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Financing 1.5°C: Climate Resolutions Gather Momentum

’Tis the season once again for annual general meetings, where shareholders have the opportunity to raise and vote on shareholder resolutions. Unsurprisingly, climate-related shareholder resolutions feature prominently for the second year in a row. This follows from last year’s annual general meetings (AGMs), where shareholders raised climate resolutions ranging from calls for greater transparency and climate-related disclosure, to demands for companies to set climate-aligned emissions reduction targets.

Shareholder engagement is one of the main tools investors have to influence the real economy. Although they are often nonbinding, shareholder resolutions can be an important device for fostering dialogue and spurring action within companies, and a vote in favor of a proposal can provide a powerful signal for change. This year, shareholders of private financial institutions and energy companies again pushed management teams to implement climate strategies aligned with the goals of the Paris Agreement—and saw varying degrees of success. Staff at RMI’s Center for Climate-Aligned Finance (the Center) noted some interesting trends from key climate resolutions under the gavel this AGM season.

 

The 2021 AGM Landscape

First, even though activists’ climate resolutions generally did not garner enough votes to change company policy, the margin of their defeat was often smaller than in previous years. This is important because, as BlackRock points out, 67 percent of proposals that receive 30 to 50 percent support result in companies fully or partially meeting the ask of the proposal. In other words, activist investors can still change corporate policy without an outright voting victory.

Additionally, there has been an interesting evolution in shareholder engagement, from earlier voting on whether companies should make climate commitments, to now voting on the quality and feasibility of their transition plans. This attention to transition plans has been driven, in part, by initiatives like Say on Climate.

The question is whether investors are in an optimal position today to understand what a “good” transition plan looks like. It is heartening that investors are having a say on these plans. But to effectively assess transition strategies, investors will likely need more sector-specific guidance on the different roadmaps to net zero: understanding how companies must shift capital expenditures, technology deployment, and other factors over time. The Center will monitor and support the development of guidance to help investors assess companies’ net-zero transition strategies in the coming months.

In the meantime, let’s review what’s happened in AGM season so far.

 

HSBC, Barclays, and Beyond

Action in the financial sector began as early as January 2021, when 15 institutional investors (with $2.4 trillion in total assets under management) filed a climate resolution at HSBC, coordinated by UK-based NGO ShareAction. The resolution called on HSBC to publish, among other things, a strategy to reduce its exposure to fossil fuels—starting with coal—on a timeline consistent with the goals of the Paris Agreement. ShareAction withdrew its resolution “following constructive and positive discussions” with the bank, and HSBC announced its own climate resolution in March. HSBC’s shareholders will vote on the bank’s climate resolution in its AGM on May 28.

Another ShareAction-led investor coalition was less successful with its latest climate resolution at Barclays. The investor group wrote to Barclays in late April with a five-point set of requests, targeted largely at the bank’s oil sands and coal financing activities. The resolution (Item 29 on the agenda) received only 14 percent of votes, with roughly the same number abstaining. It was the second time in two years that a ShareAction resolution was rejected by Barclays’ shareholders; last year, 24 percent backed the ShareAction request that Barclays provide a plan to stop financing energy companies and utilities not aligned with the Paris Agreement.

So, what led to the 10-point drop this year? A bulletin from BlackRock, which abstained from voting this year, provides a clue. Even though BlackRock said it agreed with the ask of the resolution, “the imprecise and ambiguous wording means that [BlackRock] is unable to support it, particularly as the resolution is legally binding.” For example, BlackRock found the term “financial services” too broad, since it includes many activities beyond those highlighted in the resolution’s wording. Barclays chairman Nigel Higgins said his bank would offer investors an advisory vote on its climate policy at next year’s AGM. Aside from agreeable language in the resolutions, shareholders will also need robust guidance on assessing net-zero transition strategies if climate policies are to receive enough votes going forward.

 

Energy Majors Pushed Further

While activist investor groups may have seen mixed success with climate resolutions at financial institutions, they seem to have attracted more support from fellow shareholders in large energy companies. As Ceres’s CEO and president Mindy Lubber pointed out this month, climate-related shareholders resolutions won outright majorities in votes at US oil and gas giants ConocoPhillips and Phillips 66. Meanwhile, a vote on May 26 by ExxonMobil shareholders could have major implications for the company’s climate plans.* Across the Atlantic, Dutch NGO Follow This has been coordinating shareholder action at European majors Shell, BP, Equinor, and Total.

In 2019, a Follow This-backed resolution asking BP to set reduction targets for scope 3 emissions (also known as value chain emissions) received just 8.4 percent of votes. In 2020, Follow This agreed to withdraw its resolution and work together with BP—which that year had announced its ambition to be a net-zero company—to put forth a joint resolution at this year’s AGM. The joint resolution did not materialize, and Follow This filed its own resolution for the company to commit to Paris-aligned targets (Resolution 13), indicating pressure on companies to move beyond high-level net-zero ambitions toward setting concrete, interim targets. BP’s board recommended shareholders reject the resolution in March 2021. BP’s board eventually won out, but the share of votes for the activists grew to 20.7 percent, more than double the support from 2019.

It was a similar story with Shell, albeit with more success for Follow This. The NGO’s Shell resolution for binding targets (Resolution 12) attracted over 30 percent of the vote at Shell’s May 18 AGM. Although Shell had recommended against the resolution, and the resolution ultimately failed, the 30 percent figure is more than double the support Follow This received last year. Meanwhile, 89 percent of Shell’s shareholders have voted for Shell’s own energy transition plan.

 

Motoring Along

At the Center for Climate-Aligned Finance, we see climate resolutions remaining a key shareholder voting issue in the near term, not least because of the International Energy Agency’s recently unveiled Net Zero by 2050 report. Among other things, the IEA roadmap calls for halting sales of new internal combustion engine passenger cars by 2035 and stopping investments in new oil and gas fields. This will have major implications for how firms—particularly in the financial sector—implement their climate strategies. Boardrooms, however, will have to think beyond the IEA report if they want to map out systems-level change. The IEA does not model drivers like unforeseen technological breakthroughs, behavioral changes driven by cultural movements, and voluntary commitments by nonstate actors.

Shareholder engagement has gained traction in recent times and is often presented as an alternative to the blunter instrument of divestment. With the IEA’s net-zero roadmap and companies’ latest net-zero commitments in hand, do not expect to see activist shareholders and their climate resolutions going away any time soon.

* Update (May 26, 2021): May 26 was a seismic day for ExxonMobil and Chevron, with shareholders of both US oil companies flexing their muscles on climate issues. ExxonMobil shareholders voted to install at least two new activist-nominated independent directors on the company’s board. Meanwhile, 61% of Chevron’s shareholders voted to approve new reduction targets for scope 3 emissions, also known as value chain emissions, which include emissions generated by the use of a company’s products.