Twenty years ago, environmental and social considerations were not embedded into mainstream investment. When it came to ESG, governance was the only game in town.
“And the truth is, it still is,” says Matt Crossman, the director of stewardship at UK-based asset manager Rathbones Group. “Because everything in ESG comes down to how a company is being run.”
That is why he believes shareholders should have voted against BP’s board at its annual meeting, in response to its decision to row back on parts of a climate strategy it had signed off by shareholders in a Say on Climate vote last year.
The company had agreed with its investors that it would cut emissions by at least 35%, but revised that target to at least 20% in light of the short-term surge in demand for oil and gas.
While ESG took more than a decade to gain traction in the mainstream investment industry, Say on Climate found itself a strong fan base almost as soon as it was spawned three years ago. The idea is that, just like they do for pay and board composition, listed companies should run their plans to decarbonise past shareholders, to make sure they’re appropriate.
“BP’s AGM was a watershed moment for the Say on Climate movement,” says Crossman. “If shareholders and companies are operating in partnership, with investors trusting companies to ask their opinion on key strategic issues, then – regardless of whether you agree with the substance of BP’s updated climate plan – the fact they didn’t put it back to a shareholder vote after they changed it calls into question the whole governance architecture of Say on Climate.”
Five UK pension funds announced ahead of BP’s annual general meeting (AGM) that they would vote against the chair, Helge Lund, in response to the move, but most investors did not feel as strongly. Despite nearly 90% endorsing the 2022 climate strategy, 90% also backed Lund’s re-election in April. A shareholder proposal pushing for more ambitious climate targets received less than 17% support.
Fellow oil major Shell has also been accused of putting its shareholder-approved climate commitments on the backburner in favour of meeting short-term energy demands. Again, a more ambitious climate proposal at the firm received around 20% support, and the chair got backing from more than 90% of investors.
Regulating transition plans
Regulators across Europe are rowing in to mandate climate transition plans (which cover decarbonisation targets as well as other areas, like scenario analysis); and it remains to be seen whether these new rules will strengthen or weaken the Say on Climate movement.
The UK government’s Transition Plan Taskforce has proposed guidance for what should be included in corporate transition plans published under existing TCFD-based regulation.
In the EU, the Corporate Sustainability Reporting Directive demands that entities publish climate transition plans, if they exist. Because it is just a reporting law, there is some disagreement as to whether the Directive can mandate transition plans in instances where they do not exist, but the upcoming Corporate Sustainability Due Diligence Directive is trying to do just that for all companies with significant EU operations.
These moves to embed climate plans into legislation could make it easier to convince companies to put those plans to a shareholder vote, but they could also be a seen as a more official replacement for Say on Climate votes – especially if cases like BP and Shell cause those votes are perceived as ineffective.
Developments in France
Grégoire Cousté, the executive director of France’s Forum pour l’Investissement Responsable, also known as the French Sustainable Investment Forum (SIF), believes both regulatory interventions and shareholder votes are needed to strengthen the quality of climate strategies, arguing that “Say on Climate is a necessary tool to increase shareholder democracy”.
To prevent investors from being overloaded, the French SIF has begun evaluating every Say on Climate proposal in France and telling its members whether the proposals are credible. The evaluation looks at the governance of the proposal – a strategy should be revised every three years with an annual vote on progress, for example.
To assess the content of the plans, it uses long-standing and recently-updated guidance from France’s Agency for Ecological Transition, ADEME.
Cousté notes “a growing convergence” among investors and rulemakers in France on the need to mandate Say on Climate votes.
Nearly 50 financial institutions, including key French pension funds like Ircantec, ERAFP and Fonds de Réserve pour les Retraites (FRR), signed a letter from the SIF calling for Say on Climate to be a legal requirement for all major companies.
The body is currently fighting to have this rule added to the Green Industry Bill being developed in France to compete with the US Inflation Reduction Act.
Unlike other mandatory votes that companies have to put to shareholders, such as pay and board composition, SIF wants Say on Climate to remain non-binding.
France’s supervisor AMF has also waded into the debate, asking for advice from its multi-stakeholder Climate and Sustainable Finance Commission (CCFD) on the topic. In January, CCFD said that Say on Climate should become mandatory for all companies covered by the CSRD, and that transition plans should go back to a vote if any changes are made.
On the back of this advice, AMF came to a more conservative conclusion, saying that it would be helpful to embed Say on Climate votes into law for all listed companies in France.
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