Does shareholder activism induce firms to voluntarily disclose climate change risks? And how do markets respond to these disclosures? New research finds that the extent of climate-risk disclosure increases by approximately 4.6% for each environment-related proposal that is submitted, and that the effect rises to 6.8% when environmental shareholder activism is more effective is initiated by institutional shareholders with a long-term holding horizon. It also found that the stock market responds favorably to such disclosures, with a disclosing firm’s stock price increasing by 1.21% on average in the days following a disclosure. This suggests that investors value higher transparency with respect to climate change risks and that disclosure tends to benefit disclosing companies.
Shareholders are becoming more vocal in demanding companies disclose the risks of climate change. In May 2019, the shareholders of BP voted overwhelmingly in favor of disclosure, and similar proposals have been accepted by the shareholders of Exxon Mobil, Occidental Petroleum, and PPL Corporation. This year, the proxy advisory firm ISS (Institutional Shareholder Services) expects a record-high number of these proposals. Despite their rising frequency, most shareholder proposals still receive little support at annual meetings.
Apart from the occasional news story about individual companies, little is known about whether this kind of shareholder pressure actually triggers greater disclosure of a company’s exposure to climate change risks. Does it work? And is there an impact on the markets?
To find out, we studied the effects of such activism on S&P 500 companies between 2010 and 2016. We analyzed a proprietary dataset from CDP (formerly, the Carbon Disclosure Project), which asks large public companies to disclose information about the risks and opportunities posed by climate change, their strategies to address them, and other environment-related information. We also analyzed a database from ISS that compiles information on shareholder proposals that were submitted to S&P 1,500 companies. (Our study is forthcoming in the Strategic Management Journal.)
Our analysis shows that shareholder activism — measured by the number of environment-related shareholder proposals submitted to a company — does induce firms to voluntarily disclose climate change risks. On average, the extent of climate-risk disclosure increases by approximately 4.6% for each environment-related proposal that is submitted. We also found that environmental shareholder activism is more effective when initiated by institutional shareholders with a long-term holding horizon: The effect rises from 4.6% to 6.8%.
We also documented that the stock market responds favorably to such disclosures. In the days following a shareholder-induced disclosure of climate-change risks, the disclosing firm’s stock price increases by 1.21% on average (on a market-adjusted basis). This suggests that investors value higher transparency with respect to climate change risks and that disclosure tends to benefit disclosing companies. Put differently: Investors dislike uncertainty and are willing to pay a premium for less opaque companies.
These findings have important implications. Understanding risk is of utmost importance for companies and shareholders. Yet, in many countries, including the U.S., the law does not compel companies to disclose their exposure to climate change risks. For example, the U.S. Securities and Exchange Commission (SEC) merely recommends that companies disclose and offers no guidance about what information should be provided. As a result, shareholders are often in the dark — they know little about their portfolio companies’ exposure to climate change risks or how those risks are being managed. Our findings suggest that shareholders can elicit greater corporate transparency with respect to climate change risks.
More transparency might be on its way. Demands for climate disclosure are becoming increasingly sophisticated. The Task Force on Climate-related Financial Disclosures (TCFD) has developed recommendations (around four areas: governance, strategy, risk management, and metrics and targets) for helping businesses disclose climate-related financial information. And the SEC recently launched a review to assess whether regulations might be needed to provide investors with “more consistent, comparable, and reliable information” about climate change risks. Such mandatory disclosure would likely help improve the quantity and quality of disclosure, standardize it, and enable greater progress in the fight against climate change. To support such regulatory efforts, shareholders seeking information about the climate risk exposure of their portfolio companies can engage with government regulators to encourage mandatory disclosure, while also actively engage with their portfolio companies, file resolutions calling for greater transparency, and vote in favor of such proposals.