26 May 2021: A day of shareholder action for ESG issues

This Wednesday (26 May 2021) witnessed two landmark instances of shareholder action in relation to climate change, exemplifying the increasing expectations placed on businesses by investors, regulators and markets with regards to ESG issues, and the expected rise in support for climate change resolutions this year.

The votes

ExxonMobil

A majority of Exxon's shareholders voted in favour of two out of four directors nominated by activist hedge fund, Engine No.1, with a third expected to be approved once the official count is in next week.  Launching a proxy fight in December 2020, Engine No.1 argued that the oil and gas group's refusal to recognise the need for a transition away from fossil fuels failed to take into account the financial risks posed by climate change, which would result in "value destruction".  The 0.02% shareholder's argument secured support from state pension funds (including New York state's), and large asset managers (including BlackRock, Vanguard and State Street). Backing three of the four nominees, one asset manager noted that its vote "reflected [its] belief that Exxon's energy transition strategy falls short of what is necessary to ensure the company's financial resilience in a low-carbon economy".

Chevron

Chevon's shareholders voted in favour of a resolution for the company to set stringent targets to "substantially reduce" its scope 3 emissions (ie emissions from the products it sells).  Chevron has said it will "carefully consider" the result.

The trend

In the last few years, shareholder action in relation to ESG issues has been increasing:

• According to data compiled for FTfm by Proxy Insight, this year (up to 20 May 2021) climate change resolutions at annual meetings have received average shareholder support of 23%, compared with just 16% during all of 2019. 
• Analysis by Morningstar and Alliance Advisors has found that the level of support for ESG shareholder proposals looks set to reach record levels in 2021.

A significant contributing factor to this increase has been a change in the voting behaviour of asset managers and investment funds ("AMIFs").  As demonstrated by the Exxon vote, collectively, large AMIFs have the power to swing shareholder resolutions.

The drivers

Key drivers of this increased shareholder action include:

1. A raft of legislation and updated voluntary codes, which took effect in 2020, requiring an ever-greater focus on ESG matters, not only by the companies themselves, but also by AMIFs.  This is compounded by stakeholder expectations in relation to ESG.  Consequently, there is an ever-increasing pressure on companies and AMIFs to deliver sustainable, long-term success in a socially responsible manner.

2. The increase in asset managers committing to sustainability issues and investment funds recasting themselves as ESG funds.  This carries the risk of greenwashing allegations, which can be partially addressed through active campaigning on ESG issues, such as using voting rights. 

3. The continued development of reporting obligations on ESG issues, with the regulatory landscape moving towards far greater transparency. Any information disclosed by a company (and its senior managers) will be scrutinised by its shareholders, as well as its other stakeholders.  This applies both to the companies holding AGMs and the AMIFs casting their votes; for example, AMIFs must disclose annually their engagement and voting policies and voting records, and explain how they have implemented those policies, including disclosure of how they monitor investee companies on their social and environmental impact.

4. A growing recognition of the need for far greater stewardship by AMIFs in relation to ESG issues.  For example:

   • The Asset Management Taskforce recommends that AMIFs should use requisitioned resolutions more proactively, and develop model resolutions to escalate a range of critical concerns with investee companies, including on climate change.
   • The Investment Association (whose members manage £8.5 trillion) has stated that its members should increase their engagement with climate change, including escalating engagement through the use of shareholder requisitioned resolutions.
   • The UK Stewardship Code 2020 requires all its signatories to recognise the importance of ESG factors, take ESG factors (including climate change) into account in all stewardship activities and ensure their investment decisions are aligned with the needs of their clients.

For further detail, please see our note UK Shareholder Activism - ESG revisited.

The future

The Exxon vote, with its focus on the financial risk of climate change, has already been touted as a blueprint for further ESG shareholder resolutions.

This is an argument that has already had success in the courts.  In Australia, a pension fund settled a claim, agreeing that its trustee had a duty to manage the financial risk of climate change. It also agreed to manage its investments with a goal of net zero emissions by 2050.  In Poland, a shareholder claim prevented the defendant company from building a new coal factory because its construction would harm the economic interests of the company and its shareholders as a result of climate change related financial risks.

Given the recent landmark Court decision in the Hague against Royal Dutch Shell (also on Wednesday), we expect that this argument will be combined with increased scrutiny on whether a company's climate strategy aligns with the Paris Agreement.  In that case, the Court found Royal Dutch Shell's existing climate strategy to be insufficient and ordered the company to increase the rate at which it cuts its emissions so as to align with the Paris Agreement.  AMIFs may also find themselves under increasing pressure to align their voting policies and decisions with the Paris Agreement.

We will discuss these issues in more detail in our webinar on 16 June 2021.  Register here.