Paul Hodgson: Climate competent directors… coming soon to a board near you

Talking to Pax World’s Julie Gorte about what was happening this proxy season led naturally to what is likely to happen next year. “The next step in proxy access is the need to figure out if they are going to run someone. And that someone is likely to be a candidate to help get a board climate-ready,” she said. “I know people say you can’t afford to have ‘specialists’ on the board,” she continued, “but companies still need directors with this competence as well as other skills. This need could initiate the first proxy access mobilisation, the ‘foot in the door’.
Gorte is well aware of the risks and dangers of nominating a director, untried territory for most investors. “Running a person for a director post is wholly different from any other form of engagement – it’s acting like a hedge fund. No investor wants to be responsible for nominating and electing a failure as a director and then have to listen to the [US] Chamber [of Commerce] crowing: ‘This is what happens when you have shareholders nominating directors. So the first candidate needs to be Superman or Superwoman, or, better yet, Storm, from the X-Men. Her superpowers allow her body to compensate for climate extremes. She sounds like just the job.”
No sooner said than done. Storm, or her human equivalent, is already in … a database being developed by the 50/50 Climate Project in collaboration with a number of other groups. The group is developing a bench of board candidates – independent directors, who understand the science of climate change— to help both nominating committees and investors increase board climate competency. The 50/50 Climate Project is an investor project that is pushing boards to respond more aggressively to deal with the risk of climate change.

It follows RI reporting last week that US pension giants CalPERS and CalSTRS are seeking a new home for their Diverse Director Datasource (3D), their database of prospective directors for companies.
Rich Ferlauto, a member of the governing board of 50/50, told me: “The pieces are being put in place and there are private discussions between key players preparing to use proxy access. The largest asset owners and managers are putting in place policies and it is pretty clear that there is a potential 3% coalition [the proportion of shares required to nominate a directorunder most proxy access rules] out there among major firms that have the capacity to mount a nomination. Major investors are talking to each other – as I said 3% is not an obstacle – and resources will be available to prepare highly qualified candidates.”

Ferlauto is a former Deputy Director for Policy, Office of Investor Education and Advocacy, at the SEC and was director of Corporate Governance for the American Federation of State, County and Municipal Employees (AFSCME) for eight years. Before that he was the Managing Director of Proxy Voter Services at ISS.

He enumerates the recent changes in shareholder attitudes in a paper he has written for publication in June by the International Corporate Governance Network. CalPERS amended its corporate governance principles to require board members with climate competence. State Street Global Advisors has published a “Climate Change Risk Oversight Framework for Directors” as guidance to board members on overseeing climate risk in their portfolio companies.

Ferlauto quotes BlackRock CEO Larry Fink’s recent letter, which calls on boards to consider not just governance but also environmental and social issues as mainstream to sustainability. Finally, he refers to an investor’s side meeting at COP21 during which Jack Ehnes, CEO at CalSTRS, argued that achieving “climate competent boards” might sometimes mean that institutions need to take action against incumbent directors at fossil fuel companies.
The 50/50 Climate Project is focused particularly on the energy sector initially, but also aims to be useful across the board. It is a “tool for having useful discussions with nom coms,” said Ferlauto, “particularly surrounding climate expertise.”
Ferlauto described these conversations as phase 2 of 3-stage process. The first stage is the institutionalisation of proxy access, something that is close to becoming a reality. The second stage is having serious discussions about the types of directors needed. The third stage is to make proxy access a reality by nominating and electing a director. “It’s not clear what will be the trigger for running a candidate yet, but there are real actors out there willing to take the first step at the appropriate time.”