by Cydney Posner
Are we witnessing the beginning of a new trend? The history of shareholder proposals to enhance disclosure regarding climate change has been a dismal one. But suddenly, this proxy season, we have climate change proposals succeeding at two — and, as of today, three — major companies. Is this the start of something big?
The proposals asked each of the companies — Occidental Petroleum, PPL and ExxonMobil — to issue a report providing a “2 degree scenario analysis” — a term that refers to the goal of the Paris Climate Accord of limiting global temperature increases to 2 degrees Celsius (3.6 degrees Fahrenheit). The report would assess the impact on the company’s asset portfolio of long-term climate change, explaining (as stated in the Occidental proxy) “how capital planning and business strategies incorporate analyses of the short- and long-term financial risks of a lower carbon economy,” including specifically, “the impacts of multiple, fluctuating demand and price scenarios on the company’s existing reserves and resource portfolio.” The proposal to Occidental was submitted by Wespath Investment Management and the Nathan Cummings Foundation and was subsequently supported by a coalition of large asset owners that included CalPERS, and the proposals to PPL and ExxonMobil were submitted by the New York State Common Retirement Fund.
At Occidental, the shareholder proposal regarding the climate change impact assessment was approved by a 2/3 vote, PPL reported a 57% vote in favor, and, hot off the press, the Washington Post and Reuters are reporting that the proposal at ExxonMobil passed with a favorable vote of 62%. The Post reported that the trustee of the New York Common Retirement Fund hailed the ExxonMobil vote as “an unprecedented victory for investors in the fight to ensure a smooth transition to a low carbon economy.”
The idea that we could be at an inflection point on climate-change related proposals is not entirely implausible: the difference this year may be that some of the largest institutional holders — including mammoth institutional holders BlackRock and Vanguard —have reportedly switched sides on some of these votes, after years of limiting their actions to just cajoling. In the case of Occidental, Bloomberg BNA reported that BlackRock, which owns 7.8% of the shares, voted in favor “due to the ‘lack of response’ on the issue by the company and a lack of improvement in its climate-change related reporting following a similar proposal in 2016 that received more than 40 percent support. This year’s vote marks the first time BlackRock has supported a climate-change related shareholder proposal….” The Post reported that the favorable vote at ExxonMobil was likely largely attributable to shifts from past positions on this issue by BlackRock and Vanguard, which together hold 13% of ExxonMobil shares. In addition, the Post reported that State Street Global Advisers, a holder of 5.1% of the shares, also may have voted in favor of the proposal. As BlackRock has stated in discussing its Investment Stewardship priorities for 2017-2018, “[a]s a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite — when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations.” (See this PubCo post.)
SideBar: As discussed in this PubCo post, a recent survey by EY showed that investors are concerned about ESG (environmental, social and governance) issues, and take information about ESG into account in making investment decisions. EY surveyed over 320 institutional investors, one-third of which had over $10 billion in assets under management, about the importance of nonfinancial reporting, in particular, the role ESG analysis plays in their investment decision-making. Looking at data over several years, EY found that there was a global trend toward increased interest in nonfinancial information on the part of investment professionals as well as an enhanced focus on ESG factors, albeit an informal one, in the investor decision-making process. Analyzing information over a three-year period, EY concludes that ESG factors are now playing an increasingly influential role in investment decision-making. Interestingly, EY contended that ESG analysis has shifted over time from a primary focus on corporate governance issues to a now equal interest in environmental issues, particularly climate change.
The proponents of these proposals argued that the reports were necessary to disclose the potential risks to investors, noting that a number of peer companies were already providing the requested analysis. The Occidental proposal maintained that “[c]limate change, and actions to mitigate and adapt to it, will meaningfully affect the demand for, and costs associated with, locating and extracting carbon-based fuels.” The proponent of the proposal to PPL contended that a “2 degree scenario analysis of our company’s current generation and future plans will generate a more complete picture of current and future risks and opportunities than business as usual planning. By assessing the impact of a 2 degree scenario on the company’s full portfolio of power generation assets and planned capital expenditures through 2040, including the financial risks associated with such scenarios, the company can better plan for future regulatory, technological and market changes.” The proposal to ExxonMobil stated that its goal was “to ensure that ExxonMobil fully evaluates and discloses to investors risks to the viability of its assets as a result of the transition to a low carbon economy, including a 2 degrees scenario, in line with sector good practice.” In supplementary soliciting material submitted in connection with all three proposals, CalPERS contended that “effective management of environmental factors, including those related to climate change risk increase the likelihood that companies will perform well over the long-term.”
In each case, the company’s board recommended a vote against the shareholder proposal, essentially arguing that the company was already providing a lot of the same climate-related information and had a strategy that addressed the risks of a lower carbon economy; in effect, the arguments went, the particular report requested was unnecessary. Noting the uncertainty as to whether the U.S. would honor the Paris Accord, PPL contended that, “[i]n the absence of any clear governmental policy directive or regulatory framework specific to a 2-degree Celsius scenario, assessing such a scenario would be both premature and impractical.” ExxonMobil argued in its proxy statement that the current processes it employs “sufficiently test the portfolio to ensure long-term shareholder value and position the Company to maintain a leadership role in energy development.” In numerous additional soliciting materials, ExxonMobil observed that it considered the climate change risk to be serious, that it supports the Paris Accord, that it had already “addressed the 2-degree Celsius scenario in its disclosures,” and that it was already taking various actions that made the company “part of the solution.” As reported by Bloomberg, both ISS and Glass Lewis recommended in favor of the ExxonMobil shareholder proposal.
Some commentators attribute these victories to a feeling among climate-risk-focused investors that, in the current deregulatory environment, they may need to take more affirmative steps on their own. According to Reuters, the executive director of the 50/50 Climate Project speculated, after the Occidental vote, that actions by the current administration such as “the dismantling of Obama-era climate policies may have moved big investors to take on a more active role.” It’s also possible that other factors may have contributed to the result at ExxonMobil, including probes into ExxonMobil’s past climate change risk reporting. (See Reuters.)
As is typical, these proposals are all precatory, but, as you know, companies do feel the heat when a proposal receives a majority vote in favor. According to Reuters, a PPL spokesman said that the company “is committed to sustainable energy” and that the board “‘will carefully consider the results and determine the best path forward.’” Reuters also reported that the ExxonMobil CEO indicated that “the board would review the request.” Bloomberg BNA reported that the Chair at Occidental acknowledged shareholder support for the proposal and said that the company looked “forward to continuing our shareholder engagement on the topic and providing additional disclosure about the company’s assessment and management of climate-related risks and opportunities.” Reuters also noted that proposals have been submitted at several other companies but were withdrawn when the companies conceded to take steps the proponents viewed as acceptable.
In light of these successful results, companies most subject to climate change risk are likely to be seeing an onslaught of similar proposals in the future. That assumes, of course, that the plans in the Financial CHOICE Act 2.0 that could effectively curtail the shareholder proposal process never make it into law. (See this PubCo post.)