Download - ESG Shareholder Activism Final
June 2016
ESG Shareholder Activism
– It’s all French to Me
ESG Shareholder Activism
ESG Shareholder Activism - It’s all French to Me
June 2016 2
Preamble……………………………………...........……………………………………………………….……..
Introduction …………………………………………………………………………………………...…….…….
Recent Global Climate Change Developments ……………………………………………...........….….
United Nations Framework Convention on Climate Change (UNFCC) ……………………........…
The Green Finance Study Group (GFSG) ………………………………………………….........…..…...
Task Force on Climate Change-Related Financial Disclosures (TCFD) ………………….........….…
ESG Reporting Guidelines – USA, Europe, Australia ……………………………………………….........….
The Role of Asset Owners and Not-for-Profit Groups …………………………………………............…..
ESG Shareholder Proposals in the United States - 2016 AGM Season ……………………............……
Australian Market Observations ……………………………………………………………………...........…..
ASX100 Review of Board Skills and Experience and ESG – linked Compensation Arrangements....
Key Findings …………………………………………………………………………………………….................
Appendix A: Shareholder ESG Proposals by Sector (United States)…………………..……...........……
Appendix B: United States ESG Shareholder Advocacy Case Studies …………………..........…….…
Appendix C: European Union ESG Shareholder Advocacy Case Studies...………………….......…....
Appendix D: Australian ESG Resolutions – 2015 AGM Season ……………………………….........……...
Appendix E: Research Sources ………………………...................................................………............…...
Contents
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France may be best known
for the Eiffel Tower and its
amazing croissants but
governance circles are now
all abuzz with talk about the
‘Paris Agreement’ and the
momentous impact it will
have on ESG. A world first was
achieved at the recent Paris
climate change conference
where a globally binding climate
deal was struck. This deal is
driving a frenzy of work ranging
from government policy,
pathways for companies to
achieve lower carbon emissions
and footprints and to companies
developing robust and
meaningful sustainability
disclosures. If companies fail to
pay attention or fail to effectively
comply then they can expect to
be placed under the microscope
and potentially the wrath of their
shareholders, regulators and the
market.
Introduction
Environmental, social and
governance (ESG) matters have
transformed into a mainstream
investment concern. More than
ever before, shareholders
around the world are demanding
increased disclosure and action
around a company’s ESG risk
exposures to assist them in
determining their asset allocation
strategies as it relates to
measuring specific equity
investment risk. Where
shareholders or groups of
shareholders are dissatisfied with
a company’s current disclosure
or investment policy as it pertains
to its environmental and/or social
impacts, they are not simply
resigned to taking the ‘wall street
walk’ but are rather seeking
change through undertakings
that a company will meaningfully
improve disclosure, and failing
that either ESG-related
shareholder voting proposals or
activist-like ‘vote no’ campaigns.
Studies indicate that sustainability
performance and value creation
are correlated. Researchers
have found that firms with good
performance on material
sustainability issues
significantly outperform firms
with poor performance on
these issues1. Some have also
found that companies that have
adopted sustainability policies
outperform their peers over the
long term, both in terms of stock
market as well as accounting
performance2, whilst others have
connected good sustainability
performance with higher
risk-adjusted returns3.
Furthermore, some research
has found that a constructive
engagement program between
shareholders and their investee
companies around
environmental and social
impact considerations resulted
in improved accounting
performance, profitability and
efficiency4. It is for these
reasons that sophisticated
investors continue to place
increasing emphasis towards
a company’s capability to
manage and report upon its
environmental and social
externalities.
Australian company boards
and senior executives are
encouraged to observe
overseas developments that
relate to shareholder demands
and activist campaigns around
ESG matters. Specifically, the
United States and European
regions are held as valuable
proxies in forecasting the nature
of shareholder advocacy that
approaches for Australian public
companies around sustainability
performance. Although such
activity remains in its relative
infancy for the domestic market,
there is a reasonable
expectation that increasing
complexity around ESG
reporting and risk management
will be imposed upon ASX
companies by their shareholders
over time. In Australia,
associations such as the
Australian Council of
Superannuation Members (ACSI)
already correspond with ASX300
companies to seek improved
disclosure on sustainability
matters. It is on this basis that
GPS continues to work with
Australian boards in developing
their ESG reporting disclosures
and to execute an effective
shareholder engagement
strategy around such matters.
June 2016 3
ESG Shareholder Activism
It’s All French to me
United Nations Framework Convention on Climate Change (UNFCC)
In December 2015, following
limited participation in the
Kyoto Protocol and an absence
of consensus in Copenhagen
in 2009, parties to the UNFCCC
reached a historic agreement to
combat climate change and to
accelerate and intensify the
actions and investments needed
for a sustainable future, known
as the ‘Paris Agreement’. During
the Paris climate conference
(COP21), 195 countries came
together and agreed to adopt
the first-ever global, legally
binding climate deal. During the
conference, governments agreed
to set out a global action plan to
tackle climate change by limiting
the increase in global average
temperature to well below 2
degrees Celsius (C).
The Paris Agreement
The Paris Agreement adopted on 12 December 2015
at the 21st session of the conference of the parties to
the UNFCCC and shall be open for signature at the
United Nations Headquarters by states and regional
economic integration organisations that are parties to
the UNFCCC from 22 April 2016 until 21 April 2017. At
least 55 signatories, representing 55% of global
emissions, need to deposit their instruments of
ratification for the agreement to enter into force.
As of the 5th of June 2016, 177 countries have signed
the agreement, including Australia5.
In addition to the 2 degrees C target, governments
have also reached a consensus on the following:
The agreement mandates that all parties need to
commit to preparing and maintaining nationally
determined contributions (NDCs) and pursue domestic
measures to achieve them. All parties must disclose and
evaluate their NDCs every five years, with each
successive NDC representing a progression beyond the
previous one8.
Recent Global Climate Change Developments
4 June 2016
Aim to limit the increase to 1.5°C, since this would significantly reduce risks and the impacts of climate change;
The need for global emissions to peak as soon as possible, recognising that this will take longer for developing countries;
Undertake rapid reductions thereafter in accordance with the best available science6; and
Extend the current goal of mobilising USD $100 billion a year in support by 2020 through 2025, with a new, higher goal to be set for the period after 20257.
ESG Shareholder Activism
The Green Finance Study Group (GFSG)
Further to the Paris Agreement,
the G20 recently launched a
new initiative – the GFSG - that
held its first meeting in January
of 20169. The GFSG is entrusted
with identifying institutional and
market barriers to green finance
and also with analysing options
on how to enhance the ability of
the financial system to mobilise
private green investment in order
to facilitate the transformation to
a global green economy.
Task Force on Climate Related Financial Disclosures (TCFD)
As a further step, the Financial
Stability Board (FSB) under the
instructions of the G20, has
created the TCFD, which is
“tasked with a stock-taking of existing climate-related disclosure requirements and the characteristics of effective disclosures, identifying gaps and inconsistencies among existing guidance, and developing recommendations to improve the consistency and effectiveness of climate risk disclosures for the capital markets and the financial sector.”10 As such, the ultimate
objective is to create a
standardised framework that will
facilitate comparability of
disclosures between industry
peers. The first voluntary
guidelines on how companies
should disclose information on
their exposure to climate
-related risks
are expected to be released in
December 201611. This trend
highlights the increasing
emphasis upon timely and
accurate disclosure from
companies around material
climate-related risks.
ESG Reporting Guidelines – USA, Europe, Australia
EU Directive 2014/95/EU
regarding the disclosure of
non-financial and diversity
information was passed in 2014
and requests that European
companies, “disclose relevant non-financial information to provide investors and other stakeholders with a more complete picture of their development, performance and position of the impact of their activity.”12 Companies are
required to disclose a review of
policies, principal risks and
outcomes, including on:
If companies do not have a
policy on one of these areas, the
non-financial statement should
explain ‘why not’ – an approach
that is quite similar to the one
applied by the ASX Corporate
Governance Council through its
3rd edition of the Corporate
Governance Principles and
Recommendations (ASXCGC).
Having adopted an ‘if not, why
not’ approach to corporate
governance practice in Australia,
ASX Recommendation 7.4 states that, “a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks.”13
In the United States, disclosure
obligations for public companies
are set out by the Securities and
Exchange Commission (SEC).
The Acts of 1933 and 1934
impose liability on corporations
and individuals who do not
comply with disclosure
requirements. The SEC has issued
multiple environmental disclosure
mandates ever since:
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Environmental matters;
Social and employee aspects;
Respect for human rights;
Anti-corruption and bribery issues; and
Diversity on boards of directors.
Regulation S-K, Item 101 requires that public companies disclose the material effects that compliance with environmental laws may have on capital expenditures, earnings and the competitive position of the company and its subsidiaries.
Companies must also disclose any material estimated capital expenditures for environmental control facilities for the remainder of their current fiscal year and their succeeding fiscal year and for such further periods as the registrants may deem material.
ESG Shareholder Activism
From 1 January 2010, the
Environmental Protection Agency
(EPA) in the United States began
requiring large emitters of
greenhouse gases to collect and
report data with respect to their
greenhouse gas emissions.
Pursuant to this development
and following the increasing
demand for greater regulation
of greenhouse gas emissions:
The Role of Asset Owners and Not-for-Profit Groups
In 2015, 84% of institutional
investors believed that
shareholder activism adds
value to a target company15.
In general, most institutional
investors are increasingly
seeking to engage with
companies around strategies
related to ESG matters. They
have indicated that they
consider ESG metrics in order to
reduce risk, enhance financial
returns and avoid making
investments in companies that
engage in unethical conduct16.
Funds that focus on ESG matters
have quadrupled their assets
under management since 2010
and have achieved a 28% annualised growth rate. It is
estimated that shareholders
whom fully integrate ESG
considerations into their
decision-making process
account for 6% of all equity
investments held globally17.
Major asset management and
pension funds are leading the
way on ESG shareholder activism.
In the United States alone there
were 171 resolutions related to
ESG matters submitted by
shareholders between January
and April 2016; 44% of which
were filed by the following funds
and not-for-profit groups:
Most of these funds have some
current exposure to the Australian
equities market.
These groups and funds are
committed to including ESG
considerations in their
decision-making process and
some of them, for example
Walden Asset Management,
devote significant resources to
various shareholder engagement
strategies.
All of the aforementioned funds
and not-for-profits are members
of the Global Investor Coalition
on Climate Change, a joint
initiative of four regional climate
change investor groups:
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Regulation S-K, Item 103 mandates disclosure of pending administrative or judicial proceedings arising under environmental laws and to which the company or any of its subsidiaries is a party, or to which any of their property is the
subject14.
In 2010, the SEC published
an interpretive release to
provide guidance to
public companies
regarding how existing
disclosure requirements
apply to climate change
matters.
In 2012, the SEC issued
a rule mandated by the
Dodd-Frank Wall Street
Reform and Consumer
Protection Act to require
companies to publicly
disclose their use of
conflict minerals
originating in the
Democratic Republic of
the Congo (DRC) or an
adjoining country.
Trillium Asset Management
Walden Asset Management
As You Sow
New York City Office of the Comptroller
New York State Comptroller
The Institutional Investors Group on Climate Change (IIGCC - Europe);
The Investor Network on Climate Risk (INCR - North America);
The Investor Group on Climate Change (IGCC - Australia & New Zealand); and
The Asia Investor Group on Climate Change (AIGCC - Asia).
ESG Shareholder Activism
These groups are working
together to provide a global
platform for dialogue between
investors and governments on
Trillium Asset Management
Over US$2 billion The fund operates a Global Equity Strategy in a mutual fund form.
Holdings of this fund include Australian equities: Westpac Banking Corporation & Woolworths Holdings Limited.
Investment adviser exclusively focused on sustainable and responsible investing.
international policy and investment practice as it relates to global climate change.
In addition to these joint initiatives, a growing number of asset owners are becoming signatories to the
Principles of Responsible Investment (PRI), an independent not-for-profit organisation committed to
encouraging investors to use responsible investment to enhance returns and better manage risks. The
PRI currently has nearly 1,500 signatories from over 50 countries representing US$60 trillion. For Australia,
the Industry Super Network is a disclosed supporter of this initiative.
Boards need also be aware that asset owners are currently being advised by independent ESG research
providers, such as MSCI and Sustainalytics, which produce company based ESG ratings and analysis for
consumption by sophisticated investors.
Walden Asset Management
Approximately US$3 billion
The Walden International Equity Fund has a 6% expo-sure to the Australian market.
Holdings of these portfolios include: Origin Energy & Commonwealth Bank of Australia.
In addition to traditional financial analysis, Walden evaluates companies on their environ-mental, social and corporate governance (ESG) performance. Walden also devotes significant resources to various shareholder engagement strategies. Many of Walden’s clients seek to have a social and environmental impact through their investments.
New York State
Controller
New York State has the third largest
pension fund in the United States with US$184.5 billion in audited net assets (31 March 2015).
4.9% of the funds portfolio is allocated to global equities.
With an emphasis on ESG issues, the fund helps shape corporate policies and practices in ways that safeguard the fund’s investments and promote corporate responsibility.
More recent company engagements have concentrated on: Climate Change, Political Spending & Diversity and Non-Discrimination.
In 2015, the NYS Controller filed shareholder resolutions with 48 companies with a combined portfolio value in excess of $4.7 billion.
New York City Office of the Comptroller
Asset allocation YTD 2016: US$153
billion
16.1% of assets are allocated to international shares.
The New York City pension funds take the responsibility of stock ownership seriously. They believe that advocacy and activism for shareholder rights, corporate governance reforms, and corporate responsibility is consistent with their fiduciary obligations.
As You Sow N/A N/AAs You Sow has utilised shareholder advocacy to increase corporate responsibility on a broad range of environmental and social issues. As You Sow engages companies to adopt social and environmental policies.
June 2016 7
ESG Shareholder Activism
Table 1: Major Funds and Investors Filing Shareholder Proposals
Name International exposureAssets Under Management
Investment Objectives and Overview
Another large US pension fund,
the California Public Employees’
Retirement System (CalPERS), has
decided that where members
of Ceres (a US-based
sustainability advocacy coalition)
have filed for proposals calling
for risk reporting, they will not only
vote in favour of these proposals
but are also seeking to pursue
proxy solicitation strategies for
such proposals. CalPERS will also
seek to engage with the SEC
where companies are refusing
to have these types of proposals
included on the ballot18.
ESG Shareholder Proposals in the United States - 2016 AGM Season
Between the months of January
and April of 2016, there were 171
ESG-related resolutions filed by
shareholders in the United States.
The majority of these resolutions,
or 54%, were related to climate
change and carbon-related
asset risk management19. What
this demonstrates is that
shareholders are increasingly
demanding more:
A 2014 investor survey
conducted by
PricewaterhouseCoopers
(PwC) indicated that there is
a high level of dissatisfaction
with the sustainability related
information companies choose
to disclose20. At that time it was
reported that 89% of investors
were “very likely” to request
more information on
sustainability issues from the
companies that they are
invested in.
As depicted in Exhibit A,
two-thirds of ESG-related
shareholder resolutions filed in
the United States from January
to April 2016 had requested that
additional disclosure be provided
by those companies.
A further breakdown of
shareholder proposals by sector
can be referenced in Appendix
A.
Disclosure and additional
reporting are not the only
items on shareholders’ agenda.
Investors are increasingly
demanding that board directors
have the necessary skills to
oversee companies through
this transitional period, address
threats and detect
opportunities that will lead to
sustainable value creation for
both investors and the
jurisdictions within which these
businesses operate. Therefore
in addition to the standard
governance considerations
around board independence
and diversity, investors are
expecting to see a new
parameter in board selection,
being board competence as it
relates to ESG oversight and an
expectation that directors carry
the appropriate skills and
experience to understand the
implications to business that
stems from ever evolving ESG
regulatory developments and
shareholder expectations (refer
to page 12 for additional detail
on where ASX100 companies sit
in this regard).
June 2016 8
Disclosure;
Board directors with the skills and experience to help companies transition to a low carbon producing and green economy;
Stress testing around how companies are responding to climate change matters and how climate risk might affect their portfolios; and
Links between ESG considerations and executive compensation key performance indicators (KPIs).
ESG Shareholder Activism
Exhibit A: Common Shareholder Requests Related to Climate Change
(January - April 2016)
Source: Ceres, GPS analysis
BHP Billiton
Companies are expected to actively address climate change and present scenarios that test
their asset resilience. BHP Billiton is an example of a company that has increased its disclosure
around the actions taken to address climate risk and create shareholder value in a carbon
constrained work. The company’s portfolio analysis was well received by investor groups such as
‘Aiming for A’ and investor funds like Aviva Investors who applauded the company’s initiative.
Stephanie Maier, Head of Responsible Investment Strategy & Research at Aviva Investors stated
that, “BHP Billiton has shown real leadership by publishing its climate change portfolio analysis ahead of COP21 in Paris. This provides an excellent starting point for more detailed dialogue with investors on portfolio stress testing and future capex decisions in a carbon efficient manner.”21
As shown in Exhibit B, linking ESG with executive
compensation was one of the top five topics addressed
through shareholder ESG proposals. Investors are therefore
seeking to integrate sustainability metrics into executive
variable pay entitlements in order to reduce potential
reputational, legal and regulatory risks through incentivising
a sustainability-focused corporate culture (refer to page
12 for additional detail on where ASX100 companies sit in
this regard).
Devon Energy
In 2016, shareholders of Devon
Energy requested that, in order to
help ensure the company responds
appropriately to climate-change
induced market changes, the
Compensation Committee should
adopt a policy to not use “oil and
gas reserve addition” metrics in
determining senior executive
variable pay entitlements -
effectively delinking oil and gas
reserves replacement from
executive compensation
arrangements. In their proposal,
shareholders addressed the new
Paris Agreement and further
mentioned, “we believe that severing the link between reserves growth and executive compensation would better reflect increasing uncertainty over climate regulation and future oil and gas demand and would more closely align senior executives’ and long-term shareholders’ interests”22. The company’s board has
recommended that shareholders
vote against this resolution.
June 2016 9
ESG Shareholder Activism
Exhibit B: Topics Covered by Shareholder ESG Proposals (January – April 2016)
Source: Ceres, GPS analysis
institutional investors with
total funds under management
exceeding A$1 trillion. The IGCC
aims to encourage government
policies and investment practices
that address the risks and
opportunities of climate change
for the ultimate benefit of
superannuants and shareholders.
Members of the group include,
amongst others, Australian
Catholic Superannuation &
Retirement Fund; Australian
Council of Superannuation
Investors (ACSI); AMP Capital
Investors; AustralianSuper and BT
Financial Group.
Australian 2016 Mini-AGM Season: Case Studies
Santos Limited (STO):
In March 2016, Santos received notice requesting that a
shareholder resolution be put forward for consideration at
its 2016 AGM. Shareholders wished to express their concerns
around the risks associated with the Narrabri Gas Project,
mentioning that the project was facing community
opposition and legal challenges in the NSW Land and
Environment Court. Shareholders requested that Santos
abandon the project and stated that the company should
be “looking forward to new opportunities in the renewable energy sector.”25
Ultimately, the resolution was not put to a vote based on
the fact that of the 104 signatories, 98 were verified as
shareholders, representing approximately 0.019% of the
outstanding shares in Santos . This meant that the requisition
failed to satisfy the requirements of section 249N of the
Corporations Act, which dictates that 100 shareholders are
required in order for a resolution to be eligible for
consideration by shareholders.
Australian Market Observations
A list published by the
Australasian Center for
Corporate Responsibility (ACCR)
tracking Australian ESG-related
shareholder resolutions filed at
ASX200 companies has recorded
only 13 such cases within the last
decade23. Refer to Appendix D
for examples from the 2015
shareholder voting season.
It is noteworthy that according
to information gathered by the
ACCR, “no resolution was put multiple years in a row as is standard US practice; no resolution was sponsored by a church or religious group.”
Religious groups tend to be very
active in the United States. For
example, the Mercy Investment
Services group filed 3.5% of the
ESG resolutions submitted in the
United States between January
and April 201624.
Another difference observed
between ESG activism in the
United States and Australia is that
companies in the United States
are likely to receive more than
one ESG related resolution
within a single shareholder
voting season. In fact, 21% of
the companies that have a
shareholder proposal on ballot
from January to April 2016 are
having more than one
shareholder resolution being
put to a vote.
It is also important to mention the
role of the IGCC in the Australian
market. The group represents
In terms of sustainability
performance, five Australian
companies have made the
Global 100 Index in 2016. The
Global 100 is an index of the
most sustainable corporations
in the world. The company
that received the highest score
amongst Australian corporations
was the Commonwealth Bank,
which ranked 4th worldwide.
Westpac (#33), ANZ Bank (#67),
National Australia Bank (#73)
and Insurance Australia Group
(#74) were also included in these
rankings.
June 2016 10
ESG Shareholder Activism
June 2016 11
A similar resolution was the subject of extensive debate at the
company’s 2014 AGM and was rejected by shareholders with
99.2% of the votes cast being against the resolution. The board also
stated that “the proposed resolution would not have been a legally binding resolution and the Board would not have been required to include it on the AGM agenda.”
Rio Tinto:
Rio Tinto Plc received a shareholder proposal (Resolution
17 – 2016 AGM) requesting that the board and shareholders support
a climate change resolution. A special resolution entitled ‘Strategic
resilience for 2035 and beyond’ filed by ‘Aiming for A’ was similar
to the shareholder resolutions that Statoil and Shell had previously
received.
Shareholders requested that routine annual reporting from 2017
include further information about:
Rio Tinto operates as a dual-listed company and under this
structure, which was established in 1995, decisions on significant
matters affecting shareholders of Rio Tinto Plc and Rio Tinto Limited
in similar ways are taken through a joint electoral procedure.
As disclosed in the company’s Notice of Meeting, “the chairman and management met with representatives of the coalition in December 2015 and support the intention behind the resolution.”26
The annual general meetings of Rio Tinto Plc and Rio Tinto Limited
were held on 14 April 2016 and 5 May 2016 respectively and 99.16% of votes were cast in favour of Resolution 1727.
Ongoing operational emissions management;
Asset portfolio resilience to the International Energy Agency’s (IEA’s) scenarios;
Low-carbon energy research and development (R&D) and investment strategies;
Relevant strategic key performance indicators (KPIs) and executive incentives; and
Public policy positions relating to climate change.
ESG Shareholder Activism
Given that shareholder ESG
proposals in overseas markets
carry some focus towards the
skills and experience of directors
as it relates to ESG oversight, as
well as a desire by some to link
sustainability metrics to executive
compensation, GPS has
conducted an independent
review of the constituents of the
ASX100 index based on their
public disclosures to ascertain
where Australia’s largest public
companies are positioned in this
regard.
Director Skills & Experience
The average number of directors
on a board that exhibit ESG-
related skills and experience
for constituents of the ASX100 is
two directors (board sizes across
the ASX100 range between 4-12
directors). Out of the top 100 ASX companies, 82% had at least one
board member with identifiable
ESG oversight capabilities.
Therefore 18 companies within
the ASX100 do not show any
board members with ESG
related skills.
Moreover, when focusing solely
on environmental-related skills
and experience, only 31% of
company boards have a director
with such oversight capabilities.
Therefore when reviewing
director skills and qualifications,
more than two-thirds of ASX100
boards do not exhibit any
oversight capability pertaining to
environmental sustainability risks.
Such a perceived absence of
environmental board capabilities
was targeted by Mr. Ian Dunlop
when, at the 2013 BHP Billiton
(BHPB) Annual General Meeting,
the former international oil and
gas executive put himself
forward for election to the board.
Mr. Dunlop intended to,
“encourage BHPB to become a global leader in building a coalition of progressive corporates & investors to initiate rapid transition to a low-carbon economy”. The climate change
activist failed to get a seat on
the board and was only able to
achieve 3.5% of votes in favour
of his nomination as a director of
BHPB.
The majority of ESG-related
board capabilities for ASX100
companies relate to social
sustainability matters, with most of
this experience being obtained
through charities and not-for-
profit organisations that promote
social welfare initiatives.
Executive Remuneration and ESG-related KPIs
We have found that 38% of the
top 100 ASX companies directly
link ESG measures to their senior
executive remuneration
arrangements, and more
specifically within their short
term incentive (STI) scheme. The
most common metric applied is
occupational health and safety,
followed by workforce diversity
and environmental sustainability
measures.
Interestingly, no company
within the ASX100 has linked ESG
metrics to its long term incentive
(LTI) program. This may inherently
result from the frequency
required for measuring ESG-
related company performance,
however remains an interesting
observation in context of the long
term externalities associated with
adverse corporate sustainability
outcomes.
ASX100 Review of Board Skills and Experience and ESG-linked Compensation Arrangements
June 2016 12
ESG Shareholder Activism
Exhibit C: Proportion of Company Board with ESG Skills or Experience (S&P/ASX 100 Index)
Source: Company Annual Reports, GPS analysis
Key Findings
It is clear that shareholders
around the world are demanding
improved disclosure and
oversight around corporate
sustainability, with emphasis
upon environmental and social
impacts from business.
In some instances this focus is
driven by a need to reduce
equity investment risk and
improve portfolio returns. In other
cases such action is predicated
upon an altruistic concern for the
negative impacts that
businesses can have towards
the environment and humanity.
Irrespective of its nature, boards
and management of Australian
public companies need to be
aware of the following trends
and observations:
June 2016 13
The focus towards corporate sustainability oversight and reporting is underpinned by a global political movement that is evidenced by the UNFCC Paris Agreement, the recently founded Green Finance Study Group, and the newly established Task Force on Climate Related Financial Disclosures.
In addition to Australia, the United States and the European Union have corporate governance guidelines and recommendations in place that in some manner promote the reporting of policies and risks related to environmental or social impacts.
The reporting recommendations and guidelines pertaining to Australia and overseas markets are not uniform, and therefore companies are challenged by the absence of enforceable standardisation for corporate sustainability reporting. In some instances the absence of specific guidance results in fragmented or incomplete ESG-related disclosures. This issue is currently being tackled by the Task Force on Climate Related Financial Disclosures, whilst the Global Reporting Initiative’s G4 Guidelines provide a voluntary sustainability reporting framework.
In addition to more disclosure, shareholders are seeking board directors with ESG-related skills and experience, are stress testing individual company responses to climate change matters, and are requesting that compensation metrics for executives carry some link to ESG considerations.
The majority of ASX100 boards have at least one member with ESG-related skills or experience, however the representation of environmental oversight capabilities at board level is relatively small. This is in context of the majority ofESG shareholder proposals filed being related to climate change and carbon asset risk.
A significant number of ASX100 companies include one or more ESG-related metrics within its executive compensation arrangements, whereby all such instances are observed within the STI scheme. None of these companies link ESG-related KPIs to their LTI program.
Shareholders are increasingly filing ESG-related proposals to be carried on ballot at shareholder meetings, irrespective of whether such voting resolutions are binding or not.
The role of independent ESG research providers is becoming more significant in influencing institutional investor asset allocation strategies.
ESG Shareholder Activism
Appendix A: Shareholder ESG Proposals by Sector (United States)
Exhibit D illustrates that the
largest proportion of
companies that received a
shareholder ESG proposal
operate within the oil and
gas industry. Companies
operating within the food
and beverage industry also
received a notable amount
of filings.
Exhibit D: Shareholder Proposals by Industry(January - April 2016)
Exhibit E shows that the
majority of shareholder
resolutions attributed to the
Oil & Gas and Electric Power
industries are related to climate
change and carbon asset risk
proposals.
Exhibit E: Oil & Gas and Electric Power Sector Proposals (January – April 2016)
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Between the months of January and April 2016, 117 companies in the United States received
shareholder resolutions across 19 different industries.
ESG Shareholder Activism
Source: Ceres, GPS analysis
Source: Ceres, GPS analysis
Exhibit G illustrates that for the
Manufacturing and Mining
industries, the majority of ESG
resolutions filed were related
to climate change. To a lesser
extent, energy efficiency and
policy-related issues were also
covered by shareholder
resolutions.
Exhibit G: Manufacturing and Mining Sector Proposals (January – April 2016)
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Exhibit F details that the most
prevalent topics addressed
by shareholder ESG proposals
for the Food and Beverage
sector concern climate
change, renewable energy
use and human rights issues.
Exhibit F: Food and Beverage Sector Proposals (January – April 2016)
ESG Shareholder Activism
Source: Ceres, GPS analysis
Source: Ceres, GPS analysis
AES Corporation
42% A shareholder resolution requested that the company stress test its investments against the low carbon future that the Paris Agreement is intended to facilitate. Shareholders requested that AES publish an assessment of the long term impacts on the company’s portfolio of public policies and technological advances that are consistent with limiting global warming to no more than 2 degrees Celsius over pre-industrial levels.
The company engaged with shareholders and decided to send a letter to the SEC announcing its intention to omit the resolution from its proxy statement. The board recommended that shareholders vote against this resolution28.
Appendix B: United States ESG Shareholder Advocacy Case Studies
Company Vote Status Comments
Clarcor Inc. 61% 2016 marks the third year that CLARCOR received a shareholder resolution requesting sustainability reporting. The proposal has gained increasing support in each year (40% in 2014 and 45% in 2015). Shareholders requested that CLARCOR issue a report describing the company’s present policies, performance and improvement targets related to key environmental, social and governance (ESG) risks and opportunities, including greenhouse gas (GHG) emissions reduction goals. The report was requested to be available by year end 2016, prepared at reasonable cost and omitting proprietary information. The proposal was filed by Walden Asset Management. The board did not support this resolution. The resolution was approved with 23,676,553 votes in favour. The proposal was also supported by Australia’s Local Government Super29.
Emerson Electric Co.
Sustainability Reporting Proposal received: 47.3% of
votes
GHG emissions proposal received:
36.7% of votes
The company received two shareholder resolutions in 2016 related to climate change: one proposal on GHG emissions and one proposal on sustainability reporting.
The board did not support any of the resolutions submitted by shareholders regarding GHG emissions and sustainability reporting. The proposal requesting the issuance of a sustainability report was not passed30.
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ESG Shareholder Activism
Statoil Swedish buffer funds, AP2 & AP4, filed a special resolution entitled ‘Strategic resilience for 2035 and beyond’ for the company’s 2015 AGM that requested more disclosure on risks and opportunities around climate change. Investors requested that the company conduct routine annual reporting from 2016 that should include further information about: ongoing operational emissions management; asset portfolio resilience to the International Energy Agency’s (IEA’s) scenarios; low-carbon energy research and development (R&D) and investment strategies; relevant strategic key performance indicators (KPls) on executive incentives; and public policy positions relating to climate change.
99.95% of votes cast in favour.
Appendix C: European Union ESG Shareholder Advocacy Case Studies
Company Content of the Shareholder Resolution/ Disclosures Requested
Shareholder Support
Company/ Board Action
The company’s board of directors supported the resolution and welcomed shareholder interest around understanding Statoil’s risk exposures and strategic approach to climate change.
Shell Shell was another company to receive a request by shareholder activists to put a special resolution entitled ‘Strategic resilience for 2035 and beyond’ on ballot at its 2015 AGM.
98.9% of votes cast in favour.
The board, through a company announcement made on the 29th of January 2015, decided to support the special resolution31.
BP During the 2015 AGM the company received a shareholder resolution asking BP to report on the risks and opportunities associated with climate change through routine annual disclosures32.
98% of votes cast in favour33.
The board decided to endorse the special resolution. Large institutional investors and proxy advisers congratulated the board on its decision and commitment to engagement.
June 2016 17
ESG Shareholder Activism
AGL Energy Special Resolution to Amend the Constitution
That, at the end of Clause 31 ‘Notice’ the following new sub-clause 31.5 is inserted: “That, (a) the Board must prepare a business model that demonstrates sufficient diversification of the power generation and supply activities of the Company to ensure continued profitability under pathways that limit the world to 2C warming; and (b) include in future annual reporting to shareholders, at reasonable cost and omitting any proprietary information, information about ongoing power generation and supply chain emissions management benchmarked against that model.”
Disclosure of business model diversification; emissions reporting and benchmarking.
Appendix D: Australian ESG Shareholder Resolutions – 2015 AGM Season
Company Content of the Shareholder Resolution Powers/Disclosures Requested
Shareholder Support
5.2% of votes cast on this resolution were cast in favour.
ANZ Special Resolution to Amend the Constitution
To amend the constitution to insert at the end of Clause 5 ‘Powers of the Board’ the following new sub-clause 5.4: “The Company in general meeting may by ordinary resolution express an opinion or request information about the way in which a power of the Company partially or exclusively vested in the directors has been or should be exercised. However, such a resolution must relate to an issue of material relevance to the Company or the Company’s business and cannot either advocate action which would violate any law or relate to any personal claim or grievance. Such a resolution is advisory only and does not bind the directors or the Company.”
Ordinary Resolution
“That in order to address our interest in the longer term success of the Company, given the recognised risks and opportunities associated with climate change, we as shareholders of the Company: (a) requesting that the Board of Directors report to shareholders by end-August 2016, at reasonable cost and omitting proprietary information, their assessment of our exposure to climate change risk and carbon intensive business in our lending, investing and financing activities (utilising whatever metrics the Board finds most appropriate) and (b) express our view that it is in the best interests of our Company that, by end-August 2016 our Board set public targets and a timetable for reductions in the extent of that exposure.”
The power for 100 shareholders or shareholders owning >5% of issued capital to file non-binding resolutions; disclosure of business exposure to carbon emitting investments; setting and disclosing targets for reducing the bank’s climate change exposures.
10.7% of votes cast onthis resolution were castin favour.
10.5% of votes cast onthis resolution were cast in favour.
June 2016 18
ESG Shareholder Activism
Origin Energy Special Resolution to Amend the Constitution
“That, at the end of Clause 8.3 ‘Notice of general meetings’ the following new sub-clause 8.3(e) is inserted: “Each year from 2016, at reasonable cost and omitting any proprietary information, routine annual reporting will include further information about ongoing power generation and supply chain emissions management, generation portfolio resilience to the International Energy Agency’s (IEA’s) scenarios; relevant strategic key performance indicators (KPI’s) and executive incentives; and our public policy positions relating to climate change.”
Carbon emissions reporting; setting of carbon targets linked to senior executive variable remuneration opportunities, disclosure of corporate climate change policy.
6.5% of votes cast on this resolution were cast in favour.
June 2016 19
ESG Shareholder Activism
Appendix E: Research Sources
1 Khan, Mozaffar and Serafeim, George and Yoon, Aaron, Corporate Sustainability: First Evidence on Materiality (March 9, 2015). The Accounting Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2575912 orhttp://dx.doi.org/10.2139/ssrn.2575912
2 Eccles, R., & G., Serafeim. 2013. The Performance Frontier: Innovating for a Sustainable Strategy. Harvard Business Review 91, no. 5: 50–60.
3 Borgers, A., Derwall, J., Koedijk, K., & Ter Horst, J. 2013. Stakeholder relations and stock returns: on errors in investors’ expectations and learning. Journal of Empirical Finance 22: 159-175.
4 Dimson, Elroy and Oguzhan, Karakas and Li, Xi, Active Ownership (December 17, 2012) Available at: http://www.people.hbs.edu/kramanna/HBS_JAE_Conference/Dimson_Karakas_Li.pdf
5 More information regarding the status of ratification, acceptance and approval of the agreement can be found on the UN’s database <https://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXVII-7-d&chapter=27&lang=en>.
6 The EU’s briefing on the Paris Agreement can be found here: <http://ec.europa.eu/clima/policies/international/negotiations/paris/index_en.htm>.
7 All the details of the outcomes of the U.N. climate change conference in Paris are available on the website of the Centre for Climate and Energy Solutions <http://www.c2es.org/international/negotiations/cop21-paris/summary>.
8 More information on the details of the Paris Agreement can be found at the UNFCCC’s webpage: <http://bigpicture.unfccc.int/#content-the-paris-agreement>.
9 The meeting was attended by delegations from all G20 members, as well as five invited countries and six international organisa-tions. The Study Group was co-chaired by China and the UK. This first GFSG meeting was convened to discuss the Study Group’s objectives and research subjects as part of the work program for 2016. < http://www.unep.org/Documents.Multilingual/Default.asp?DocumentID=27058&ArticleID=35902&l=en>.
10 The TFCFD’s charter provides a comprehensive guide to its objectives and tasks <https://www.fsb-tcfd.org/wp-content/up-loads/2016/02/Charter.pdf >.
11 Haoxiang, Cai, Climate change disclosure framework seen by Dec, (April 18, 2016). The Business Times, Available at: <http://www.businesstimes.com.sg/government-economy/climate-change-disclosure-framework-seen-by-dec>.
12 A summary and full text of Directive 2014/95/EU on disclosure of non-financial and diversity information are available at the link below: < http://eur-lex.europa.eu/legal-content/EN/LSU/?uri=CELEX:32014L0095>.
13 The ASX Corporate Governance Council’s Governance Principles and Recommendations are available here: <http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf>.
14 The full text of Regulation S-K by the SEC can be found here: <http://www.ecfr.gov/cgi-bin/text-idx?SID=8e0ed509ccc65e983f-9eca72ceb26753&node=17:3.0.1.1.11&rgn=div5>.
15 2015 Shareholder Activist Landscape: An Institutional Investor Perspective, Strategic Communications, FTI consulting (2015).
16 Shareholder questions: Management’s considerations for 2016 annual meetings, Available at: <https://www.pwc.com/us/en/cfodirect/assets/pdf/shareholder-questions-2016.pdf >.
17 The Activist Landscape, Report prepared by Nasdaq Corporate Solutions, February 2016.
18 Companies may exclude some shareholder resolutions from the ballot. Rule 14a-8 under the Exchange Act addresses when a company must include a shareholder’s proposal in its proxy statement and identify the proposal in its form of proxy. 17 C.F.R. §240-14a-8. Companies often ask staff in the Division of Corporation Finance for informal advice as to whether a company may properly exclude a proposal without violating Rule 14a-8. Although such staff advice is not binding on the Commission or any court, it can have a significant impact on the ability of shareowners to use the proposal process, given the tight timing of the annu-al meeting process and the potential costs involved to litigate this issue.
June 2016 20
ESG Shareholder Activism
19 For the purpose of this analysis we categorized the following topics as related to climate change: water pollution, air pollution,
methane emissions, coal, forests, hydraulic fracturing, palm oil, water scarcity and green house emissions.
20 Sustainability goes mainstream: Insights into investor views: <https://www.pwc.com/us/en/pwc-investor-resource-institute/publi-
cations/assets/pwc-sustainability-goes-mainstream-investor-views.pdf>.
21 BHP Billiton’s press release can be found at: <http://www.bhpbilliton.com/investors/news/diversification-and-competitive-
ness-provide-resilience-to-climate-risk>.
22 The resolution filled by shareholders is available in the company’s Notice of 2016 Annual Meeting of Stockbrokers and Proxy
Statement and can be found here: <http://s2.q4cdn.com/462548525/files/doc_financials/DVN-2016-Proxy-Statement.pdf>.
23 Further details and the complete list published by the Australasian Centre for Corporate Responsibility are available at: <http://
www.accr.org.au/australia>.
24 Ceres Data. Mercy Investment Services does not invest in companies whose activities involve:
25 The notice of resolution filed by investors and the company’s response can both be found at: <https://www.santos.com/me-
dia/3251/160308_santos_receives_resolution_from_shareholders_for_consideration_at_agm.pdf>.
26 The 2016 NoM of Rio Tinto Ltd is available at: <http://www.riotinto.com/documents/RTL_Notice_of_Meeting_2016.pdf>.
27 Voting results and relevant media release by the company available at: <http://www.riotinto.com/media/media-releas-
es-237_17313.aspx.>.
28 Complete Notice of Annual Meeting (NoM) and Proxy Statement available at: <http://www.envisionreports.com/AES/2016/2C-
909FE16E/default.htm?voting=false>.
Voting results available at: <http://www.sec.gov/Archives/edgar/data/874761/000087476116000088/annualmeeting8-k42116.
htm>.
29 Voting results available at: <http://www.clarcor.com/investor/SEC/2016/8K20160329.pdf and the company’s NoM for 2016 is
available here: http://www.clarcor.com/investor/SEC/2016/Proxy2016.pdf>.
30 Voting results available at: <http://www.sec.gov/Archives/edgar/data/32604/000003260416000064/a2016votingresults8-kbody.
htm and the company’s NoM for 2016 is available here: http://www.emerson.com/SiteCollectionImages/investors/documents/
Proxy/15EmersonProxy16.pdf>.
31 Original announcement can be found at: <http://www.ap2.se/Global/NyheterPressmeddelanden/2015/response-to-sharehold-
ers-29jan2015%5B1%5D.pdf>.
32 The resolution was filed by a coalition of shareowners assembled by CCLA Investment Management. Investors requested that BP
reports on an annual basis, starting from 2016, on its ongoing operational emissions management; asset portfolio resilience to the
International Energy Agency’s (IEA’s) scenarios; low-carbon energy research and development (R&D) and investment strategies;
relevant strategic key performance indicators (KPIs) and executive incentives; and public policy positions relating to climate
change
33 Source: <http://www.bp.com/content/dam/bp/pdf/investors/bp-agm-poll-results-2015.pdf>.
June 2016 21
ESG Shareholder Activism
• Manufacture of primary abortifacient drugs or devices or operation of health facilities that provide abortion services.
• Production of nuclear, chemical, biological, landmines, cluster bombs, firearms or other weapons or weapons systems.
• Manufacture, sale or distribution of tobacco products.
• Material participation in scientific research through the use of embryonic stem cells or fatal tissue.
• Production of pornographic products and services.
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