Proxy Process Opens Door to Constructive Engagement on Climate
The number of resolutions and the increasing levels of support reflect shareholders' growing concerns about the climate-resilience of their portfolios.
Shareholder support for climate-related resolutions climbed to an all-time high of 30% in 2019’s proxy season, with the number of resolutions coming to a vote declining significantly. Those are not contradictory developments. Many proposed resolutions were withdrawn prior to votes because shareholder sponsors and company management teams sat down and had a constructive dialogue, leading to the requested action being taken. In a less-positive development, though, some resolutions were removed from the proxy ballots in 2019 because the SEC issued “no-action” letters.
Since 2004, shareholders have voted on well over 400 resolutions asking companies to report on the business risks of climate change and disclose strategies for addressing these risks. The number of resolutions and the increasing levels of support reflect shareholders’ growing concerns about the climate resilience of their portfolios.
Given the growing urgency of climate change, shareholders increasingly want companies to provide decision-useful information, including measurable, timebound greenhouse gas emission reduction goals, and plans for how they will adjust their operations and products to compete in the transition to a low-carbon economy. Many of the resolutions ask companies to use a reporting framework developed by the Taskforce on Climate Related Financial Disclosures.
For the 2019 proxy year (July 2018-June 2019) the climate disclosure resolutions that achieved the strongest support typically made requests consistent with the TCFD’s recommendations, asking companies to set and disclose goals for GHG emissions reduction and renewable energy adoption.
Engagements Lead to Withdrawals of Resolutions
The 2019 Proxy Preview, a comprehensive pre-season review of social and environmental shareholder resolutions, reported that almost 60 climate-related resolutions had been filed by shareholders through January. These resolutions requested disclosures on GHG emissions management, two-degree scenario resilience and carbon asset risk, and goals for switching to renewable energy or making energy-efficiency improvements. The majority were withdrawn before proxy materials were published.
At Emerson Electric (EMR), for example, shareholders voted at each of the past three annual meetings on resolutions filed by Walden Asset Management asking for the adoption and disclosure of GHG reduction goals. Other proponents have filed resolutions requesting an independent board chair, transparency around political and lobbying expenditures, and sustainability reporting. In 2018, the company opened a dialogue with shareholder proponents and then issued a sustainability report that included the requested GHG reduction goals. Given the company’s openness to dialogue, all shareholders agreed to withdraw resolutions and Emerson’s 2019 proxy ballot contained no shareholder proposals.
Trillium Asset Management filed a resolution at EOG Resources (EOG) requesting the company set and disclose methane emission reduction goals. After the company committed to reduce its methane emissions and set longer-term reduction goals, Trillium withdrew the resolution.
These successes point to a heightened level of willingness on the part of company management to engage with shareholders to address climate concerns.
While European companies operate under a different set of proxy rules, shareholder resolutions have been used successfully to raise concerns with corporate management that are being addressed through engagement.
Early successes with this strategy were notched up by shareholders composing the “Aiming for A” coalition in 2015 and 2016. This coalition evolved into the Climate Action 100+ Coalition, launched in December 2017 at the inaugural One Planet Summit. The CA100+ is the largest-ever coalition of investors, representing $33 trillion in assets under management. Members include many of the world’s largest public pension funds, like Japan’s Government Investment Pension Fund, the Dutch ABP, AustralianSuper, and California Public Employees' Retirement System, as well as a broad base of global asset managers. It has a five-year engagement strategy to improve climate governance, reduce emissions, and advance climate risk disclosures at the world’s systemically important emitters of greenhouse gasses.
Faced with a CA100+ investor resolution to disclose how its business strategy aligns with the goals of the Paris Climate Agreement, BP (BP) not only kept the resolution on its 2019 ballot but also recommend that shareholders vote in support the request. Ninety-nine percent of shareholders cast ‘for’ votes.
Through engagement with CA100+ shareholders Royal Dutch Shell (RDS.A) made the ground-breaking commitment to set targets that would reduce emissions from products sold to customers--known as “Scope 3” emissions--and linking these targets to executive compensation.
This collaborative approach to tackling systemic investment risk is endorsed by European stewardship code revisions, including The European Fund and Asset Management Association stewardship code, recently revised, and the proposed UK stewardship code revision, both spurred by revisions to the Shareholder Rights Directive (SRD II), which came into effect across EU states in June.
As investors collectivize their engagement and voting influence, shareholder resolutions become an even more important tool in opening constructive engagements with companies.
SEC Throws an “Ordinary Business” Wet Blanket on Emissions Disclosure
By contrast with stronger regulatory support in Europe, shareholders in the U.S. face regulatory headwinds from the SEC.
In 2018, the SEC broke with years of precedent by granting EOG Resources no-action relief for omitting from its ballot a shareholder resolution asking the company to “adopt company-wide, quantitative, timebound targets for reducing greenhouse gas emissions and issue a report discussing its plans and progress toward achieving these targets.” This signaled a new and more conservative approach by the SEC to adjudicating appeals of shareholder climate resolutions.
If companies feel they have grounds for omitting a shareholder resolution from the proxy ballot, they will clear this with the SEC by asking the SEC to confirm that it will not take action against the company for doing so. Conditions for omission are set out in SEC rule 14a-8. Permission is granted in the form of a “no-action” letter.
Based on a broader interpretation of the “ordinary business exception” rule, the SEC ruled that several resolutions asking companies to set and report on quantitative GHG reduction targets interfered in the regular operation of their businesses. The companies therefore excluded the resolutions from their proxy ballots under SEC Rule 14a-8(7).
At least five resolutions were omitted on this basis in 2019, according to SEC filings, and possibly more were deterred from being filed in the first place. According to Heidi Welsh, executive director of the Sustainable Investments Institute, which tracks resolutions filed and withdrawn, the SEC’s change of heart has had a damping effect on the willingness of shareholders to file and defend these types of disclosure requests.
Shareholders Push Back, Demanding Governance of Climate Risks
At Exxon (XOM) this year the SEC allowed the company to omit a resolution filed jointly by the Church of England and New York State Common Retirement Fund asking for GHG emission reduction goals and disclosure. In response, these proponents, both members of the CA100+, recommended that shareholders vote against Exxon board members and support a shareholder resolution to separate the Exxon’s chair and CEO roles.
These proposals gained support from shareholders. Forty-one percent voted in support of appointing an independent board chair, up from 39% in 2018. Support for a bylaw change that would allow 10% of shareholders to call a special meeting, rose to 42%, up from 36% in 2018. Furthermore, shareholders’ average support for Exxon’s board nominees dropped from 97% in 2018 to 93% in 2019, which may not seem that significant, but it placed the company in the bottom decile of the S&P 500 for board support.
Shareholders are also using the proxy process to address corporate influence over public opinion and policymaking. Corporate fees support the work of trade organizations that have helped stall government action on climate. Some of the same groups are pushing for restrictions on shareholder-resolution filing at the SEC. Resolutions asking for more transparency about the amount and board oversight of companies’ lobbying expenditures and payments to trade associations were strongly supported by shareholders in 2019: 24 resolutions earned an average 32% support. At Exxon, 37% of shareholders supported this resolution, up by 10 percentage points over the same resolution voted in 2018 and 2017.
Shareholder resolutions and engagements are helping some of the world’s largest corporations come to terms with climate change, which is a good thing for the world. It’s also a good thing for investors, who receive more decision-useful information about which companies are prepared for the transition to a low-carbon economy.
Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.
Jon Hale does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.