In 2023, average global temperatures reached the critical breaking point of 1.5˚ C above preindustrial levels for the first time in recorded human history. In the United States alone, 23 different billion-dollar weather and climate disasters occurred, incurring more than $90 billion in damages in just the first eight months of the year. With these impacts cascading through corporate value chains, the business case for action on climate risk has never been clearer.
“Small” companies also are exposed to the risks and opportunities associated with a changing climate. In fact, many of these companies reside within the value chains of larger corporations with established emissions reduction targets, necessitating action to address their climate impacts as suppliers to these customers.
The 2024 shareholder season continues to include resolutions asking companies to establish near- and long-term science-based greenhouse gas emissions reduction targets aligned with the Paris Agreement’s ambition of limiting global temperature rise to 1.5˚ C. However, this proxy season is marked by a subtle and necessary shift from last year: Shareholders are filing resolutions with companies spanning the market capitalization range—including smaller cap equity holdings. This suggests that more investors recognize all companies have a role to play in addressing direct and systemic climate risks.
Through our engagements over the last several decades, we have observed that smaller companies often face a set of climate-related risks and opportunities similar to their larger peers but also encounter unique challenges. Smaller companies typically have fewer resources to focus on risk assessments or target setting and may need time to build the necessary internal capacity. Often, these companies are building their approaches from scratch, and the individuals tasked with managing sustainability risks have other primary responsibilities.
Given these challenges, investors should customize their expectations and strategies. Relationship building is critical for companies in the early stages of their emissions reduction journey, and investors can offer valuable resources to a company striving to develop the systems and practices needed to set and achieve its commitments. Further, when an investor escalates an engagement by filing a shareholder proposal, withdrawal conversations may center on tangible commitments to further risk management capabilities, such as undertaking a scenario analysis or disclosing an emissions footprint inclusive of the value chain.
Over the last decade, investors have understandably focused their efforts on engaging the largest corporate emitters, setting the stage for many of the robust commitments and strategies we see today. But as the effects of rising global temperatures continue to develop, smaller companies do not have the luxury of time. Given the rapid development of climate-related tools and resources, investors can and should expect smaller companies to quickly build strong foundations.
In 2023, Boston Trust Walden engaged over 60 smaller cap companies to set science-based emissions reduction targets. We are encouraged by the progress we see, noting more companies have committed to set credible targets this season. Let’s keep the momentum going.
Samantha Burke
Senior ESG Analyst, Boston Trust Walden
Jared Fernandez
Proxy Voting & Senior ESG Analyst, Boston Trust Walden