esg shareholder activism final

June 2016

ESG Shareholder Activism

– It’s all French to Me


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


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.


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:

June 2016 5

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.


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:

June 2016 6

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).


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


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).


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


Exhibit B: Topics Covered by Shareholder ESG Proposals (January – April 2016)


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


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.


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


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.


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)

June 2016 14

Between the months of January and April 2016, 117 companies in the United States received

shareholder resolutions across 19 different industries.




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)

June 2016 15

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)




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.

June 2016 16


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


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


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


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


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


• 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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