Diligent Institute report
Climate change as a looming threat
Over the course of the last few years, the importance of climate change action has grown exponentially. Natural...
How investors challenged
companies on sustainability
in the 2021 proxy season
A slow burn: Shareholders
By Kira Ciccarelli,
lead research specialist,
A slow burn: Shareholders warming to climate proposals
By Kira Ciccarelli, lead research specialist, Diligent Institute
Climate change as a looming threat
Over the course of the last few years, the importance of climate change action has grown exponentially. Natural disasters in the US and across the rest of the world have increased in frequency, duration and intensity. The decade 2011-2020 was the warmest in recorded history and ocean levels could rise by as much as eight feet by the year 2100.
In August 2021 the UN Intergovernmental Panel on Climate Change issued a stinging update to its reporting, detailing that human action ‘unequivocally’ contributes to climate change.
In light of these developments, investors sent a clear message that ESG, particularly issues of sustainability and climate change, were high priorities in this year’s proxy season. This year saw the highest number of ESG proposals voted into place on record. ISS supported 64 percent of climate-related proposals this year.
From July 1, 2020 to March 31, 2021, BlackRock supported 62.5 percent of climate-related and social proposals; from July 1, 2019 to June 30, 2020, it backed just 6 percent of climate-related proposals and 7 percent of social proposals. It also voted against 255 directors based on climate issues. A recent Diligent Institute report on shareholder activism aligns with these developments. As governments, investors and regulators attempt to slow the tide and work toward a more sustainable future, how have companies responded?
Are corporate statements on the climate crisis translating into action?
The Diligent Institute set out to gain a better understanding of how environmental proposals and corresponding shareholder approval have trended over time. Using Diligent’s Compensation and Governance Intel (Diligent CGI), we analyzed environmental resolutions put forward at 5,062 companies in the US, Canada, the UK, France and Australia, along with their levels of shareholder support from January 1, 2016 to August 31, 2021.
We selected this timeframe to review what happened after the Paris Climate Agreement went into effect in 2016 through to the present. The analysis below contains breakdowns by year, country and sector, with a spotlight on the energy and healthcare sectors.
Our key findings include:
- While the total number of climate-related proposals put forward each year has decreased compared with the 2016 high of 68, the average support levels for these proposals has increased dramatically over the same period and now sits at 50.8 percent. The number of climate-related proposals has also started to rise year on year since 2019, moving from 29 to 36
- Of the countries in our sample, the US far outpaces the others in the number of environmental proposals put forward: 203 since 2016
- Support for environmental proposals in the US has been increasing since 2016, rising from 24.6 percent to 39.1 percent
- The energy sector has experienced the highest number of environmental proposals at 61, as well as the highest rate of shareholder approval at 40.6 percent, on average, since 2016
- Despite small gains, environmental proposals make up a miniscule percentage of overall proposals at just 0.11 percent in 2021 and receive lower levels of support (50.8 percent) compared with the overall average (93.7 percent).
2019: The turning point on climate-related shareholder proposals
In November 2016 when the Paris Climate Agreement took effect, we saw the highest number of proposals at 68 with 33.2 percent support on average. The chart (right) displays the number of climate-related proposals put forward at all firms in our sample since the beginning of 2016.
Interestingly, the number of climate-related proposals declined from 2016 to 2019, but then began to rise annually. Despite there being fewer climate-related proposals, the level of shareholder support for the proposals jumped from 28.2 percent in 2019 to 50.8 percent in 2021, a record high level of support.
Number of and average support for environmental proposals, by year
US companies have more climate-related proposals but less shareholder support than other countries
The US clearly outpaces the other countries included in our analysis. Since 2016 the US companies have had 203 climate-related proposals, the UK 20, France 15, Canada 14 and Australia seven. The chart (right) shows the total number of climate-related proposals filed at companies in each country since 2016, as well as the average shareholder approval for those proposals for each country over that span.
Number of and average support for environmental proposals, by country
But the US lags other countries when it comes to average shareholder approval, at only 29.9 percent compared with 71 percent in the UK and 94.2 percent in France. Although the US lags the other countries in this sample in terms of shareholder approval of climate-related proposals, the average level of support is rising in the US year on year, increasing from 24.6 percent in 2016 to 39.1 percent in 2021, with the majority of that jump occurring between 2019 and 2021.
By comparison, in the UK, shareholder approval of climate-related proposals decreased sharply from 2016 to 2018, rebounded in 2019 and has since fallen again, albeit at a slower rate. Between 2016 and 2018, shareholder approval of climate-related proposals shot down from 98.7 percent to 18 percent. In 2019 approval rose significantly to 69.2 percent before decreasing to 66.5 percent in 2021. The chart (left) shows the average percentage of shareholder approval of climate-related proposals from 2016 to 2021 for each country.
Average support for climate-related proposals per country per year
In the US specifically, as average shareholder approval has risen since 2016, the number of climate-related proposals has actually gone down. In 2016 there were 58 climate-related proposals from the US companies in our sample – this fell to 25 in 2021. The chart (right) shows the number of climate-related proposals each year from 2016 to 2021 and the corresponding average shareholder approval rate for each year in the US.
Number of and average support for environmental proposals, US
Energy sector leads the way in climate-related proposals and shareholder approval
Unsurprisingly, the energy sector received the greatest number of climate-related proposals over the last five years, as well as the greatest level of shareholder support. The energy sector companies in our sample have faced 61 climate-related proposals since 2016, with shareholder approval rates at 40.6 percent on average over that span.
Meanwhile, the industrials sector is close behind, with 44 climate-related proposals and an average shareholder approval of 40.6 percent. In third place is the consumer discretionary sector, with 35 climate-related proposals and an average shareholder approval rate of 31.6 percent.
At the bottom of the pack are information technology with nine proposals and an approval rate of 29.8 percent, and healthcare with 12 proposals and an approval rate of 38.5 percent. The chart below shows the total number of climate-related proposals since 2016 in each sector in our sample and the average level of approval in each sector across the same time span.
Number of and average support for environmental proposals, by sector
Climate-related proposals are rare and tend to receive less support
Despite the fact that climate-related proposals and shareholder approval of environmental items have been on the rise since 2019, they account for only a tiny fraction of all resolution items. Globally in 2021, climate-related proposals made up just 0.11 percent of all proposal items. Additionally, climate-related proposals receive a lower overall level of support – 50.8 percent support, on average – compared with other proposals, which receive 93.7 percent support, on average.
In the US these numbers are even starker. While climate-related proposals make up a similar proportion of all proposals since 2016 (0.14 percent), in the US these proposals receive only 29.9 percent support on average, compared with other proposals that receive an approval rate of 90.6 percent.
Environmental proposals as percentage of total proposals, by year
In France and the UK, shareholder approval numbers approach the overall average. Though climate-related proposals make up just 0.04 percent and 0.09 percent of all proposals in the UK and France, respectively, UK environmental proposals receive 71 percent support compared with an overall average of 97.7 percent, and French environmental proposals receive slightly higher support than the average, at 94.2 percent compared with 94 percent.
Environmental proposals as percentage of total proposals, by country
Two essential steps for corporate secretaries
Although climate-related proposals make up only a small proportion of all proposals, shareholder support for them is clearly on the rise, and the drumbeat for companies to up their game on climate issues will only continue to grow louder in the coming years. Knowing this, what can you do to ensure your board is prepared?
The first step is understanding where your organization is on its ESG journey. This plan will look different for each organization based on size, location, industry and more.
ESG goals, particularly around climate and sustainability, should be measurable, achievable, applicable and communicated throughout the company. As a corporate secretary, transparency around the current status of climate-related goals and which actors at the organization lead ESG efforts can inform the rest of your approach.
Once you have transparency into ESG practices
at the firm, the next step is active shareholder engagement. This involves ensuring the appropriate actors are able to communicate progress, trends and other important updates to the board when necessary.
Especially given the focus investors are placing on climate-related issues and rising support levels for climate-related proposals, the board needs to be adequately informed in order to manage these pressures. Putting the right tools, processes and meeting protocols in place so that the board can get all the information it needs is essential for progress on environmental strategy.
Rev Kirsten Snow Spalding is senior program director of the Ceres Investor Network. She talks to <I>Ben Maiden</I> about how the 2021 proxy season may impact next year’s season and how governance issues are tied to sustainability performance
Seeking performance on sustainability through governance
Rev Kirsten Snow Spalding is senior program director of the Ceres Investor Network. She talks to Ben Maiden about how the 2021 proxy season may impact next year’s season and how governance issues are tied to sustainability performance
Was the degree to which support for environmental proposals rose this proxy season a surprise?
What I’m hearing from the [Ceres Investor Network] is that the climate crisis, as indicated by all of the scientific research, is now a major focus for investors, so it wasn’t a surprise to see they were going to start addressing this in a more robust way, especially with the heaviest-emitting companies.
I think we’d been on that trend for a while but the Intergovernmental Panel on Climate Change report and the International Energy Agency scenarios suggest we’ve got to accelerate. Investors are dealing with [climate] as a real threat to their portfolios. Maybe another shift is that I’m hearing investors say, This is systemic. You can’t address it one company at a time. We can’t divest away from it. We’ve got to deal with it across the portfolio.
The work companies did on climate in the last proxy season is translating into more focused action on the challenges with water, natural resources and human rights
What else are you hearing from the Ceres Investor Network right now?
The sense I’m getting about the 2022 proxy season is that we’re going to see more of the same. Investors are encouraged by the outcomes. What I’m hearing is that companies in advance of the 2022 season are making more commitments, they’re being more transparent about their plans and investors feel they’re getting more of what they need to address risk in their portfolios. I’m also hearing that the work companies did on climate in the last proxy season is translating into more focused action on the challenges with water, natural resources and human rights. It’s not just one issue – it is cutting across a range of ESG risks.
Are those actions by companies leading to more proposals being withdrawn?
Investors work in two ways. Some say, We file first, and that instigates a dialogue. Then we can decide whether to go forward with the proposal depending on how the dialogue is going. Other investors say, We prefer to talk first and file only when the dialogue isn’t going well.
In either case – and it depends on the type and size of a particular investor – what we’re seeing is more investors coming together around priorities such as Climate Action 100+. There isn’t as much fragmentation in the market as there used to be – and that leads to more corporate action.
There isn’t as much fragmentation in the market as there used to be – and that leads to more corporate action
Is there a change in approach from investors?
I think there are three things we saw in the 2021 season that will influence the next one. The first is director votes. The ExxonMobil vote will have a ripple effect: it demonstrated that investors are serious about climate risk and, if companies don’t make adequate progress, investors are prepared to address it as a governance issue.
When I say ‘governance issue’ I mean not only that we might see more director campaigns, but also that there’s a real focus on what audit committees are doing. Are they building into their financial assumptions shifts around climate, shifts in the business plan around climate? I think we’re going to see director and accounting-type resolutions because of this focus on governance. If a company is a laggard, it’s a sign that it’s not a well-managed company.
The second is that with climate we saw a lot of proposals on climate lobbying, and I think that alignment between companies’ advocacy efforts and their own actions is really important. I think investors are very interested in seeing where the lobbying dollars are going and how the industry associations are behaving.
If a company is prepared to move its own business plan then it’s also got to be prepared to seek policy support. It’s the only way we’re going to see the systemic risk of climate addressed.
My third point is [the] forward-looking emphasis on transition plans. I think we’re going to see more of that. It’s no longer sufficient for companies to tell us what their emissions are; they’ve got to tell us how they’re going to be addressing climate in their forward-looking plans. We saw a couple of resolutions last season [in this area].
As you say, the links between corporate governance and sustainability go beyond disclosures. What other areas are being looked at?
What Climate Action 100+ and others in my network are focused on is that you use ESG metrics as a signal to how well managed a company is. These things are intimately related.
You can’t say, We’ve got a company that’s brilliant, but it doesn’t address these types of risks. If [a company] is failing on ESG metrics then probably we’ve got to look at that board. A key demand is board oversight of these issues.
If a company is prepared to move its own business plan then it’s also got to be prepared to seek policy support
Following on from that, how can investors or companies measure the effectiveness of governance as it relates to sustainability?
I think we have good evidence that boards with diverse experience and expertise on these issues do better. Not only boards that have diversity in terms of race, ethnicity and gender but also boards that have diversity of experience and expertise. All of those things matter.
There are lots of ways boards can be structured to govern their sustainability risks in a robust way. It’s when we see that a company is not doing a good job that the board gets under the spotlight.
I think it comes down to the board chair and the CEO. If we’re not seeing real performance then investors are questioning whether this is a well-managed company.
You mentioned tying executive compensation to ESG. How important is that to members of your network?
The say-on-pay movement was very important in terms of raising issues about executive compensation and relating that to performance. I don’t think we’ve seen at this point a lot of companies tying executive compensation to sustainability metrics.
In a case where there’s a failure, we may see those kinds of resolutions but I don’t think it’s going to be a wholesale strategy. You see companies in a sector and often the leaders and laggards relate both on the level of having failed on ESG concerns and underperforming financially. When you see both you have to ask what’s going on with the governance.
The future of shareholder
advocacy in North America
may not involve say-on-climate
advisory votes. But Michael Hugman
from The Children’s Investment
Fund Foundation says there are other mechanisms available to investors
‘2050 targets by themselves
are frankly meaningless’
The future of shareholder advocacy in North America may not involve say-on-climate advisory votes. But Michael Hugman from The Children’s Investment Fund Foundation says there are other mechanisms available to investors
The Children’s Investment Fund Foundation (CIFF) has spearheaded the recent say-on-climate campaign in North America, Europe and Australia. The campaign – led by Chris Hohn, founder of The Children’s Fund – is intended to use shareholder advocacy to provoke companies into disclosing their climate action plans. In Europe, a number of companies – including Unilever, Nestlé and Severn Trent – put these plans up for an advisory vote this year.
But in North America, the idea of an advisory vote received a less positive reception, as asset managers raised concerns that it would lead to investors rubber-stamping corporate climate plans. In this interview, Michael Hugman, director of finance for climate at CIFF, talks about the future of the say-on-climate campaign in North America.
The number of companies publishing ESG reports grows by the year. Why are you taking more assertive action to hold companies accountable for their climate impact?
We perceive a couple of major problems. The first is that there are an awful lot of companies that are still doing nothing. There is a small percentage of companies globally that are even working on science-based targets or 2050 targets.
We’re very clear that 2050 targets by themselves are frankly meaningless – they’re simply not going to lead to any material real-world change on their own. So the first critical point is that we need to focus on actioning timeframes that are meaningful – which means we’re talking about five-year plans.
The single most-important aspect of say-on-climate is the focus on five-year plans and concrete, specific actions on business strategy. It’s much more important than the advisory vote that companies disclose concrete plans. And the vast majority of investors aren’t doing anything to make that happen.
We’re direct supporters of the Climate Action 100+ initiative and have been very supportive of the net-zero company benchmark that has come out. But even among the companies that have been supportive of Climate Action 100+, none has Paris-aligned cap ex plans.
The second challenge is about how you hold people to account to make sure their plans are happening. We’ve tried to be clear over the last six months that we’re not going to seek advisory votes in North America because the message has been clear that asset managers don’t want that.
But what is clear is if you look at the UK, Europe and Australia, you have pretty clear consensus that progressive investors, NGOs and leading companies do see advisory votes as a way of getting both the disclosure plans and the feedback mechanism. I think that’s partly to do with a different market structure.
It’s undeniably true that say on pay has been more effective in the UK and Australia than it has in the US and that leads to a difference of views across regions. In North America, there is a very valid concern about rubber-stamping and part of that is about how dominant passive investing is in the US equity market. All of which is to say that we and our NGO partners are not going to file proposals seeking advisory votes in North America. But let’s aim for disclosure of five-year plans: that’s the only way investors can demonstrate to their beneficiaries that they’re doing anything on climate change.
It seems the community is saying that it doesn’t want an advisory vote but doesn’t want to step up to hold people to account using other mechanisms, either
Beyond advisory votes on climate plans, what mechanisms can investors use to hold companies accountable?
That’s a little trickier. The reality is that other avenues are not that obvious. For instance, the challenge with voting against directors is that even though it’s positive to see more asset managers and owners voting against directors, it’s normally done privately and there’s no communication done beforehand. There are concerns about collective action and being deemed to have acted in concert without the right designation from the SEC.
And the reality is that even when investors vote against directors, it rarely registers a change of more than a few percentage points. That’s not irrelevant, but it doesn’t change company strategy notably. The one big exception largely proves the rule on this: we all saw the dramatic impact at ExxonMobil this year. But in reality that was a very unusual campaign where one very brilliant investor spent millions of dollars on a very well-fought and specific campaign. It’s unclear to me how many US asset owners or mainstream asset managers would be able to replicate that.
Even among the companies that have been supportive of Climate Action 100+, none has Paris-aligned cap ex plans
Even when you look at campaigns like the one this season by Majority Action, which aimed to co-ordinate votes against certain directors, it got a bit of traction but the not the full-throated support of the US asset owner community. It seems the community is saying that it doesn’t want an advisory vote but doesn’t want to step up to hold people to account using other mechanisms, either. That’s why we feel it’s the right move to focus on disclosure plans.
Some investors we’ve talked to feel overwhelmed by the volume of available ESG data. There is a risk that 2050 net-zero plans contribute to more noise and that some companies could seize the opportunity for greenwashing. How will you mitigate against that?
We’re going to work with our other philanthropic partners in an analysis of the plans that are published so that we can benchmark. We want to establish a net-zero center that is going to have significant philanthropic funding and is going to independently grade the performance of funds.
What you have right now is private companies rating that work. Ratings agencies tend to be conflicted because they earn fees from the companies they rate, so having a really strong independent analysis will help everyone have clarity over which companies are failing.
‘Companies aren’t making change
at the speed needed’
Danielle Fugere, president
and chief counsel of
As You Sow, discusses
the non-profit’s latest
thinking on climate risk
and the need for measurable
net-zero emissions targets
‘Companies aren’t making change at the speed needed’
Danielle Fugere, president and chief counsel of As You Sow, discusses the non-profit’s latest thinking on climate risk and the need for measurable net-zero emissions targets
Danielle Fugere is president and chief counsel of As You Sow, one of the most influential shareholder advocates in the US. During the 2021 proxy season, As You Sow initiated 188 engagements with 142 companies. It filed 86 resolutions, 21 of which went all the way to a vote. The firm received average support of 43.3 percent across its resolutions, gaining majority support on five.
Here, Fugere talks about how the investing landscape has evolved on climate issues, why US investors turned their backs on say-on-climate votes, and the importance of net-zero plans.
Can you explain As You Sow’s history of shareholder advocacy on climate-related issues?
We’ve been working on climate for more than a decade. What’s been interesting about climate and shareholders is that it’s been an evolving arena.
When we first started working on it, climate wasn’t part of the dialogue. Our goal when we started out was the need for finance to be taking account of climate. Every shareholder should be looking at the risks, and companies should be providing information about the risks. The shareholder asks have evolved as we’ve learned more about the science.
How have you seen investor sentiment on climate-related issues evolve?
The finance arena now recognizes the risk priced into activities and lending. If you’re doing business as usual in a world that is decarbonizing, that will not work well for you. Recent votes reflect that – there’s concern about the risk to climate, companies and investors. Climate change is causing on-the-ground impacts that are costing companies more money, and we’re seeing supply chains breaking down.
Every shareholder should be looking at the risks and companies should be providing information about the risks
I look to Climate Action 100+ as a very good indicator of where large institutional asset managers are with regard to climate. Climate Action 100+ has set forth its benchmark very clearly that companies need to put their money and capital investments toward a plan for net-zero impact.
We’re also seeing a focus on accounting. Companies historically have described risk as separate, but [shareholders] are now asking companies to address climate on the books. From the governance perspective, investors are absolutely looking to the audit committees and what they are doing to make sure this happens. This brings together the movement toward boards being responsible for climate action.
As You Sow engaged with 81 public companies on climate during the last year. What was the most memorable?
This year was significant in many cases, but I think General Electric was a major example of where shareholders are landing. We asked GE to set targets for Scope 3 emissions. It wasn’t quite ready to do that so we filed a proposal and GE’s management recommended that shareholders vote in favor of it. [The proposal received 98 percent support.]
Having followed up with the company, it has set those targets now and is working toward them. The company had not been in front of the climate curve and was paying the price in terms of value – value was declining and shareholders were unhappy. GE re-evaluated, brought in a new CEO and adjusted its new business plan. Shareholders seem to be in support of that. It’s a good example of a company that recognized how harmful its stance on climate issues was to its business.
This year, As You Sow engaged with several companies on offering a say-on-climate vote, which has gained momentum in Europe. Why didn’t it garner the same enthusiasm in the US?
In the US, we’ve had the whole say-on-pay issue and the failure to vote meaningfully against questionable pay packages. In working with the Forum for Sustainable and Responsible Investment, we said we didn’t think [say on climate] was a good idea.
It’s difficult for shareholders to say what is a good plan and what is a bad plan. Some of the largest institutional investors were very clear that they didn’t think approving of climate plans was something they could – or even should – be doing. There was significant investor pushback.
But what we can say is that the science tells us we need to be aligned with net-zero and every company needs to take responsibility for its own emissions – its Scope 1 through Scope 3 greenhouse gas emissions.
Countries can create policy, but companies need to be responsible.
Companies aren’t making change at the speed needed to hit net-zero goals
If not a say-on-climate vote, what’s the best mechanism for a shareholder advocate like As You Sow to hold companies accountable on climate?
We tell companies they need to set a net-zero target, as well as short, medium and long-term targets to figure out how to get to net-zero.
Some companies will say they don’t want to overpromise, but our response is that we’ve given every company time and there’s been insufficient progress across the board.
Companies aren’t making change at the speed needed to hit net-zero goals. Every decision they make – whether it’s related to the product line, the buildings, the energy the company uses or how the employees get to work – needs to be aligned with net-zero.
Most companies are saying they understand where they need to go, which is a sea change. But there’s still some reluctance from some companies to go out on a limb.
Climate change is causing on-the-ground impacts that are costing companies more money
How sympathetic are you to that reluctance? I’ve talked to plenty of firms that understand the need for lofty goals, but that are also uncertain about how to break them down into short, mid and long-term targets.
Companies are reluctant to set targets they’re unsure they can meet. The conversation and the world is changing and nobody knows how to meet a net-zero target yet. But that’s why we ask to see the short and mid-term targets – in order to see whether they’re aligned with net-zero.
Investors are realistic about what companies are going to do: they know companies make plans they may need to change in the future. As investors, it’s about how companies work toward those plans. We’re not trying to punish companies that are making a good faith effort but not achieving their objectives. It’s really about whether they’re setting targets and working toward achieving them.
If you had to suggest one emerging environmental issue in the world of shareholder advocacy, what would that be?
We and others are starting to think about the issue of offsets. We’re seeing a lot of companies that are relying significantly on offsets rather than emissions reductions so it’s going to become an important topic of discussion. There are a lot of folks out there who want to make a lot of money with offsets. Climate Action 100+ has said that you need to reduce emissions – you can’t just do offsets.
And I want to underscore the importance of that. Companies can certainly buy offsets to compensate while they reduce their emissions, but using offsets as the first port of call is not acceptable.
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Diligent Institute seeks to help corporate leaders be more effective by providing cutting-edge insights on corporate governance, amplifying the voices of diverse corporate leaders and sharing broadly all we are learning about modern governance practices.
Founded in 2018, Diligent Institute serves as the global corporate governance research arm and think tank of Diligent Corporation, the largest SaaS software company in the governance, risk and compliance space. Diligent serves more than 20,000 organizations and more than 700,000 corporate leaders in more than 90 countries. Diligent Institute is able to tap into that broad network and highlight the diverse perspectives of corporate leaders from around the world.
Diligent Institute produces original research both on our own and in collaboration with partners, including institutions of higher education and thought leaders in the corporate governance space. We produce more than a dozen reports each year, ranging from our monthly Director Confidence Index, which measures how corporate directors are feeling about the economy, to in-depth reviews of issues such as ESG practices and our AI-powered Corporate Sentiment Tracker, which analyzes data from thousands of public sources to discern what’s on the minds of corporate leaders.