By Elizabeth Doty

 

In a recent Expert Dialogue presented by the Corporate Political Responsibility Taskforce at the Erb Institute, Yamika Ketu, Senior Associate, Ceres Accelerator for Sustainable Capital Markets, shared steps companies can take for responsible policy engagement on climate. Ketu argued that this is necessary for businesses to maintain credibility with stakeholders and regulatory bodies, avoid systemic risks, and promote an economy that rewards long-term value. She also offered practical advice on how companies can avoid the impacts of common misalignments with trade associations. 

As more investors consider risks related to climate change and a just energy transition, and California and the European Union implement new Scope 3 reporting requirements, companies are being pressed to develop concrete action plans to achieve net zero or other environmental targets. “Responsible climate policy engagement for companies is definitely at the top of mainstream investors’ minds,” Ketu says. “BlackRock, the world’s largest asset manager, has been vocal about addressing climate change’s impact on the financial system and the broader economy. Their stance underscores the growing recognition among institutional investors of the risks posed by climate change and the importance of responsible policy engagement in mitigating these risks.” 

Though company action on climate usually focuses on operations, supply chains, and products or services, firms are increasingly recognizing the importance of stable, aligned climate policy as a critical factor in reaching their stated environmental goals. “Responsible policy engagement is important because it ensures systemic-level support is in place to help companies achieve their climate goals,” Ketu says. “If companies are not lobbying in favor of climate policy, then they’re not working to create the necessary regulatory environment to help them meet their goals, and it will undermine any efforts that they have operationally – whether they’re lobbying directly or through their trade associations.” 

Ketu shared additional thoughts on how companies are using trade association audits to assess and evaluate their engagements and to create alignment between their climate goals and indirect lobbying engagement. She also highlighted aspects of the Ceres Blueprint for Responsible Policy Engagement on Climate, which outlines expectations for how companies should incorporate their exposure to climate change risks into their decision-making on climate change lobbying.

In the edited excerpts from the Expert Dialogue that follow, Ketu shares how companies can approach climate as a systemic risk and avoid common misalignment that can impact a company’s bottom line. 

Elizabeth Doty: Despite ongoing debates around the energy transition, companies know that investors and others are holding them accountable for ambitious net zero and emissions targets. Yet, companies typically focus on action pretty close to home –  improvements in operations and supply chains, perhaps some in products and services. Why focus on responsible policy engagement for climate?

Yamika Ketu: Responsible policy engagement is important because it ensures systemic-level support is in place to help companies achieve their climate goals. If companies are not lobbying in favor of climate policy, then they’re not working to create the necessary regulatory environment to help them meet their goals, and it will undermine any efforts that they have operationally – whether they’re lobbying directly or through their trade associations. 

That kind of misalignment can lead to inefficient corporate spending and reputational and financial risks, which ultimately impact investors and the company’s bottom line. It’s important to establish systems that address climate change as a systemic risk to the enterprise.

Moreover, part of companies’ examining the systems in place to meet their net-zero climate goals should include aligning their lobbying efforts with the goals of the Paris Climate Agreement. If a company is on track to their climate goals, then they’re also advocating in a way that is helpful to themselves and their shareholders.

Doty: Are mainstream investors really concerned about responsible climate policy engagement for companies? Isn’t this just a preference for a small group?

Ketu: Responsible climate policy engagement for companies is definitely at the top of mainstream investors’ minds. 

BlackRock, the world’s largest asset manager, has been vocal about addressing climate change’s impact on the financial system and the broader economy. Their stance underscores the growing recognition among institutional investors of the risks posed by climate change and the importance of responsible policy engagement in mitigating these risks.

Here at Ceres, we have been monitoring shareholder proposals related to climate lobbying. Over the past few years, there has been a substantial increase in such proposals, with around 60 filed. What’s noteworthy is that a significant portion of these proposals have been withdrawn due to investors reaching agreements with companies to either disclose their lobbying activities or provide transparency on related matters.

Doty: Do you see a connection between Ceres’ concept of responsible policy engagement and our outline for Corporate Political Responsibility more broadly? What links do you see?

Ketu: Yes, Ceres’ concept of responsible policy engagement and Erb’s Corporate Political Responsibility are aligned, especially in regard to their inclusion of legitimacy as a principle. Firms should engage with policymakers in a manner that aligns with their climate goals. This includes advocating for policies that facilitate the achievement of these goals while staying true to their commitments and investments in sustainable technologies. 

In terms of accountability, responsible policy engagement requires companies to disclose their efforts in engaging with policymakers, addressing any misalignments in trade association memberships, and ensuring that resources received from investors are used productively and not in a manner detrimental to their enterprise. Similarly, Corporate Political Responsibility emphasizes transparency and accountability in political activities, ensuring that companies are held responsible for their actions and their impact on stakeholders.

Doty: Let’s go now to trade association audits as one tool because clearly we’ve seen these groups as part of the challenge in responsible policy engagement for companies. How do trade association audits work in practice and why are they helpful?

Ketu: A trade association audit is a valuable tool for companies to assess and evaluate their engagement with trade associations, particularly concerning responsible policy engagement and climate-related advocacy. These audits have gained prominence due to increasing demands from investors for transparency and accountability in indirect lobbying efforts.

In practice, some of the things you might look at in an audit are how a trade association’s climate policies and lobbying efforts compare with a company’s own climate policy and any discrepancies between the two. There is also a step-by-step process of when the misalignment can be cause for leaving a trade association. 

Doty: I believe some companies who have engaged in trade association audits have made some very big changes – such as Unilever. What did they find, and what actions did they take?

Ketu: Unilever developed elevated sanctions as part of its trade association engagement strategy. These sanctions included specific action steps for addressing misalignments with trade associations on climate policy. The process involved raising concerns with the association and evaluating alignment over a two-year period. Ultimately, if the alignment with the associate remains low, then the CEO makes a decision on whether they should leave the trade association.

This strategic approach highlights the importance of aligning with associations that support Unilever’s climate goals and values. It also sets an example for other companies, showcasing the potential impact of trade association audits in ensuring that companies prioritize climate alignment in their advocacy efforts.

For instance, Ford recently decided to leave a trade association due to misalignment on climate issues, further emphasizing the impact of companies taking a stand based on their values and principles.

Business leaders seeking resources on whether and when to weigh in on policy issues can consult the Erb Principles for Corporate Political Responsibility. See the CPRT website for additional information, and sign up for newsletter updates!

The CPRT is strictly non-partisan and does not advocate, promote or support any political party or candidate. While speakers and participants in the Expert Dialogues may express their views freely, the CPRT does not endorse particular organizations, individuals, parties, policies or legislation.