Dive Brief:

• Seven out of 10 institutional investors say they will prioritize the risks and opportunities from climate change during 2022 shareholder meetings, EY found in a survey. When voting on directors, 73% of the investors will put greater emphasis on sustainability than last year. 
• Institutional investors pushing for sustainable business practices “want to see companies back up bold pronouncements and long-term commitments with shorter-term interim goals, clear reporting on progress and direct board oversight,” EY said in a report.
• “Underlying these expectations and areas of focus are investors’ conviction that more effective management of business-relevant environmental, social and governance (ESG) issues will lead to better financial performance,” EY said, describing a survey of 62 institutional investors in the U.S., U.K. and Canada managing more than $47 trillion.

Dive Insight:

CFOs and their company boards face a proxy season likely to be more contentious than last year as investors sharpen advocacy for greater business attention to environmental and social issues, the Conference Board said. Shareholder support for proposed board candidates may further decline.

“The 2022 proxy season promises to be even more challenging for corporations,” the Conference Board said, warning of “an increasing risk of collision between companies and shareholders, especially on lobbying — including climate-related lobbying — and the use of corporate funds for direct and indirect political contributions.”

A proxy defeat at Exxon Mobil underscored for CFOs the hazards of shrugging off shareholder concern about sustainability. Engine No. 1, a hedge fund, rallied some of the largest institutional investors and won investor support in May for replacing three directors on Exxon’s board.

Institutional “investors are telling us that ESG oversight is going to be a much more important factor in how they evaluate and vote on directors,” according to Kris Pederson, leader at the Center for Board Matters at EY Americas. “Now a director’s skills and expertise around ESG is going to really be much more part of the equation in these contests.”

Three out of five institutional investors (61%) said that in contacts with companies this year they plan to prioritize equity and inclusion and push for board and workforce diversity, EY said.

CFOs should pay close attention to mounting ESG activism given their key role on board finance and audit committees, as well as with investor relations, Pederson said in an interview. “CFOs have to be able to help prepare those speaking to the investors on these topics.”

CFOs should ensure they are fully involved in discussions over what ESG topics are germane to their companies, she said.

Working with the Chief Sustainability Officer, the CFO “should be at the table helping define what is material for the long-term value of the business,” Pederson said.

A CFO should also ensure a company can report on non-financial ESG data and information, including carbon emissions by the company itself and its suppliers, she said. “Those are very, very key, especially as we see some of the potential SEC [Securities and Exchange Commission] regulations changing in the future” on ESG.

The SEC will combat so-called greenwashing and enforce disclosure standards on ESG reports as vigorously as it upholds rules for other corporate reporting, SEC Commissioner Allison Herren Lee said Thursday.

“Companies are just churning out hundreds of pages of disclosure related to ESG right now,” Lee said in a webcast. “If we don’t have something there set up to ensure that it is, you know, sort of operating at its best capacity, then we are falling down on the job.”

The SEC will soon release proposed rules for ESG disclosure that will feature guidelines for greenhouse gas emissions (GHG), building on existing standards such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol, she said. GHG data “is key to comparability, is key to understanding transition risk,” or the cost of reducing reliance on fossil fuels.

A CFO needs to choose from among more than a dozen inconsistent frameworks for measuring and reporting ESG performance such as the TCFD, the Sustainability Accounting Standards Board and the Global Reporting Initiative, Pederson said.

A CFO should “focus on what’s material, find out what their investors want to see in terms of these frameworks and then take the high ground and be bold about saying, ‘Here’s what we’re reporting against and why,’” she said.

One out of three (36%) of institutional investors said they are focusing more on audit committee oversight of ESG risks, including how a committee is improving its competency in overseeing those risks, and how it has made adjustments to risk management and financial reporting, EY said.

“Companies should expect to face more questions around the depth and reliability of their ESG disclosures, risk exposure and resilience, as well as concerns about so-called greenwashing,” EY said. “Audit committees can play an important role in overseeing that ESG reporting has robust processes and controls with a supporting audit trail, like what exists for financial reporting.”

Directors during the coming proxy season should prepare themselves for greater scrutiny of how well they understand the ways their companies can show progress on ESG issues, according to Jamie Smith, associate director at EY’s Center for Board Matters.

“We are really seeing this as a major wake-up call to the directors,” Smith said in an interview. “Now investors are saying, ‘We want to hear from the directors in individual engagement,’ and so that changes the game — they’re vulnerable.”