9 March 2021

Firms committing to a green future is not enough – they need shareholders to stick with them

By John Flint

The days that followed this spring’s Budget have produced few headlines about climate change, and perhaps we shouldn’t be surprised. 

The green announcements made by the Chancellor were largely expected. Embracing this agenda is a given now, a non-negotiable part of the job for many in command of capital. Inevitably, with the COP26 climate change conference on the way campaigners will ask ministers – what next? 

But that challenge is as relevant – and persistent – in board rooms as it is in politics.

Some chief executives are responding by making sweeping changes to their companies. But they face different questions from the Chancellor. They are asked not only whether they are doing enough, but whether they can keep boards and investors onside as they execute expensive carbon transition plans. 

Real change does not come quick. Obstacles arise and timescales stretch. Share prices dip. The congratulations of campaigners for doing the right thing can sound pretty thin when investors are dumping your stock.

To cynics, many of the green-tinged corporate announcements of recent years have seemed like little more than public relations. But even a sincere commitment to a zero-carbon future by boards may not be enough. They need shareholders to stick with them.

It is time then for some practical suggestions of how to achieve long-term change.

Firstly, regular votes on climate change policies are the way of the future. Unilever’s commitment to net zero emissions by 2039 became more significant after the company promised to offer shareholders a regular say on its climate change plans. Fund manager Sir Christopher Hohn has championed the idea, and already turned it into a reality for the Spanish airport operator Aena.

Few boards rush towards difficult votes. They take legwork, months of consultation, and are never without risk. But explicit shareholder backing is a powerful force that adds real substance to good intentions.

Secondly, climate change outcomes should be linked to executive pay. That’s not simple or uncontroversial either. In practice this will likely mean downgrading traditional measures of return for shareholders in favour of climate change metrics. Many remuneration committees will baulk at that idea. But, armed with the confidence that comes with a shareholder approved approach to climate change, boards should be able to restructure the incentive plans. Over time this will reduce the likelihood that executives get paid less for safeguarding the future of the planet.

Thirdly, we need to be clear about the risk posed by climate change to companies themselves. For now, we cannot be confident that those risks are priced in. The Bank of England will begin its climate change stress tests for financial institutions within months – demanding banks and others think hard about how their businesses will fare as the world warms.

Stress tests are now a standard part of banking life, and they have proved to be a very useful addition to the regulatory tool-box.  They expose risk and ask questions about resilience. In future, if we apply them to firms crucial to the carbon transition they can guide the wider economy too. Standardised climate stress tests would expose companies’ long term vulnerabilities and make clear where reforms serve investors’ interests.

Couple the tests with successful carbon pricing – also easier said than done, I know – and you start to see the real costs businesses face if they fail to adapt.

Fourthly, real support for change will depend on decisions by the biggest and most powerful investors. The best environmental, social and governance advisors in the world will be powerless if asset owners and fund managers steer clear of firms going through climate transitions. Asset owners need to step up and drive the agenda. If they change the mandates that they set for their asset managers, this can change how firms behave. And each individual asset management company must make sure its chief executive’s office, corporate governance team and fund managers take the same approach to tackling climate change. No one else can do this for them and until it is done the asset management industry will continue to send mixed signals to the companies it invests in. 

Every part of this is challenging. I know this from my own experience at HSBC. It is infinitely harder to do these things than suggest them. But change is coming whether boards embrace it or not. Demands for reform are emerging now not just from activist groups, but from some shareholders and major investors. They will eventually come – in one form or another – from governments and regulators across the globe.

Companies can choose between a sudden moment of disruption when the pressure and costs of business as usual get too great, or evolution that begins now. Increasingly, they are aware of this. For many, the debate has long since moved on from whether to act and settled instead on how to act effectively. Changing the minds of owners and investors, and focusing the minds of executives through regular stakeholder consultation, will help to do that.

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John Flint is a former chief executive of HSBC.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.