Climate change and critical mass: Making the most of AGMs

A rapid transition to sharply reduced GHG emissions demands action on multiple fronts. In addition to pushing for government action, shareholder activists have demanded low-carbon strategies at annual general meetings around the world. Having tested the water with different resolutions in different jurisdictions, we have learned a lot. Given the short timeframe left to address climate change in a meaningful way, and with some encouraging signs of investor support, e.g. for the transition resolution at Southern Company, Preventable Surprises is now making the case for a scaling up of shareholder action.

We advocate starting to file resolutions on an industrial scale in 2017, by which we mean filing resolutions across at least 25% of the publicly quoted companies within a given sector. In addition to the urgency of pace, the inherent systemic risk posed by climate change (across entire portfolios for universal investors) argues for shifting from the traditional ad hoc, case-by-case approach of shareholder advocacy – that’s fit-to-task for non-systemic issues – to a more comprehensive approach. As well, these resolutions should move beyond a 2°C stress test analysis to require transition plans consistent with a world where warming is kept below 2°C (<2°C transition plans). For reasons explained below, we propose selecting a sector besides fossil fuels for piloting industrial scale <2°C transition plan resolutions in 2017.

Preventable Surprises will be exploring these and other issues relevant to the 2017 resolution round (with a particular focus on the U.S.) in our fourth online dialogue, which will take place in early-mid September 2016. This dialogue will be action oriented and we are selecting participants who are moved to act by the urgency and scale of the situation. If you would like to explore taking part in this dialogue, contact Raj Thamotheram at [email protected] for an informal conversation.

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What is the time horizon that avoids climate catastrophe? UNFCCC – which has often been accused of understating the problem – calls for emissions to peak within the next five to 10 years. Working backwards (see Table 1), that means the leaders in each sector need to be providing shareholders with business transition plans by as early as 2017 and no later than 2020. Put simply: industrial scale in one sector can lead to industrial scale in multiple sectors, which can lead to transition plans in all climate-vulnerable sectors. But only if we start now. Moreover, these business transition plans need to be robust and made with reference to Science-Based Targets, such as the Sectoral Decarbonisation Approach emission-reduction trajectories or other vetted methods.

We have previously made the case for moving from 2°C stress tests/scenario analyses to <2°C transition plans – see here. In summary, our reasoning is that stress tests/scenario analyses are static snapshots in time and can be easily gamed by changing assumptions. In contrast, transition plans focus attention on what the company is going to do on key issues including operations (including emissions reductions), capex, remuneration policy, and political influence. Stress tests have remained popular because their preference for disclosure over action can be less antagonistic to management. A shift to transition-plan resolutions may be too ambitious in the fossil fuel sector, due to the lack of alliances between campaigners and climate-aware investors and because of attitudes of senior investment executives. But this can change, especially if climate-aware foundations indicate they would like this to happen. However, there is a strong case for industrial scale resolutions in other high risk/high impact sectors in 2017.

Until we have a critical mass of appropriate climate-risk resolutions within the most emissions-intensive sectors, Adam Smith’s invisible hand ensures market players will continue to ignore concerns regarding energy transition risks and opportunities. Analysts cannot incorporate climate risk and business transition planning information into their investment calculus unless there is sufficient peer group information with which to make informed comparisons. For example, there was only one very brief sell-side analyst comment on BHP’s 2015 report on climate risk and, with little to compare it to, the analysis was rather dismissive. This would change if every large-cap diversified miner were reporting on climate risk and associated scenario planning with reference to science-based targets.

In recent years, engaged investors have focused on one or a few high profile companies at a time. This approach focussed on high profile companies gives the issue visibility and encourages positive change agents at a senior level to take action eg BHP Billiton. But it can also support management arguments for inaction based on a perceived loss of competitive advantage and can induce a sense of victimhood at targeted companies. Company management arguably may be right to take this approach because the market often punishes outlying companies as soon as ambitious targets are not met (e.g. NRG). The highly targeted approach can also be easily dismissed by traditional investors as coming from a radical fringe motivated by “politics” or hostility to individual brands.

Working across a whole sector disposes of these arguments. The fastest way to gain industrial scale is by filing resolutions in the U.S., which has a lower threshold for shareholder action. Thus it would be possible, should U.S. SRI/ESG players so choose, to cover all major companies listed in the U.S. in any given sector. Moreover, the U.S. market is large enough and deep enough to provide meaningful peer group comparisons for investment analysts. The key sectors are upstream and downstream fossil fuel companies; fossil fuel consumers/GHG emitters (e.g. electric utilities, autos, aviation, cement, steel, agriculture); and “enablers” (e.g. insurers, banks, asset managers).

Taking utilities as an example, 12 companies account for more than 30% of market valuation worldwide. An approach that targets these companies (see Annex), could begin to shift the whole sector.

However, there are three caveats to consider:

1. Large-scale filing of resolutions, at whatever level of assertiveness, could backfire unless the resolutions gain serious (e.g. at least 40%) support. The good news is that the vote ‘for’ the Southern Company transition plan resolution was 34% and this was achieved with much less investor effort than the votes at Chevron and Exxon-Mobil and with very little campaigner/opinion-shaper attention.
2. Some U.S. companies might complain that publishing a transition plan disadvantages them relative to international peers. Whilst this argument is unconvincing, it may be enough to reduce investor support. Therefore, coordinated action on non-U.S. peer companies will be important. In Australia, the European Union, and Canada, institutional ESG teams operate with the self-imposed constraint that they can put down a resolution only after a prolonged period of engagement with company management. Since ESG teams lack the resources to do this kind of engagement on a broad front, ESG professionals naturally conclude that industrial scale climate risk resolutions are not possible. However, if senior management in these ESG firms agreed to suspend this constraint—on the basis of the severity and urgency of climate risk—resolutions could progress at the pace and scale needed to address the challenge. An alternative strategy is that engagement overlay providers (EOPs) could redefine their purpose and business model and focus on coordinating sectoral change. For further details, see here.
3. If ICGN and its national investor trade association partners (in particular CII in the U.S. but also Investor Forum/Investment Association in the U.K., CCGG in Canada, AFG in France, Eumedion in Netherlands, etc.) led an international and systemic approach to engagement—and so normalized the process of filing resolutions—this could short-circuit the filing process by removing the need to waste large amounts of time in company-specific engagements that cannot deliver the necessary change. How to convince these trade organisations—which often operate at the pace of their slowest members—to do this is the big question. The answer may lie with the climate-aware investors who belong to these groups – ICGN’s board (11 people), for example, has five representatives of firms that have a strong position on climate risk and one is the chair.

To conclude, the deployment of climate resolutions at scale, directed at specific industries, is a necessary strategic development and the U.S. ESG/sustainability community is uniquely positioned to achieve this. What is clear is that SRI/ESG fund managers, groups coordinating investor action (notably PRI and ICGN), and those that could do so, namely engagement overlay providers (such as BMO, GES, Ethos, and Hermes), all need to aim higher and hold themselves accountable to catalysing systemic change at the sectoral level. This represents a significant scaling up of ambition and re-direction of resources and requires substantially more collaborative working.

Key Questions

The participants in the dialogue will shape the agenda but here are some questions that could benefit from collective attention:

1. Is the logic of the timetable for action, based on UNFCCC/COP21, convincing? If not, how could the logic be strengthened or should the timetable adapted?

2. What is the best way to ensure that resolutions in the U.S. achieve better than 40% support? Can we set a target for 2017, say 60-70%? What tangible steps can members of the investment community take to shift voting practices? How can campaign groups be persuaded to support resolutions — especially in non fossil fuel sectors in 2017?

3. Assuming the movement is able to focus on only one (non fossil fuel) sector, which is the best target of the three identified (financials, transportation, utilities,)? Are subsectors a more realistic target, e.g. insurance, autos, electric utilities?

4. What would be the best approach for persuading senior execs at ESG/SRI investors to support this industrial scale strategy focusing on <2°C transition plans for non fossil fuel sectors in 2017 and fossil fuels thereafter? Similarly, how do all the asset owners who supported COP21 (including the foundations who backed divest-invest) align with this strategy? Is systemic risk a key frame in this discussion? What is the role of ESG team leaders and other insiders? How can outsiders help?

5. Might it be possible for the (U.S.) SRI/ESG investors to take responsibility for engaging specific industries and could this result in focusing limited resources and getting the job done in time?

6. How can we persuade investor trade associations, ICGN and PRI in particular, to step up to this challenge of industrial scale resolutions? For example, might such groups across the world collaborate on one sub-sector (e.g. electric utilities)? Or might investors in one country take global responsibility for one sector, putting down resolutions in other countries as needed?

7. In the interim, might engagement overlay providers (EOPs) re-define—with the active support of their biggest clients—their role and business model to lead on industrial scale resolutions? For example, could different EOPs take on different sectors? Or could they collaborate to share responsibility for companies in one sector?

8. Bringing philanthropic foundations on board with these developments could be critical. How can this be done without making organisations anxious about their existing income streams?