The Changing Face of Climate Voting
Climate change now occupies a central position on the risk radar of most capital markets players, including the largest investment managers. Concerted shareholder action has played no small part.
From sustainability reporting to financial risk, climate votes reached a new high in 2017: The ‘mainstreaming’ of climate change as a business and financial risk can be traced through the 10 most strongly supported climate resolutions over each of the last five proxy seasons. Up to 2015, sustainability reports referencing GHG emissions were the most attractive category of the resolution requests. Table 1 below shows that shareholders are increasingly supporting disclosures directly linked to the business and financial risks of climate change: GHG emissions and planning for portfolio impacts of a 2-degree climate policy scenario (‘2-degree scenario’).
Table 1: Most strongly supported climate resolutions by company and filer by year
In 2015 and 2016 the European investor-led campaign, ‘Aiming for A’, was successful in securing BP, Royal Dutch Shell, Anglo American and Rio Tinto management backing for 2-degree scenario resolutions. This resulted in near unanimous shareholder votes in support of these resolutions and helped shift the corporate mindset on climate disclosure. It also served to expose large asset managers who supported and opposed similar resolutions without a convincing explanation of how they evaluated them differently.
Meanwhile, in the U.S., ongoing investigations into ExxonMobil’s securities disclosures, the waning fortunes of the coal industry and of carbon-intensive oil and gas extraction, and growing attention to the carbon-intensity of investment portfolios made investors all the more concerned about U.S. energy companies’ ongoing resistance to engage constructively with shareholders on climate change.
Heightened shareholder scrutiny of asset manager proxy voting records, the growing sophistication of filing strategies, and growing concern—particularly by pension funds—over climate risk governance at U.S. energy companies contributed to the vote successes of 2017.
Pension fund filers focus on business and financial risks: Large public pension funds, including those in NY State, NY City, Connecticut, Philadelphia, Rhode Island, plus the California State Teachers’ Retirement System (CalSTRS), led the filing of 32 climate risk and climate-related lobbying disclosure resolutions published in proxies in 2016 and 2017. During this period, NY City also led filing on nine proxy access resolutions that came to vote at fossil fuel companies’ shareholder meetings. The growing concern of fiduciaries tasked with preserving the value of retirement savings became abundantly clear in the closing months of 2017, with a flood of announcements by large public pension funds and other asset owners across Europe and North America of their intention to reduce their portfolio carbon footprints. Table 1 shows the emergence of pension funds as lead filers of climate resolutions.
Largest asset managers start voting for climate: Ironically, the rise of passive investing forces the most powerful asset managers to become more active stewards as climate change is recognized as a systemic risk to global financial markets.
BlackRock and Vanguard’s support of 2-degree scenario planning resolutions at Exxon and Occidental in 2017 contributed significantly to the historic levels of support achieved.
BlackRock, Vanguard and Fidelity, the #1, #2 and #4 asset managers globally, did not support a single climate-related resolution before 2017. In 2016, State Street extended support to new categories of resolutions, having previously supported only sustainability reporting. BNY Mellon is the only one of the largest five asset managers to vote against all of the 10 most strongly supported climate resolutions in 2017.
A survey of 2017 asset manager climate voting by Ceres shows a noticeable shift by 40 of the largest asset managers. Yet surprisingly few asset managers specifically mention climate change in their proxy voting guidelines.
The release of the Task Force on Climate-related Financial Disclosures (TFCD) recommendations in June 2017 and the formalization of global investor commitment to improve climate-related financial disclosures— under the ClimateAction100 initiative— will make it difficult for companies, particularly in the energy sector, to oppose shareholder calls for emissions disclosures and strategic resilience plans.
Investors increasingly are interested in board-level climate competence and incentive structures that map to climate change resilience. There are, therefore, obvious synergies between climate competence and heightened investor concerns about gender diversity at board and senior management level. Boards that fail to demonstrate competence across a range of ESG risks will raise concerns for investors who want to see a broad range of perspectives included, considering options outside the usual boxes.
Therefore, looking beyond 2018, the question for fiduciaries is how they can ensure engagement and voting strategies actualize a vision of resilient governance arrangements, which can pave the way for new corporate business models and a lower-carbon economy. Increasingly, we are likely to see shareholders use both shareholder and management ballot items to advance improved ESG risk governance.
Founder and CEO of Fund Votes; Director, Proxy Research and Services, SHARE