Shareholders are used to voting on a wide array of proposals. These can range from the election of board members to resolutions on diversity policies, or changes to the articles of association in how management is rewarded. This AGM season we have seen a new type of proposal: the Say on Climate. This is a clear indication of the increasing relevance of this topic to investors and corporates.
A Say on Climate (or at least the ones we’ve seen so far) is an energy transition strategy presented by management on how it wants to deal with the challenges around climate change. Shareholders get to vote on these plans according to whether they think the company is on a sensible trajectory to decarbonize, or needs to go back to the drawing board.
In most cases, the items for an AGM agenda that are presented by management deal with governance-related items, such as the election of board members and their remuneration. Environmental or social issues are not often included unless an investor – or a group of them – is successful in filing a shareholder resolution. These resolutions often ask for a specific report or policy on a ESG issue such as closing gender pay gaps, receiving reports about lobbying activities, and also the development of climate change strategies. A Say on Climate is a novelty, as it means management now tables a proposal on a sustainability topic themselves.
The Say on Climate vote has similar potential to the Say on Pay vote. If shareholders get a frequent vote on a climate proposal, this will eventually trigger best practices, more disclosure and accountability on a company’s climate plans. When shareholders have to vote on something, they want to understand what they are voting for. Drawing the analogy with Say on Pay, one could argue that executive pay has not been successfully driven down over the years, but at least reporting on it has improved, and in many instances shareholders have been able to push for improvements in the design of remuneration policies.
Even if the Say on Climate has the potential to improve a company’s accountability on climate change, not everyone is in favor of these new types of votes. Some argue that such a vote prevents management from making further changes on climate change if necessary, or even that shareholders would become liable for climate change if they approve such plans.
Therefore, it is important for management to clarify what a shareholder is voting for. If the intention is to gauge their shareholders’ approval of their climate plans, an advisory vote based on a climate report is more practical. Management proposals also sometimes compete against shareholders’ own proposals on climate. It is then up to the investor to decide which ones to approve.
We have generally supported these proposals if they meet a set of criteria, including whether the company has set a net zero ambition, and if it has presented concrete plans for achieving it using long-, intermediate- and short-term targets. Additionally, we require the proposal to be based on Paris-aligned scenario analysis, and that progress is reported in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework. In cases where there were no Say on Climate proposals that met our criteria, we did mostly vote in favor of any other shareholders’ proposals on climate.
The first Say on Climate votes passed with broad shareholder support. One of the companies that gained the highest support rate for its climate strategy was Unilever, which received a whopping 99% backing for its proposals. Several companies that are in traditionally high-carbon sectors also received significant support from shareholders: Total got 92% backing, Royal Dutch Shell received 88% support for its energy transition plan, and Glencore received 94% approval. Canadian National Railways which was one of the first companies to present shareholders with a Say On Climate proposal, received 92% support.
What do these initial cases tell us so far? That shareholders are giving companies an easy pass on climate practices? It might look like that, but this is not necessarily the case. There are several reason to be optimistic about the usefulness of such a vote.
The companies that have presented Say on Climate votes have done so voluntarily. They are therefore more likely to be more comfortable than others in presenting their climate plans compared to peers who are still struggling. Should laggards put their plans up for a vote, it is likely that those plans would face more opposition. Yet, as long as these votes are voluntary, this is not likely to happen any time soon.
Additionally, for many shareholders these proposals are new. Best practice guidelines, policy frameworks and voting principles still need to be developed. Once those take more shape, shareholders are likely to vote against when they believe plans for implementation are not detailed enough, or that companies are not making sufficient progress if climate targets are not set with the appropriate timing, scope or ambition.
The more Say on Climate votes that we see, the easier it will become to identify differences in quality between these plans. Similar to Say on Pay, it is important that a feedback mechanism exists: voting on Say on Climate proposals needs to be accompanied by advice from investors. Without explaining how plans should be further improved, just voting against an agenda item does not tell management what to do better.
Are Say on Climate proposals here to stay? We expect additional companies to introduce them once they are comfortable enough to publish an energy transition plan, and are confident that they can gain support. Shareholders could support this by asking for such votes in their engagements with companies.
Another push could come from further institutionalization of a shareholder vote, like we have seen with remuneration votes in the US and EU. We will closely monitor such developments in the coming years, as these are likely to take some time.
The 2021 AGM season has already been exceptional, as all meetings were virtual and many companies were heavily impacted by Covid-19. We hope to say goodbye to the pandemic-related complexities of the 2021 AGM season, but we hope that Say on Climate is here to stay.
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会