Written By Denise Bright, John Piasta, Jon Truswell and Ryan Amaral
In recent years, there has been a distinct increase in climate-related shareholder activism with shareholder proposals and other initiatives on climate-related topics becoming prominent world-wide. On May 12, 2022, Institutional Shareholder Services (ISS) released its annual insights report titled “Climate & Voting - 2021 Review and Global Trends” (the Report) which outlines and explains trends of climate-related issues in the context of shareholder voting at company's general meetings over a six year period and climate-related management proposals in 2021.
The Report sets out several categories in which climate-related shareholder and management proposals were categorized. In particular, ISS identifies an organization's goals, risk analysis, transition plans, compensation structures, political spending, board composition and other related topics all in the context of climate issues. Also included under this umbrella are Say on Climate (SoC) proposals, which have traditionally been advanced by shareholders for companies to present a climate plan and report on progress for annual approval. New to 2021 has been the development of management providing such proposals to shareholders.
The Report notes that climate-related proposals were seen across 14 markets worldwide: Australia, Canada, Denmark, Finland, France, Japan, New Zealand, Norway, South Africa, Spain, Sweden, Switzerland, the United Kingdom and the United States.
The Canadian market saw a trend among shareholder proposals being targeted at banks regarding their carbon-related assets. The Canadian companies targeted by proposals in 2021 include various large national banks, Canadian National Railway and Imperial Oil. Canada also saw its first management SoC proposal in 2021. Similarly, the European market saw most of its shareholder proposals in 2021 targeted at banks or oil and gas companies, and mainly sought to address greenhouse gas related reduction goals or transition plans. Europe also saw the highest number of management SoC votes in 2021. The United States, the jurisdiction in which shareholder activism is the most common, saw the highest number of climate-related proposals of any market in 2021. More specifically, American shareholder proposals soared with 87 climate-related proposals filed in 2021, as compared to 58 in 2020. While, as a result of negotiations or withdrawals, only 26 such proposals (excluding executive pay or board-related proposals) were ultimately voted upon (ten in 2020), a record 11 climate-related proposals received majority support in 2021.
The Report notes that climate-related proposals span across various sectors and industries, the most common of which includes banking, insurance, metals & mining and oil, gas & other consumable fuels. These four categories cover nearly half of the climate-related shareholder resolutions in 2021. Of these, the oil and gas sector has received a far higher number of proposals over time, and particularly so in 2021 where the sector saw a dramatic increase from 2020. This increase may be explained in part by the Vote No Campaign launched by the US shareholder advocacy group Majority Action (the Campaign). The Campaign specifically targeted several oil & gas companies, calling for votes against the board chair or lead directors based on failures to sufficiently oversee climate performance. The banking sector saw a surge in shareholder proposals in 2019, which dropped off in 2020 before rising again in 2021 and represents the second most voluminous sector in terms of climate-related proposals. Most proposals to banks have been related to transition plans, as well as other topics related to the Campaign. Similarly, proposals in the metals & mining sector also saw significant growth in 2021. Meanwhile, the insurance sector remained relatively level, with a small decrease in climate-related proposals on ballot in 2021 as compared to 2020.
Climate-Related Shareholder Proposals
The Report outlines that 88 climate-related shareholder proposals were voted on across the globe in 2021, up from 65 in 2020. Far more proposals were filed in 2021, but many were withdrawn after negotiations with the respective company and never reached the voting stage. The U.S. market saw the highest number of proposals, with 34 being voted on last year. A substantial number of these American proposals focused on carbon asset risk, particularly related to the long-term business risks associated with the low-carbon energy transition. American companies in the consumer discretionary and energy sectors received the most climate-related proposals. The United States also saw a record number of climate lobbying-related proposals passed in 2021. Canada saw four proposals reach a vote, three of which related to climate goals and gained on average 21.12 percent support. In aggregate, the most common type of climate-related shareholder proposal across the various markets in 2021 requested disclosure of emissions reduction goals. These proposals received 42.1 percent support on average, up from 29.2 percent in 2020. Markets such as Australia, Japan, Sweden and Norway saw the bulk of their proposals related to transition plans with support rates varying significantly.
Say on Climate Proposals
SoC proposals originated in late 2020 as an accountability mechanism in response to the Paris Agreements goal to hold climate change to 1.5 degrees Celsius, as well as to the multitude of net zero transition commitments by countries and corporations. These proposals push corporations to develop credible climate transition action plans, typically arose from shareholders, and generally proposed that companies provide annual emissions disclosures, a plan to manage those emissions and an annual advisory shareholder vote on the sufficiency and progress of the plan.
2021 was the first year that a significant number of SoC proposals originated from management. ISS notes in the Report that only six shareholder proposals on this topic reached a vote, as compared to 26 management proposals. In Europe and Australia, shareholder SoC proposals were often met with an offer by the target company to proactively put forth their climate transition plans, prompting the withdrawal of several shareholder proposals and explaining the corresponding increase in management proposals. The Report also notes that the approach taken toward management SoC proposals in 2021 varied significantly, with not all retaining the structure of the Campaign. The most common variation was related to the regularity of the shareholder vote. Many European companies departed from annual voting and instead selected a triennial or hybrid model, while others had no commitment at all or utilized other formats such as one-off votes. Of the 26 management SoC proposals in 2021, 19 came from European and the United Kingdom, three from North America, three from South Africa, and one from Australia. Fifty-five percent of these proposals were in the financials, industrials, and utilities sectors, and all 26 passed with support rates ranging between 81.82 percent and 99.97 percent.
As to content, the Report lists all but one European SoC management proposal as committing to a net-zero emission policy for Scope 1 and 2 emissions, which includes direct emissions from owned or controlled sources, and indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Commitments to Scope 3 emissions, which are characterized by indirect emissions that occur in a company's value chain where the company does not have organizational control, varied significantly at a near even split. As an alternative, the Report outlines that the Science-Based Target Initiative has suggested that companies may be able to address Scope 3 emissions by setting supplier engagement targets which commit the company's suppliers to setting science-based emissions reduction goals. Several companies that did not commit to a net-zero policy for Scope 3 emissions have begun to implement this process.
Over three quarters of management SoC proposals put forth in 2021 also linked elements of executive remuneration to progress on climate goals such as the reduction of Scope 1 and 2 emissions, reduction of carbon intensity, achievement of UN sustainable development goals and the assessment of climate-related index rankings.
The increase in shareholder activism through climate-related proposals and campaigns that has been witnessed in recent years continues to grow. According to the Report, the number of management SoC proposals in 2022 has already surpassed the entire quantity of 2021, although it should be noted that the majority of such proposals are at European companies. Yet ISS reports that there are concerns which could lead to an eventual downturn in growth, and that it's more likely the number of SoC votes will plateau in the coming years with concerns arising around the voting mechanism. Principles for Responsible Investment Corp. (PRI) have warned 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,” and suggest that investors consider other more effective vehicles. BlackRock has cautioned that Say on Climate shareholder voting may inappropriately shift accountability from boards to investors if used in isolation. Others, such as shareholder advocacy group As You Sow, have moved away from requesting advisory votes entirely.
Proposals related to risk analysis, emissions reduction goals, and independent assurance of climate-related disclosures have featured prominently thus far in 2022, specifically so in the industrial, energy, and utility sectors. Canadian and American banks have also seen a continued increase in climate-related proposals, particularly regarding requests to move away from financing fossil fuel ventures and to disclose Scope 3 emissions. Additionally, the insurance industry has seen an increase in proposals primarily aimed at greater transparency and disclosure on how these companies will reduce emissions associated with their business.
The Canadian Securities Administrators (CSA) published proposed National Instrument 51-107 Disclosure of Climate-related Matters and its companion policy (the Proposed Instrument and Policy) on October 18, 2021. The public comment period for the Proposed Instrument and Policy expired on February 16, 2022. The results of the initial public comment period have yet to be released by the CSA however a significant number of comment letters have been received and posted to the various securities commissions websites. In addition, we note that the SEC has also published for comment their version of a climate disclosure policy which is still open for comment and will likely be considered by the CSA due to the overlap of the North American markets. If the Proposed Instrument and Policy comes into force, market participants will have access to prescribed climate-related disclosures for reporting issuers that are intended to provide consistent, comparable and decision-useful information. While it will ultimately be up to market participants to determine whether the ultimate instrument and policy adequately addresses their expectations on climate-related disclosures, the "equal playing field" arising from a comparable and consistent disclosure regime may act to limit the number of shareholder proposals and activism in Canada related to climate-related disclosures to those issuers who have failed to make adequate disclosures or adopted appropriate climate-related policies.
The global push to conform with the Paris Agreement target of limiting global warming to 1.5 degrees Celsius on an accelerated timeline is likely to lead to significant pressures from ESG-oriented investors. That said, it remains to be seen whether this will indeed lead to a sustained rise in climate-related proposals and initiatives in the coming years.