The reduction of carbon emissions is becoming a world-wide endeavor. A major difficulty faced by this initiative, however, is that the negative consequences of carbon emissions might not be fully internalized by those who generate this externality, notably corporations. Governments have dealt with this difficulty via regulatory requirements and carbon pricing, either through Pigouvian taxes or through the creation of cap-and-trade systems. Despite these governmental efforts, it is unclear whether regulation alone can curve carbon emissions at the desired pace, as these initiatives face several political and technical challenges. As such, it is necessary to identify alternative, market-based, mechanisms to induce firms to reduce their carbon emissions. One of these alternative mechanisms is shareholder monitoring; firms could reduce carbon emissions responding to pressure from their shareholders. 

But are shareholders pushing companies to reduce carbon emissions? Critics would concede that some are, but would argue that it is unlikely that shareholder activism is strong enough to curve emissions in a significant way. In support of the skeptical view of the role of shareholders on carbon emission reduction, one could also argue that, historically, shareholder proposals related to climate risk have not gained majority support. 
 
Recent developments, however, suggest that climate risk-related shareholder activism is on the rise. For example, in a major rebuke to the company, shareholders of ExxonMobil passed a climate proposal at the May 2017 annual meeting requiring greater transparency on the impact of climate change on the company’s operations. The resolution successfully passed partly because ExxonMobil’s two largest shareholders – Blackrock and Vanguard – supported the measure. Occidental Petroleum and PPL are other recent examples. 

There is also increasing anecdotal evidence that institutional investors are directly interacting with corporate leaders regarding climate risk issues. For example, in the guidelines on their approach to climate risk issued last month, BlackRock states that “…Over the past year, we have engaged with over 200 companies on the topic of climate risk, some multiple times. During the course of our engagements, we have asked management and corporate boards to speak to board oversight of climate-related risks, how the company assesses potential opportunities that the changing market may present, how climate risk might influence future long-term capital expenditure plans, how certain companies are managing methane emissions, and whether the company does scenario analysis in relation to its climate risks and business strategy.”[1]

Does this mean that shareholder activism has become a meaningful mechanism to mitigate climate risk? While it might be too early to reach such a conclusion, the above-mentioned recent developments suggest that we are moving in this direction. Is this good news? Many would claim it is, but this move also raises intriguing questions. For example, what is the effect of institutional investors’ engagement in climate risk on overall shareholder wealth? Is the reduction of carbon emissions a source of higher returns or a necessary cost that shareholders are willing to assume for the overall benefit of society? Why weren’t the targeted firms reducing emissions before they felt shareholder pressure? Do firms’ responses to shareholder pressure effectively result in lower emissions or are these responses cosmetic changes or, as dubbed by some commentators, just “greenwashing”? These questions suggest that the economic consequences of the recent surge in shareholder activism on climate risk are non-trivial. We look forward to future research that will help us understand them.

Professor Gaizka Ormazabal
Academic Director
IESE Center for Corporate Governance 
 

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[1]https://www.blackrock.com/corporate/literature/publication/blk-commentary-engaging-on-climate-risk.pdf

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