More hot news: climate-related shareholder resolutions

What is our proposition?

Our proposition is that climate-related shareholder resolutions are likely to become much more common in the UK, EU27 and elsewhere.

Why?

There is a series of developments, which, taken together, indicate a gathering and, we think, game-changing momentum. These include:

• The US: There have been around 140 climate-related shareholder proposals filed during 2020 already.  These proposals averaged an approval vote of 30.7%, up from 26.3% in 2019.  At Chevron's 2020 AGM, the majority of shareholders voted for a resolution that aligns Chevron's lobbying activities with the Paris Agreement.  This is the first time that a US climate-related proposal has won a majority of a company's shareholder votes.  And, the activist investor proposal, that J.P. Morgan reports how it intends to reduce greenhouse gas emissions from its lending activities, was not supported by the J.P. Morgan board but was only narrowly lost with 49.6% support.

• Climate Action 100+: 500 investors with over US$47 trillion under management have signed up to this initiative, a 5-year plan to help achieve the goals of the Paris Agreement.

• 'Say on Climate' Campaign: Chris Hohn, founder of the TCI Hedge Fund, plans a campaign to force hundreds of US and European companies to reduce their greenhouse gas emissions, and to make it standard practice for all major US and EU companies to submit climate plans for annual scrutiny through an advisory shareholder vote - a 'say on climate' vote. In January 2021 the Investor Forum (representing one third of the FTSE-all share market capitalisation) called on the UK government to consult on mandating 'say on climate' votes.

• Support from Mark Carney: He said recently: "Giving investors an annual vote on how companies plan to cut their carbon emissions would establish a 'critical link' in efforts to fight climate change."

• Investment Association (IA): The IA (whose members manage £8.5 trillion) published its position on climate change on 16 November 2020 about increasing engagement by its members, including escalating engagement through the use of shareholder requisitioned resolutions.

• Asset Management Taskforce: A taskforce, comprising the UK government, the FCA and investors, published its recommendations on 24 November 2020. These include that shareholders should use requisitioned resolutions more proactively, and develop model resolutions to escalate a range of critical concerns with investee companies, including on climate change.

What's the evidence for our proposition?

• UK: In May 2019 Climate Action 100+ proposed a special resolution directing BP to include a strategy, which the Board considers to be consistent with the goals of the Paris Agreement, in its Strategic Report, and to report on its progress annually. This resolution received 99% support.

• UK: In April 2020 a special resolution supporting Shell to set and publish targets aligned with the Paris Agreement was not recommended by the Board and only obtained 14% support.

• UK: Shareholders in Barclays proposed in May 2020 two special resolutions. One to authorise and direct Barclays to set an ambition to be a net zero bank by 2050, and to set and report on a strategy for its financial services to align with the goals of the Paris Agreement. This resolution was recommended by the board and won 99.93% support.  The other resolution sought to direct Barclays to set targets to phase out the provision of financial services to the energy sector and electric/gas utility companies not aligned with the Paris Agreement. This resolution was not recommended by the Board and was not passed as it obtained 23.95% support.

• France: In May 2020, 11 European investors proposed a shareholder resolution requiring Total to present an action plan to align the company's operations with the objectives of the Paris Agreement, and to specify how it intended to reduce its greenhouse gas emissions.  While this resolution was not supported by the directors and only obtained 16% support, it did lead to the directors amending the company's constitution so as to require the directors to take into account social and environmental issues involved in the company's activities. And, following dialogue with Climate Action 100+ investors, the board also adopted a climate policy aiming to reach climate neutrality by 2050.

• Japan: The first climate-related resolution for a Japanese listed company was submitted to Mizuho Financial Group in June 2020. With 34%, the resolution did not gain enough support, but Mizuho announced it would stop financing new coal power plants and end lending to such projects by 2050.

• Spain: In October 2020 Chris Hohn, working with 'Say on Climate', obtained shareholder support to pass two resolutions requiring Spanish Airports Operator Aena AENA.MC to draft a new climate plan and submit it to an annual vote.

• UK: In December 2020 Unilever announced its intention to give shareholders a non-binding advisory 'say on climate' vote on its climate transition plan.

• US: In December 2020 Moody's announced its commitment to 'say on climate' resolutions, the first S&P500 company to do so.

• UK: In January 2021 HSBC was the subject of a climate related shareholder resolution proposing to authorise its directors to set, publish and report against a climate reduction strategy and targets.

What's our view?

• If at first...: Even if a shareholder resolution is not passed, it may cause the company to adopt targets and report on progress towards those targets nonetheless.  There is evidence of this occurring in the US.

• The 20% threshold: Under the UK Corporate Governance Code, when 20% or more of votes have been cast against the board recommendation for a resolution, the company should explain, when announcing voting results, what action it intends to take to consult shareholders in order to understand the reasons behind the result. In the annual report, it should explain the impact the feedback has had on decisions the board has taken and any actions or resolutions now proposed.

• Advisory votes: Shareholders cannot usurp powers, which under the articles are vested in the directors. Shareholders cannot, by ordinary resolution, direct the directors how to run the company. But, in our view, they can pass ordinary resolutions expressed as advisory or supporting a particular action such as reporting.

• Not just climate change: The logic of at least non-binding ordinary advisory resolutions potentially applies to a broader set of ESG related resolutions. The Asset Management Task Force recommendation (referred to above) is not limited to climate-related resolutions. And, there are indications that climate-related shareholder resolutions for financial institutions are also targeted at them lending only to companies aligning themselves with the Paris Agreement. In principle, the same approach could be taken for other companies in relation to the provision of goods and services by them.