Canada Pension Plan Investment Board (CPP Investments) has added more climate change- and climate risk-related details to its proxy voting principles and guidelines (PVPGs).
The PVPGs, reviewed annually, now include requiring company boards to understand and articulate to investors whether the business has a dependency on nature or natural ecosystems.
"Climate risk doesn’t stop with decarbonisation and the mitigation of physical risk," CPP Investments chief sustainability officer Richard Manley told AsianInvestor. "We now expect the board to understand where the business has a critical dependency on nature or ecosystem.
“If a company’s supply chain has a dependency on water, or agricultural products, or forest systems, the board should ensure the [chief] executive has identified that dependency. And then they need to determine whether that dependency is sustainable or not.”
The PVPGs, which were updated this week, also include changes to gender diversity requirements on corporate boards in emerging markets, including Asia.
The Canadian pension is a significant investor in Asia, so the impact of its PVPGs will be felt in boardrooms across the region.
The fund had about C$145 billion (US$107 billion) in Asia Pacific across all asset classes, with about C$60.9 billion (US$44.8 billion) in public equities, at the end of December 2022.
CPP Investments initiated a voting policy on climate risks a few years ago, with the broad expectation that it would encourage company executives to consider all material business risks and opportunities when formulating strategy and implementation goals, and how this information would be disclosed to investors.
Climate risk refers broadly to the potential for climate change to create adverse consequences for human and ecological systems, including the impact on people's lives, livelihoods, health and wellbeing, economic, social and cultural assets, infrastructure, ecosystems and species.
“If it’s a material risk at the nexus of the business, we expect the board to be engaging with management team on it," Manley said. "They will have identified and quantified the climate risk in the portfolio, and in turn will have integrated those insights into the setting of strategy and operational implementation.”
Although companies determine their own climate-related transition strategies, the fund expects boards and executives to integrate climate risks into their strategy and operations, and in investor disclosures, according to its PVPGs.
There are no expectations for specific climate committees, but CPP expects companies to communicate to investors which committee is responsible for managing climate risk.
When companies fail to show adequate consideration of climate risks, CPP will vote against the reappointment of the chair of the committee responsible.
“In case of non-compliance, in the first year, it would be voting against the chair of that committee. In subsequent years, it would be [voting against] the committee, and then, if they're still unresponsive, our escalation would be to [vote against] the entire board,” Manley said.
Increasingly, asset owners expect the companies they invest in to anticipate and manage environmental, social and governance (ESG) risks and opportunities. Climate change and associated risks have come to the forefront in recent years.
Regulators across the globe are also actively introducing climate risk disclosure norms.
Companies listed on the Hong Kong Stock Exchange will soon need to disclose climate-related risks, Securities and Futures Commission chief Julia Leung told media in January, according to a Bloomberg report.
Standards for those climate-related disclosures will be based on the principles decided by the International Sustainability Standards Board.
The SFC has required fund managers to disclose climate-related risks since 2021.
A steering committee co-chaired by the Hong Kong Monetary Authority and the SFC last December announced a collaboration with CDP (the Carbon Disclosure Project), a non-profit organisation that runs a global environmental disclosure system for companies, to jointly enhance climate data availability and sustainability reporting.
Stock market operator Singapore Exchange has enhanced its climate risk reporting system by mandating reporting on climate and diversity by listed companies from January last year. Companies must provide climate-related disclosures based on the recommendations of the Task Force on Climate-Related Financial Disclosures.
Large asset managers such as BlackRock and State Street have also included higher expectations around climate change disclosure in their voting policies.