Virtual round table: Having a say on climate change
Listed@ASX Winter 2021
Climate change has become a flashpoint in company governance. In the past, a perceived lack of accountability or abuse of social licence has led to contentious issues being enshrined in legislation. An example is the three-strikes rule relating to executive and board pay for listed companies. Say on Climate started in the UK but is rapidly becoming a global movement. In Australia ACCR is the sponsoring organisation.
Alan Deans, moderator, Listed@ASX: What is the Children’s Investment Fund Foundation (CIFF) and what is the background to the establishment of its Say on Climate initiative?
Dan Gocher, director of climate and environment, the Australian Centre for Corporate Responsibility (ACCR): Say on Climate is a UK-registered charity started by hedge fund investor Chris Holme. It is very well known in the UK and very successful. CIFF has been going for nearly 20 years and a lot of its donations are for education on children’s health. Climate is one aspect of that. It is a very significant donor to advancing climate research and efficacy. We started talking with them in the third quarter of last year and became a formal partner. CIFF has moved very quickly, particularly with the number of voluntary commitments it has received from UK and European companies in the absence of shareholder resolutions. We saw them as being a very useful way of holding companies accountable on climate.
Jana Jevcakova, managing director corporate governance, Morrow Sodali: We saw a reduction in support for directors in 2020. It’s hard to pinpoint the specific reasons, including whether it is attributable to climate change. The perception is that it is minimal in terms of negative votes against directors, yet we know some investors really care about climate change and are not happy with how some companies are performing or disclosing on climate change. Say on Climate would be one way for them to express their views.
Listed@ASX: Are companies listening and taking action on this?
Akaash Sachdeva, senior responsible investment adviser, HESTA: We’ve definitely seen that with Rio Tinto, and Santos and Oil Search have voluntarily signed up to put climate votes to their AGMs. The primary focus of investors relates to climate change being a financial risk, so the emphasis has been on engaging with them to address those risks, individually and through Climate Action 100+. It started with asking them to tell us what they were doing and then disclose this in line with the Climate Action benchmark. Companies should align strategy, capital expenditure plans, governance and disclosure with targets. We find things get done where there’s executive and, more importantly, board accountability. So far, the response in Australia has been reasonably positive for a couple of reasons. Engagement has been going on between investors and companies for a long time. Companies are used to the cycle of reporting, getting feedback, receiving questions and producing the next iteration of the report. Many people are also now concerned about climate change and their stake in it. There is a real benefit for companies in being transparent around this and showing what they are doing.
Listed@ASX: Dan, how are companies responding?
Dan: Our first conversations with companies were in December 2020, and the initial response was lukewarm. The warmest response we received was from Rio Tinto, because they saw it would bring structure into their discussions with investors. Often, companies say to us investors are not consistent in what they ask. Another response, from a bank, was that they didn’t see an advantage in being a first mover because their AGM is after the other banks. Another question, from each of the oil and gas companies that are now committed to Say on Climate, was what does the vote mean? If there is a substantial vote against management, how should they react? It’s not that difficult, because it’s similar to a significant vote against remuneration. It’s feedback the company should take on board. If there is a massive vote, then it might lead to significant change, but if only a small percent of shareholders are against them, they need to listen to their concerns and seek to address them.
Listed@ASX: Jana, are enough companies taking up Say on Climate?
Jana: The wave is gaining momentum globally. Looking at the list of the companies that have signed up, we’ve got 12 here and some are companies outside of energy and oil and gas. You’ve got Canadian National Railway, Nestlé and Unilever. They’re all outside the mining or energy sectors. There’s reputational risk for companies on Say on Climate, and that’s what they’re taking into consideration. There are also additional issues in managing any resolution, the results and what it means regarding additional activities. There’s reputational risk if they don’t do it. If you are a global leader in a specific industry, I believe over 2021 it will almost become an expectation to take up Say on Climate. All Australian companies that have agreed will be doing it from 2022.
Dan: Glencore has committed to a vote this year.
Jana: Some global companies have agreed to do it in 2021, such as National Grid and Royal Dutch Shell. But none in Australia.
Akaash Sachdeva, senior responsible investment adviser, HESTA
“The company may be doing well in some areas and not in others. Investors need to exercise some judgment to ask whether the company meets the requirements.”
Listed@ASX: Akaash, when you raise climate with companies HESTA invests in, do they make commitments to Say on Climate?
Akaash: The time it’s taking from first raising it with a company to them signing up is becoming shorter and shorter, as Say on Climate becomes better known. Companies see it as a legitimate and effective way for them to publish their plans and then for investors to hold them to account. They have committed to having their first votes from next year, and there’s still a lot of details to work out. Will oil companies do the vote annually? Will some do it once every couple of years? That part of it is not clear. Investor response is also in a development phase, and it’ll probably be on a case-by-case basis. The vote is a blunt instrument. It’s black or white. The company may be doing well in some areas and not in others. Investors need to exercise some judgment to ask whether the company meets the requirements.
Listed@ASX: What issues are being raised via Say on Climate companies don’t already address?
Dan: Three areas stand to benefit. One is disclosure of emissions. Disclosure at an asset or a project level is an area of improvement for the energy and resources sector so investors can see where individual projects or divisions within a company are improving. You see that at a commodity level at Rio Tinto, for instance, but not at a facility level for many oil and gas companies.
Also, strategy is one of the most important disclosures. We have a lot of companies committed to net zero greenhouse emissions by 2050. But the Climate Action 100+ benchmark published recently showed few companies are reporting substance around this. They lack short- to medium-term targets, detail on what’s required, information on strategic disclosures, steps they are taking and when are they taking them, cost and the emissions abatement each step will deliver and what happens if they don’t deliver. They need to articulate a plan B if targets are not met. That’s particularly relevant when companies say they have new technology and need to see how it goes. If it works, their emissions will drop by 50 per cent. But, what if it doesn’t?
Listed@ASX: Will the pressure being applied by groups like yours prompt real change by companies?
Dan: I would like to think so. Over the last couple of months, we have dug into the strategies of each of the three oil and gas companies, looking at what is on the public record and what isn’t. We have tried to put dollar values on how much they’ve spent on carbon capture and storage, offsets or hydrogen debt. There are some very lofty statements, but not a lot of data. Investors are going to need that to assess company efforts.
Listed@ASX: Jana, could there be a need for investors and climate activists to apply the blowtorch unless there’s swift action?
Jana: Yes and no. It varies from investor to investor. Some don’t consider climate change or sustainability in their decisions on voting or engagement. There’s no right or wrong answer. There are many mechanisms investors can use to cause companies to take specific actions. Say on Climate is one of the first steps. The debate about how companies approach climate change has evolved significantly. In some cases, companies are switching their operations or shutting down assets.
Listed@ASX: Could activist groups or governments take notice of Say on Climate?
Akaash: Yes. The transparency of the public vote is really useful because investors see climate change as a financial risk. When you see large investors, not just activists or ethical funds voting on these issues at AGMs, broader stakeholders including governments will take notice. Our framing of climate change is financial, in line with our fiduciary duty, and we seek to manage risks that impact future member returns.
Dan: If you’re an AGL shareholder, you’d be hard pressed to think climate risk is not financial. The value of the share price has halved in the last 12 months, due to much lower electricity prices, which are being driven by renewable energy. If you’re an investor in that company, you’re acutely aware climate risk is financial. The flip side of that is companies like Tesla and others have seen extraordinary growth because of the possibility of massive profits in the future. So it doesn’t matter whether investors accept the science of climate change. It’s about the financial performance of these companies and that risk manifesting as a financial risk. Activist investors may not watch Say on Climate, but they’re definitely watching how companies are responding to the transition in the energy sector to clean energy and some companies are clearly doing it better than others.
Listed@ASX: How many investing groups are active in this space?
Jana: I don’t have specific data, but from a general perspective 2020 was a record year in terms of the dollars flowing into ESG funds. Obviously, that includes many issues in addition to climate change, but many investors who previously were either sceptical or not on the ESG bandwagon have jumped on board.
Dan Gocher, director, the Australian Centre for Corporate Responsibility
“It doesn’t matter whether investors accept the science of climate change. It’s about the financial performance of these companies and that risk manifesting as a financial risk.”
ESG funds outperformed traditional funds over 2020, showing investors companies that take ESG seriously are good investments from a long-term perspective but are also much more resilient to crises such as COVID. It’s about protecting physical assets from the impact of climate change and exploring opportunities from the transition to clean energy in the economy. More investors are joining Climate Action 100+, including Blackrock.
Akash: Climate Action 100+ currently has 575 investors and more than US$54 trillion in assets. It is also engaging 167 companies, which together represent more than 80 per cent of global industrial emissions.
There’s about a dozen of these companies in Australia.
Dan: Four companies have committed so far to Say on Climate. Plans are to have at least the Climate Action 100+ companies make the same commitments, so that’s another eight companies. Our plans would probably extend to engaging 15 to 20 companies in the second half, beyond the mining and energy sectors and into ones that are significant users of electricity or significant producers of emissions. That could be in retail, telcos and there’s also live conversations with the banks. They have a very significant role in the transition to clean energy and how they manage that is of acute interest to most investors.
If we can get 20 companies to commit to Say on Climate by the end of the year, it would become almost an industry standard and we would expect other companies to commit voluntarily.
Listed@ASX: What impact has ratings agency Moody’s had in terms of its participation?
Dan: A positive one. I don’t know whether Moody’s is going out there and encouraging the companies it rates to commit to Say on Climate just yet. That might become something next year. As soon as we get a significant global bank making a commitment to Say on Climate, you’ll see a lot of other banks jumping on board. If you look at what’s happening in mining, with Glencore and Rio Tinto, you would expect BHP Billiton to follow their lead. It doesn’t like to be a follower.
Akaash: The companies that have signed up had AGMs in the first half of the year. The next batch will be companies that will consider it in the lead up to their AGMs in the second half of the year. They might be quiet at the moment, but I’m sure those conversations are being had.
Listed@ASX: Are the major ESG ratings agencies incorporating Say on Climate?
Jana: To our knowledge, no. It may be something they will be incorporating in their assessments, but what’s important to note here is they are already incorporating the disclosures these companies provide. Risk resilience and other metrics and KPIs are part of their assessments already. Say on Climate might be just an additional point to that assessment. What’s really important for their assessment is what companies are already doing.
Listed@ASX: What is involved for companies to prepare for Say on Climate?
Akaash: This isn’t necessarily extra work for them. I know companies sometimes see new ESG initiatives, and see another report to fill in, another box to tick. I don’t think this is the case with Say on Climate, because the framework for how companies should respond and disclose already exists in terms of the Task Force on Climate-related Financial Disclosures. The Climate 100+ benchmark is the report card, if you like. The extra step with Say on Climate is not doing an extra report. It’s just putting the existing TCFD report up to a vote. One reason why companies have been responsive to this is because they may not receive as many tricky shareholder resolutions at AGM time. Also, these are advisory votes so the two strikes rule doesn’t apply.
“It’s great companies are taking the first steps to sign up and set targets, but we’re at that inflection point where we need to see action.”
What protestors outside AGMs or investors want is action to decarbonise, to invest in low carbon technology and to reduce emissions. There has been a long period where there’s been a lot of words and not enough action. It’s great companies are taking the first steps to sign up and set targets, but we’re at that inflection point where we need to see action. Say on Climate in and of itself is not the action we want. It’s just a way to focus accountability on the board.
Listed@ASX: Dan, from a global perspective, are chairs or CEOs in global companies acting as advocates for Say on Climate?
Dan: Not yet. It is pretty early days. I suspect that may become the case in the UK and Europe, where companies have voluntarily committed without the need for shareholder resolutions. We’d love to have a chairperson advocating for Say on Climate. That’s part of our challenge.
Jana: One consideration is about the initial resolution, the constitutional amendment to incorporate the annual vote on climate. Speaking to investors, they have expressed the view it would create a significant challenge about how they vote. It would be, almost, like they couldn’t win. If they go against it, they would be going against their right to vote on climate. People would pick that up and you might be put on the list of those that voted against climate. If you are for it, then you’re supporting a constitutional amendment that would expose the company. If approved, if it gets 75 per cent, that would expose the company to additional shareholder resolutions. Many have expressed the view companies should do it voluntarily.
Akaash: We’re very much in support of companies voluntarily joining up to Say on Climate.
Dan: Just on the constitutional amendment, we weighed up whether we should file an ordinary resolution. But I think we would have ended up in the same situation that we’ve seen with the three oil and gas companies that have committed thus far. None of those three companies satisfied the request in the resolution, which was for a recurring vote. But, in good faith, we’ve given them the benefit of the doubt they’ll have the vote in 2022. Then, hopefully, they will commit to a recurring vote. We’ve made clear to other companies that, if they make a commitment and it’s a genuine one, then we’ll withdraw the resolution or won’t even feel the need to file one.
Listed@ASX: Are you prepared to campaign for it if you find resistance?
Dan: Our track record suggests the answer is yes. Companies would find themselves quickly isolated if they were to fight against this expectation from investors. There is probably a debate to be had whether or not it should be embedded in the constitution, and we’re happy to have that debate.
In the absence of constitutional change and in an ideal scenario, then you’re relying on the company to do it in good faith. While that might be the case with current managements and boards, those things change over time. So, you’d really want that cemented into the constitution if you can.
Listed@ASX: Are there other ESG issues that could be elevated to this status, say slavery, where votes are required on board and management decisions?
Jana: That is a very tough question to answer and it’s an open one. For now, climate change is taking the number one spot as a material risk for companies. In our annual survey, we asked investors what was the key topic they wanted to engage on, and 91 per cent of global funds said climate change. It is definitely the number one topic. So, I think the materiality of an issue determines that.
Listed@ASX: In the absence of government policy, is it a hard ask for companies to comply with these kinds of external campaigns? Are you, in effect, asking them for an existential vote?
Dan: For oil and gas companies and utilities, it really is. If you believe Santos, for instance, is going to be a hydrogen company by the mid-2040s then that is a significant change in its business. If they don’t get it right, then it is an existential problem. Do they have a strategy to deal with the transition that’s happening around them? If they don’t, they’ll probably get overwhelmed.
Akaash: The standard asset risk is one of the key ways in which climate transition risks become material. Part of the focus is to put some scrutiny onto plans that companies have to manage their transition risks, to show us they’re not going to become stranded, that there is a way forward. Obviously for some sectors, that might not be as possible as others.
Jana: It’s also the ongoing challenge for companies between short-term issues and the long-term impact on value creation. People in leadership positions are judged on the short term, typically, not the long term. If there is someone who makes a tough decision now but the positive impact shows up in 20 years, few remember them. It’s a key challenge for companies.
Akaash: What makes climate different from other material issues, like diversity or modern slavery, is the length of time required due to assets being really long lived and solutions involving really long term strategic planning. That’s where Say on Climate or having climate on the AGM agenda is different to other ESG issues, even though they might be material.
Jana Jevcakova, managing director corporate governance, Morrow Sodali
“People in leadership positions are judged on the short term, typically, not the long term. If there is someone who makes a tough decision now but the positive impact shows up in 20 years, few remember them.”
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