to minimize disclosure need to be aware that limited or boilerplate information may not satisfy investor demand

New Initiatives from COP21: The Financial Stability Board Task Force on Climate-Related Financial Disclosures 

For corporate and securities lawyers, the precise terms of the accord reached in Paris may be less important than the ideas and initiatives that emerged from COP21’s parallel meetings of private and public sector leaders. At one such meeting on December 9, 2015, U.S. Secretary of State John Kerry detailed the cost of extreme weather events in the United States over just the two years since he took office – the price tag since 2013 is $160 billion. Information like this connects climate change to investments and financial professionals have begun to take notice. 

Scolding the CEOs of S&P 500 firms and top European corporations, Larry Fink, the CEO of Black Rock, one of the world’s largest asset management companies, with $4.6 trillion under its control, recently wrote: 

For too long, companies have not considered [ESG issues] core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord. Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts. 

With growing evidence that climate change impacts investment portfolios, professionals from the insurance, finance, and investment communities show renewed determination to measure and understand potential climate-driven impacts. As a result, corporate lawyers can expect stronger client demand for guidance on ESG issues and new frameworks for disclosure. 

One of the new initiatives coming out of COP21 that may shape the future of climate-related disclosure is a “Task Force on Climate-related Financial Disclosures,” which was launched by Mark Carney, governor of the Bank of England and chair of the Financial Stability Board, and is chaired by former New York City mayor Michael Bloomberg. According to its website, the task force will first assess climate risk disclosure standards among G-20 nations and across every major trading exchange, and will then “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.” The task force aspires to help companies “understand what financial markets want from disclosure in order to measure and respond to climate change risks, and encourage firms to align their disclosures with investors’ needs.” 

The idea for the task force aligns with and grew out of the mission of the Financial Stability Board, created by the G-20 in April 2009, in the wake of the global financial crisis, to identify and head off stresses in the global economy. While mortgage derivatives and a housing collapse triggered the last economic crisis, in a September 29, 2015, speech at Lloyd’s of London, Carney warned that climate change holds “profound implications” to economic stability and could trigger the next one. His comments echoed a 2014 op-ed by Henry Paulson, secretary of the treasury during the George W. Bush administration. “When the credit bubble burst in 2008, the damage was devastating.” Paulson wrote, “Millions suffered. Many still do. We’re making the same mistake today with climate change.” 

In an effort to understand the links between economic stability and climate change, governments are revising corporate disclosure mandates. For example, the European Union’s 2014 Directive on Non-financial Disclosure introduced new mandates for the largest companies to report annually on their policies and risks related to a range of nonfinancial factors, such as environmental matters, human rights, and board diversity. In the United Kingdom, since October 2013, the Companies Act of 2006 Regulations 2013 has required disclosure of GHG emissions from all UK-incorporated companies listed on the London Stock Exchange, a European Economic Area market, the New York Stock Exchange, or NASDAQ. In France, as of January 1, 2016, Article 173 of the 2015 Law for the Energy Transition and Green Growth requires French institutional investors to report on how they incorporate ESG factors and climate change into their investment decisions, what the companies they invest in are doing to support the growth of low-carbon technologies, and the degree to which those companies’ goals align with the COP21 resolution. While institutional investors themselves might have a small carbon footprint, many of the companies they finance are another story. Now, in France, investors have to tell that story too. As former U.S. SEC commissioner Bevis Longstreth put it, “If you’re traded in France, you have to show your carbon footprint. If you’re traded in New York, you don’t have to list anything, you can pretend you don’t even have a shadow.” 

U.S. corporate and securities lawyers might breathe a sigh of relief that they’re not in France. However, following his participation at COP21 meetings, California Insurance Commissioner Dave Jones called on California’s insurers to divest from coal and announced that, starting in April of 2016, California’s insurers must disclose their carbon-based investments in oil, gas, or coal companies. This new mandate illustrates the ripple effect of disclosure norms, as market actors in one global region realize that the data they’re entitled to in London is information they also want from a company in Los Angeles. 

The point behind more disclosure is to connect climate change to investment risk and thus alter the flow of capital away from higher risk GHG-intensive investments and toward lower risk low- or no-GHG investments. If the promises made at COP21 come to fruition, then by 2025, not only will the United States have reduced its GHG emissions by at least 26 percent (from a 2005 baseline) but corporate disclosure of quantifiable sustainability metrics may be as commonplace as today’s quarterly earnings calls.

Tricia Dunlap

Tricia Dunlap is the founder of Dunlap Law, a business law firm focused on sustainability and climate risks to business and investments. She is a member of the ABA Business Law Section Governance and Sustainability Joint Subcommittee of the Corporate Governance and Federal Regulation of Securities Committees, and the Corporate Social Responsibility Committee.