This report discusses the relationship between companies and investors, emphasising how engaging with one-another to build adaptive capacity, in order to transfer financial risk to resilience, is in the best interest of both parties. Furthermore, as the issue of climate change has become increasingly more prevalent in the modern society, shareholder engagement has grown greatly in recent years.

Section 1 sets the tone for this publication by outlining how both investors and companies are the beneficiaries of engagement. It considers engagement beyond improved communication, and focuses on utilising it as a tool to evaluate a corporation’s governance and its vulnerability to climate change risks. Major drivers to distinguish between effective engagement in the environment of a changing climate are management’s leadership on climate risk, corporate risk management processes and adaptation strategy.

Section 2 is concerned with investor anticipation of catastrophic events, and prioritising a list of companies to engage with. It discusses how investors can plan reactively, which entails engaging based on company performance following an extreme event. It also offers a proactive strategy, which gives investors a more systematic approach to measure a company’s vulnerability to climate risks.

Section 3 highlights the importance of basing dialogue between companies and investors on risk and resilience. Through involving themselves in the right conversations, investors can obtain information that will allow them to benchmark corporations against their peers on operations, supply chain and market risks. This will also provide them with an indication of management capacity and financial resilience.

Section 4 details metrics that can be used to evaluate the progress of engagement efforts. The report maintains that successful engagement can only be achieved through the implementation of data-driven feedback mechanisms, and the importance of a robust dataset on physical risk. Tracking systems can be modelled differently in order to satisfy the investor’s criteria of successful engagement, but the golden rule for effective engagement is that they must be consistent, based on clear expectations, and supported by research.

The report concludes by stressing that climate change is a growing concern to the stability of financial markets, and that corporate transparency has not fully satisfied and adapted to investor expectations. One recommendation is to use engagement on physical climate risk as a tool to ensure company exposure to climate risk is mitigated.

1. The financial risks that are derived from extreme weather and climate change are constantly increasing, and due to the current economic landscape and sentiment around climate change, the risk to business is more prevalent than ever.
2. Shareholder engagement has increased greatly in recent years, demonstrated by investor commitments to encouraging companies to reduce emissions. However, disclosure is still quite limited, and investors are likely to become aware of exposure to financial damages from extreme weather events, only after they have occurred.
3. Engagement can be utilised as a powerful tool to evaluate a corporation’s governance. Management leadership on climate risk, corporate risk management processes and adaptation strategy are all key major differences in assessing how companies perform in a changing environment.
4. Investors can select target companies reactively based on historical data or waiting until they are exposed to financial risk, or pro-actively identify firms that would benefit from resilience plans.
5. Corporate engagement is critical to raise awareness of growing exposure to climate impacts and ensure companies invest early in building resilience.
6. There are many advantages to partnering with other investors for engagements; it can increase influence and save time. However, some investors’ mandates may prohibit shared or public engagements and this hinders transparency.
7. Shareholders should expect improved risk management, with a sense of urgency around building resilience and adaptive capacity. If a company does not clearly disclose the financial losses from an extreme weather event, investors should request greater transparency.
8. Engagement and promoting responsible corporate adaptation encourages companies to reduce their exposure to climate impacts and identify opportunities to work with local communities and invest in mutual resilience.