Dimensional Fund Advisors, with approximately $679bn in assets under management, welcomed the US Securities and Exchange Commission’s proposed rule changes on climate-related disclosures after advocating for effective climate change disclosures and oversight in a letter campaign to corporates in 2021.
Kristin Drake, head of investment stewardship at Dimensional Fund Advisors, told Markets Media: “We believe there is a role for regulators to help set standard expectations. The benefit of disclosures about climate, or any other risk, is to have consistent, comparable data and for everyone to understand what a data point means and how it is measured."
The SEC has proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports.
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The required information about climate-related risks would also include disclosure of a registrant’s greenhouse gas emissions.
Eric J. Pan, president and chief executive of the Investment Company Institute, said in a statement: “The enhanced disclosure that the proposal calls for will provide investors with comparable, consistent, qualitative, and quantitative information. We will carefully study the Commission’s multifaceted approach toward requiring scope 3 disclosure in certain circumstances and appreciate that the SEC recognizes the many challenges that currently exist with reporting scope 3 emissions.”
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Dimensional Fund Advisors’ 2021 Annual Stewardship Report said environmental and social issues, especially climate change, were a key focus for the stewardship team as it nearly doubled the number of climate change-related engagements in proxy year 2021.
The asset manager also sent letters to 168 portfolio companies in the reporting period who had failed to meet Dimensional’s expectations for disclosure and oversight of material climate change risks. One third, 57, of the companies responded and after follow-up Dimensional further engaged with 35 of the companies.
Source: Dimensional Fund Advisors.
“While responses varied, in general, companies provided updates and context related to their efforts to disclose climate risk-related information,” added the report. “Dimensional continued to monitor and assess related disclosure and noted 50 instances of improved public disclosure related to climate risk at companies included in the letter campaign.”
Kristin Drake, Dimensional Fund Advisors
Drake said board oversight of climate risk will continue to be a focus in the current proxy year.
“Accountability is key and holding directors accountable through our voting power is the best option in our view,” she added.
A successful campaign in 2021 by activist hedge fund investor Engine No. 1 to install three board members at oil company ExxonMobil was widely seen as a potential turning point for environmental and social resolutions.
Dimensional engaged with ExxonMobil and Engine No. 1 separately to understand both parties’ perspectives on the dissident and management nominees and the fund manager voted for two of the dissident director candidates .
Drake said Dimensional has a very robust process for assessing contested director elections and will look very closely at the skills and backgrounds of both slates of candidates .
“We thought about the materiality of climate risk and the need for a strong climate transition plan and some of the dissident candidates brought skills that we thought would be valuable,” she added.
In addition Dimensional had repeatedly raised concerns with ExxonMobil management over disclosure and structural issues in their incentive programs as the short- and long-term plans, as disclosed in the proxy statement, have a heavy reliance on compensation committee discretion in making incentive pay determinations.
Drake continued that there has been an increase in conversations, and engagements on environmental, social and governance (ESG) issues because they are becoming a bigger risk factor.
“Consumer preferences and expectations, as well as regulations, are changing and companies are really having to think about a wide range of environmental and social issues that they probably weren't considering about 10 years ago,” she added.
American Century
Sarah Bratton Hughes, head of ESG and sustainable investing at American Century Investments said in the asset manager’s 2022 ESG Outlook that sustainable investing will be propelled by increasing demand for investments that incorporate ESG factors, favorable economics, and supportive policies and regulations.
She cited data from the the UN Principles for Responsible Investment which noted “there have been over 730 hard and soft law policy revisions, across some 500 policy instruments, which support, encourage or require investors to consider long-term value drivers, including ESG factors. [Among] top 50 economies, 48 have some form of policy designed to help investors consider sustainability risks, opportunities or outcomes.”
Sarah Bratton Hughes, American Century
Bratton Hughes said the most impactful policies and regulations are potentially in the US.
“The Securities and Exchange Commission is focusing on corporate ESG disclosures, and there is a distinct possibility that retirement plans will be able to incorporate ESG-related considerations into their investing under a proposed U.S. Department of Labor rule,” she added.
American Century expects engagement and proxy voting to continue taking center stage in 2022 as investors increasingly demand transparency around stewardship activities. Bratton Hughes noted that Willis Towers Watson survey in 2020 found that four in five companies are considering introducing ESG-linked executive pay and similar measures over the next three years.
She continued that some ESG issues commonly linked to executive pay include setting and making progress toward net-zero and climate targets, measures of human capital, and diversity, equity and inclusion metrics.
“Regulators globally (especially in the EU) have put forward proposals to accelerate this development through soft and hard laws around integrating ESG factors in executive compensation,” she added. “ESG-linked pay could improve management accountability and board oversight of companies’ sustainability-related performance”
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American Century expects concerns about greenwashing to continue, and the focus to move beyond just climate issues to all of the United Nations’ Sustainable Development Goals (SDGs). The annual funding gap to achieve the SDGs has been estimated at $2.5 trillion, with capital markets needing to provide between $1 trillion and $1.5 trillion.
“The most influential change will be a shift in focus away from sustainable investing as just a risk mitigator to an alpha generator,” added Bratton Hughes. “We are calling this concept Alpha Plus, as we believe sustainable and impact strategies have the potential to provide market-beating returns coupled with societal and environmental alpha.”
