2022 July Proxy Governance Update

In This Edition

• A Remark On Advisory Votes On Climate-related Resolutions
• What Have We Seen So Far?
• How Are Investors Addressing Say On Climate Resolutions?
• What Others Think Around Say On Climate?

"From a corporate perspective this article, for me, raises an interesting observation and question for shareholders: do you believe that management, as responsible for delivering the long-term sustainable success of the business, are best placed to determine what climate action plan and targets are required for a business to achieve Net Zero? And what do you need from them to provide you with that assurance?"

Anne-Marie Clarke, Head of Corporate Governance

A Remark On Advisory Votes On Climate-related Resolutions

Say on Climate – an annual shareholder vote on climate action plans

As we addressed in our Governance Update from December 2021, Say on Climate was born as an initiative driven by Chris Hohn through The Children’s Investment Fund (TCI), whose main goal is that companies put an annual shareholder vote on their climate action plans. The initiative offers guidance to companies on how to fill in and submit this type of proposals and, likewise, encourages investors to submit a shareholder resolution when companies are not active.

In relation to management proposals, the initiative believes that if companies adopt this mechanism it will demonstrate credibility to stakeholders. Furthermore, the initiative defends that continued engagement with shareholders on the company’s climate action transition plan will lower the cost of capital. Thus, while some investors have welcomed the opportunity to be able to give their opinion on the companies’ Net Zero pathways, some others have shown some scepticism, as we will see later in this article. Supporting a management proposal on Say on Climate will mainly depend on the company’s transparency and disclosures. Furthermore, proxy advisor Glass Lewis will expect that companies specify in their proposal which role shareholders will have in that advisory vote, and who would have the ultimate responsibility on the company’s climate change strategy.

On the other hand, there have been shareholders who have submitted proposals requesting an annual advisory vote on the company’s climate change plans, as well as seeking that a company reports on a specific element annually, for instance disclosing Greenhouse Gas (GHG) emissions. In these cases, according to some proxy advisor and investor voting policies, supporting these resolutions will depend on the company’s current disclosures, size, and sector, among other factors.

While technically the Say on Climate initiative seeks an annual advisory vote, there have been different approaches during the last two AGM seasons. Some Say on Climate resolutions have been proposed as an annual shareholder vote, but we have also seen proposals asking for a triennial shareholder vote, or even a one-time advisory vote. For instance, the analysis carried out by MSCI[1], an ESG rating provider, shows that 58% of the Say on Climate votes held were one-time, 24% committed to hold an annual vote, and 12% of them a triennial vote.

It is important to conclude that this is an initiative that is currently unregulated and therefore non-mandatory or standardised in the UK. Therefore, we would now like to consider what other climate-related resolutions we have seen.

Other climate-related resolutions

It is important to highlight that environmental proposals, including climate-related ones, have been proposed long before the Say on Climate initiative started in 2020. We have seen throughout the years how both management and shareholders have submitted resolutions to disclose, for instance, climate-related targets, GHG emissions or progress around the Net Zero transition. The main difference between these and the recent Say on Climate proposals is that the latter ones seek an annual advisory vote on a company’s climate action plans rather than, for example, reporting annually on disclosures as the aforementioned in the Annual Report and Financial Statements.

Nevertheless, this different categorisation of climate-related proposals may cause some confusion. These days some may consider any climate-related resolution as a Say on Climate, whereas others may differentiate between climate transition plans proposals and other sorts of disclosure requests. Furthermore, another misleading aspect can be the frequency of the advisory vote. As mentioned earlier, we have observed that there have been one-off Say on Climate proposals but, given that there is not a recurring advisory vote, some people may not consider these as Say on Climate resolutions.

Given that there is currently no UK regulation stipulating the purpose, objectives and framework of reporting to support a resolution on climate, we expect these variations in resolutions to continue. Whilst we have seen developments in the UK for reporting, for example against the Taskforce on Climate-related Financial Disclosures (TCFD) and on GHG emissions, we can see that companies and investors are forming their own decisions on what they need to do, and report on, to achieve Net Zero.

What Have We Seen So Far?

Say on Climate

As we have been discussing previously, it seems that there is not a unique way to categorise Say on Climate proposals, at least until these are regulated. Given this, our observations detailed below are the result of an analysis of data provided by Proxy Insight and our analysis of Say on Climate.

In our 2021 December Proxy Governance update, we summarised the UK Say on Climate proposals there had been from 2018 until September 2021. Now we would like to analyse[2] the direction these proposals have taken since then, as well as the influence of the Say on Climate initiative in the US and the rest of Europe.

As Figure 1 shows, UK companies, particularly FTSE 100 companies, have continued including Say on Climate proposals within their AGM agendas, showing a 100% increase since our December article. Likewise, investors seem to acknowledge the UK companies’ active approach towards Climate Transition plans as, according to Proxy Insight, there have been no shareholder proposals at UK companies since the initiative began.

In the rest of Europe, we can observe a similar trend where management proposals represent 90% of the total Say on Climate resolutions. In particular, French and Spanish companies are the ones who have submitted the majority of the proposals. Of note, so far from our analysis, the Spanish companies, Aena and Ferrovial, have been the only ones putting a recurring annual shareholder vote on Say on Climate.

Figure 1: Say on Climate proposals 2018 - May 2022

Conversely, the US market presents a different approach towards Say on Climate resolutions. Thus, six out of eight proposals in the US were submitted by shareholders. Observing these results, some questions may be raised: Are investors stricter with US companies in relation to Climate Change transition plans? Or are US companies less committed to, or not reporting on, Net Zero compared to other markets, so shareholders need to be more active?

Overall, while most of the Say on Climate proposals submitted by management received over 80% of support, only 38% of the total shareholder resolutions passed. This raises an interesting observation and question for shareholders: do you believe that management, as responsible for delivering the long-term sustainable success of the business, are best placed to determine what climate action plan and targets are required for a business to achieve Net Zero? And what do you need from them to provide you with that assurance?

Management proposals

Across these three markets, UK, Europe and US, since 2018, the Say on Climate management proposal which received the highest pass rate was the resolution submitted in 2021 by Iberdrola, a Spanish company, receiving 99.97% of for votes.

Table 1: Say on Climate management proposals in the UK

*Not considered as Say on Climate by Proxy Insight.
**Left FTSE 100 share index at the end of January 2021.
***Decisions on significant matters affecting shareholders of Rio Tinto plc and Rio Tinto Limited in similar ways (such as the Say on Climate resolution) were taken through a joint electoral procedure in Australia on 5 May 2022.

Table 2: Say on Climate management proposals in the US

Table 3: Say on Climate management proposals in the rest of Europe

Shareholder proposals

As previously mentioned, most of the Say on Climate resolutions submitted by shareholders failed, four of which were proposed in the US and one in Sweden. In contrast, only one shareholder resolution received over 98% support, which was submitted by TCI at Spanish company Aena’s 2020 AGM. Of note, following further engagement with TCI, Aena’s Board changed its recommendation from opposing the shareholder resolution to supporting it. This resolution required the Company to publish a multiannual comprehensive climate transition action plan and to put this to an advisory shareholder vote on an annual basis, and to amend its byelaws accordingly so a vote occurs automatically every year.

Table 4: Say on Climate shareholder proposals in the US

Table 5: Say on Climate shareholder proposals in the rest of Europe

Other climate-related resolutions

As we commented earlier, both companies and investors have also been submitting resolutions related to climate change without these fitting into the technical definition of a Say on Climate. We have summarised below some examples we have seen in the UK.

Management proposals

We have observed how some financial companies have actively taken action towards achieving Net Zero goals. As such, at its 2021 AGM, HSBC Holdings proposed a resolution committing to set, disclose and implement a strategy to phase out the financing of coal-fired power and thermal coal mining, including short- and medium- term targets, as well as report annually on progress against that strategy. On the other hand, Investec’s resolutions have been around carbon neutrality in relation to its Scope 1 and 2 emissions (2020 AGM), and reduction of Scope 3 emissions (2021 AGM).

Table 7: Examples of climate-related resolutions submitted by Follow This in the UK

What Others Think Around Say On Climate?

At COP 26, the UK Chancellor, Rishi Sunak, announced new requirements for UK financial institutions and listed companies to publish net zero transition plans setting out how they will decarbonise through 2050. The UK Government will expect firms to start publishing transition plans in 2023.

It is a fact that governments and companies are joining their efforts to fight against climate change and try to mitigate its impact. Nevertheless, the initiative founded by Chris Hohn sees the need to go further than disclosure, and therefore, encourages these companies to put an annual advisory vote to shareholders on their climate change action plans. The Say on Climate initiative believes that a credible climate action transition plan shows shareholders and other stakeholders that the company is well-positioned for this transition. Moreover, by moving quickly to publish a credible plan and put this to a shareholder vote, companies can gain a competitive advantage. Furthermore, the initiative also believes that these votes should be held annually as the magnitude and accelerating pace of the impacts of climate change on companies mean that plans and votes must be annual. This frequency also provides for clear and consistent communication.

CDP, an international non-profit organisation that runs the global environmental disclosure system, defends that the accountability of these plans can be strengthened by putting climate transition plans to a shareholder vote, in line with the Say on Climate initiative.

However, others, including proxy advisor Glass Lewis, expressed their concerns around Say on Climate votes. They believe that the climate change strategy is part of the overall business strategy, which should be the responsibility of the Board. Their views are that shareholders may not be experts on this topic, so that it is the Board who should meet the appropriate skills and experience to make decisions around the company’ strategy, including climate change. As argued by MSCI, one concern around Say on Climate votes is that these could facilitate greenwashing. Furthermore, the fact that most of the companies have submitted a one-time Say on Climate advisory vote or have not publicly committed to continue holding this type of vote, could imply that Say on Climate votes are merely a distraction.  

Furthermore, apart from providing guidance to investors on Say on Climate votes, the Principles for Responsible Investment (PRI) highlighted that the benefits of transition plan votes as a mechanism to drive comprehensive climate action seem to be outweighed by the risks and potential unintended consequences. Furthermore, the PRI stated that investors should consider more effective vehicles to encourage companies to develop and disclose their strategy/actions on how they intend to transition to net-zero GHG emissions by 2050 or sooner. It is critical that investors are clear on the drawbacks of transition plan votes because many companies are planning to submit their climate transition plans to a vote in upcoming proxy seasons.

Another interesting view is the reflection done by Robert G. Eccles, Tenured Harvard Business School Professor at the Oxford University, around the observation that having a Say on Climate does not substitute for voting against directors. Mr. Eccles notes that these votes create an enormous burden on investors who then have yet one more issue to vote on during proxy season when in fact their most important role is to ensure Board accountability. Why expend all this time and energy starting with disclosure when evidence is clear that it alone doesn’t do much to change behaviour and that eventually a vote against directors will be required? He also believes that it would be more effective to target a select number of ‘bad actors’, having the work done by Climate Action 100+ as a starting point.

To conclude, we can see that there are different views on the Say on Climate initiative. While we observe some scepticism, we cannot forget that this initiative is already supported by several companies, asset managers and asset owners.

Round Up

As we reflect on our findings, we would like to end on a final thought that Say on Climate proposals are still an emerging trend which is not yet standardised. Thus, unless these proposals start to be regulated, we will continue seeing different approaches to these advisory votes on the companies’ climate transition plans. Furthermore, we will keep observing different type of environmental proposals, most of them aiming to reduce climate change impact.

What we know, with certainty, is that climate change has been considered by companies and investors for many years, but now we are seeing this has become a priority across all sectors, especially after COP26. Efforts are not only reflected in having a resolution on the AGM agenda, but in the increasing engagement between management and shareholders on this issue. Net Zero transition can be only achieved by the joint commitment of companies, investors, governments, and regulators, helping business to adapt and mitigate the impact of climate change.

We will continue monitoring the influence and outcomes of climate-related resolutions during the upcoming years to observe whether Say on Climate, and climate-related resolutions, continues to be a trend and become a regular item on AGM agendas.

We hope this article has given you food for thought in this developing area. If you would like to understand more about this topic or require support and advice on any ESG topic, please do contact us. 

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